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A Paper on
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EXTERNAL COMMERCIAL
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BORROWING
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S.I.M.S. Ex. MBA
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A Paper on
TABLE OF CONTENTS
Abbreviations …………………………………………………………………………………………… 3
Overview …………………………………………………………………………………………………. 4
RBI data…………………………………………………………………………………………………….. 29
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Abbreviations
SEBI – Securities and Exchange Board of India.
JV – Joint Venture
AD – Authorized Dealer
Overview:
Sources of funds and routes of capital issues in India:
Before enactment of SEBI, the sources of capital which were practically available to Indian
companies were very limited. Equity shares, preference shares, debentures and loans were the
main sources of raising capital for Indian companies. During the SEBI regime, many new
instruments of capital market were introduced based on recommendations of Abid Hussain
Committee (1989) and Pherwani committee (1991). Different types of equity shares, preference
shares, debentures, bonds and warrants were introduced in the domestic capital market. Many
new routes of capital issues like preferential allotment, qualified institutional placement (QIP),
book-building offers, employee stock option plan (ESOP) etc. were introduced in the domestic
capital market to facilitate the use of different new sources of funds to raise capital from the
domestic market.
Indian companies were also allowed to raise funds from foreign capital market during the post
reforms period, which further increased the scope of raising funds for Indian companies. New
international sources of foreign equity like American Depository Receipts (ADR), Global
Depository Receipts (GDR), European Depository Receipts (EDR), Singapore Depository Receipts
(SDR) etc. and foreign debts like External Commercial Borrowing (ECB), Foreign Currency
Commercial Borrowing (FCCB), External Non-Convertible Bonds (ENCB), foreign currency loan
etc. were made available for Indian companies.
Thus, Indian companies have wide scope of choice among various sources of funds and routes
of capital issues to raise funds during the post-reforms period. At the same time, Indian
Depository Receipts (IDR) was made available for residents to invest abroad.
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As an additional source of financing and to allow companies take advantage of lesser interest
rates abroad, Indian companies are allowed to raise funds from sources outside India.
FEMA guidelines provide Indian companies to access funds from abroad by following methods,
Foreign currency borrowings raised by the Indian companies and PSUs for financing the
commercial activities, from sources outside India are called External Commercial Borrowings
(ECBs). These are commercial loans with minimum average maturity of 3 years. The ECBs
include:-
Bank Loans
Buyer’s Credit
Supplier’s Credit
Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible,
optionally convertible or partially convertible preference shares)
Credit from official export credit agencies
Commercial borrowings from the private sector window of multilateral financial
institutions, such as International Finance Corporation (Washington), ADB, AFIC, etc.
Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds
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ECBs act as an additional source of funds for companies to finance its investment needs. The
Government of India permits the ECB as a source of finance for Indian companies for expansion
as well as for fresh investment.
The DEA (Department of Economic Affairs), Ministry of Finance Government of India along with
Exchange Control Department of Reserve Bank of India, monitors and regulates ECB guidelines
and policies.
ECBs cannot be used for investment in stock market or speculation in real estate.
For infrastructure and greenfield projects, funding up to 50% through ECB is allowed. In
telecom sector too, up to 50% funding through ECBs is allowed.
Corporate sectors can mobilize USD 750 million via automatic route, whereas service
sectors and NGOs for microfinance can mobilize USD 200 million and 10 million
respectively.
Borrowers can use 25 percent of the ECB to repay rupee debt and the remaining 75
percent should be used for new projects.
ECB limit for NBFC-IFCs under the automatic route is 75 percent of their owned funds,
including the outstanding ECBs.
Balance of payment and foreign exchange reserves position are two important drivers to
decide the level of ECBs.
Objective of ECB:
Benefits to borrower:
For corporate, ECB funding helps in many ways such as paying for overseas suppliers.
Cost of funds borrowed from external sources is cheaper at times than domestic funds.
Borrower can diversify the investor base.
Opens the international market for the borrower.
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It is not that ECB is always beneficial to a company and the country and does not carry any risk.
The borrower can be in trouble if the position is not hedged properly and the currency
depreciates sharply, which will lead to increase in the company’s liability. Also, at the macro
level, higher level of borrowing from overseas may push the currency to appreciate, which
makes exports uncompetitive in the international market. It is also argued that access to
overseas market and cheaper credit is an advantage for bigger companies that can borrow
abroad, while smaller companies have to deal with higher cost of capital in the domestic
market. Finally, economists are worried that the dependence of the country on short-term debt
flow, including ECB, is rising to fund the current account deficit and can have negative
consequences.
India’s ECB policy seeks to keep an annual cap or ceiling on access to ECB, consistent with
prudent debt management. ECB policy aims at keeping maturities long, costs low and ensures
overall growth of economy.
The policy also gives priority to projects in infrastructure and core sectors such as power, oil
exploration, telecom, railways, roads and bridges, ports, industrial parks, urban infrastructure
and export sector.
Allowed companies are free to raise funds from internationally recognized sources, offers from
unrecognized sources will not be entertained.
Applicants are free to negotiate loan terms. The policy would respect institutional relationship,
if any, between borrowers and lenders.
The choice of currency of loan and the interest rate basis (floating or fixed) is generally left to
borrowers.
The choice of security to be provided to external commercial lenders will be left to borrowers.
However, where the security is in the form of guarantee from an Indian financial institution,
there should be no counter guarantee or confirmation of the guarantee by any institution
abroad.
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Policy impact:
Government of India, along with exchange control department of RBI decides the ECB policy. It
tightens or loosens the ECB norms for various reasons such as controlling capital inflow and
thus control rupee value.
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Through its controlled policy on ECB, Government of India emphasizes the use of ECB to
fund infrastructure and SME sector of economy.
The benefit to the economy is the low cost international funds increase the cash inflow
in economy. Over the years, Indian companies are increasingly opting for low cost ECB
to reduce their cost of borrowing.
ECB increases the external debt of the country. So it has to be matched with the
country’s foreign exchange reserve growth to maintain the solvency.
ECB is associated with currency risk. Increased ECB will increase cash flow in economy
which in turn appreciate rupee. This is favorable for borrower. But if rupee depreciates
then the borrower will have to shell out more rupees to pay back his ECB.
If ECBs are not controlled, there can be huge external debt causing problems for
economy.
ECB is necessarily a loan raised for commercial activities and is different from equity. But under
certain conditions conversion of ECB into equity is permitted if following conditions are
satisfied,
(a) The activity of the company is covered under the Automatic Route for Foreign Direct
investment or Government approval for foreign equity participation has been obtained by the
company.
(b) The foreign equity holding after such conversion of debt into equity is within the sectoral
cap.
(c) Pricing of shares is as per SEBI and erstwhile CCI guidelines / regulations in the case listed /
unlisted companies as the case may be.
ECB in India can be accessed via two routes viz. Automatic Route and Approval Route.
General idea is that ECB for investment in industrial, infrastructure sector are allowed under
Automatic Route. They do not require the approval of the RBI or the Government of India.
For specific sectors such as export and import, the borrower has to take explicit permission of
the Government before raising ECB. This is referred to Approval Route.
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B. Recognized lenders
- ECB can be raised by borrowers from internationally recognized sources such as
(i) International banks,
(ii) International capital markets,
(iii) Multilateral financial institutions (such as IFC, ADB, CDC, etc.)/ Regional
Financial Institutions and Government owned Development Financial
Institutions,
(iv) Export Credit Agencies,
(v) Suppliers of Equipments,
(vi) Foreign Collaborators and
(vii) Foreign Equity Holders (other than erstwhile Overseas Corporate Bodies).
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D. All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of
withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
E. End use
- ECBs can be raised for investment (import of capital goods as classified by DGFT in
Foreign Trade Policy (FTP)) in new projects, modernization/expansion of existing
units in industrial and service sectors including infrastructure sector.
- Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS)
subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.
- First stage acquisition of shares in the disinvestment process and also in the
mandatory second stage offer to the public under the Government’s disinvestment
program of PSU shares.
- NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail
ECBs including outstanding in existing ECBs up to 50% of their owned funds under
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Automatic Route for on lending to infrastructure sector and beyond 50% of owned
funds under Approval Route.
- For lending to self-help groups or for micro-credit or for bonafide micro finance
activity including capacity building by NGOs engaged in micro finance activities, etc.
F. Restrictions
- Utilization for on-lending or investment in capital market or acquiring a company (or
a part thereof) in India by a corporate, investment in real estate sector, for working
capital, general corporate purpose and repayment of existing Rupee loans.
- Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, FIs and NBFCs from India relating to ECB.
- The borrower has the option to offer security against the ECB. Creation of charge
over immoveable assets and financial securities, such as shares, in favor of the
overseas lender is subject to FEMA regulations and ECB guidelines.
G. Other provisions
- Borrowers are permitted to either park the ECB proceeds abroad or to remit these
funds to India. ECB proceeds parked in various liquid assets as per regulation can be
invested in Treasury Bills and other monetary instruments of one year maturity and
having minimum rating etc. The funds may be invested in such a way that the
investments can be liquidated as and when funds are required by the borrower in
India.
- ECB funds may also be repatriated to India for credit to the borrowers’ Rupee
accounts with banks (AD) in India, pending utilization for permissible end-uses.
- Upon compliance of minimum maturity period applicable to the loan, prepayment of
ECB up to USD 500 Mn. can be made by AD banks without prior approval of RBI.
- An existing ECB may be refinanced by raising a fresh ECB subject to the fresh one
raised is at a lower all-in-cost and the outstanding maturity of the original ECB is
maintained.
- The designated AD bank has the general permission to make remittances of
installments of principal, interest and other charges in conformity with the ECB
guidelines.
H. Procedure
Borrowers are required to enter into an agreement with recognized lender in
compliance of ECB guidelines without RBI approval and obtain a Loan Register Number
(LRN) from RBI before drawing the ECB as per the procedure laid down in the policy.
I. Guarantees
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort
by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) relating
to ECB is not permitted.
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J. Security
The choice of security to be provided to the lender / supplier is left to the borrower.
However, creation of charge over immovable assets and financial securities, such as
shares, in favor of the overseas lender is subject to Regulation 8 of Notification No.
FEMA 21/RB- 2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-
2000 dated May 3, 2000 respectively, as amended from time to time.
L. Prepayment
Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior
approval of RBI subject to compliance with the stipulated minimum average maturity
period as applicable to the loan.
N. Debt servicing
The designated Authorized Dealer (AD bank) has the general permission to make
remittances of installments of principal, interest and other charges in conformity with
ECB guidelines issued by Government / Reserve Bank of India from time to time.
A. Eligible borrowers
- On lending by the EXIM Bank for specific purposes (case to case basis).
- Banks and financial institutions which had participated in the textile or steel sector
restructuring package as approved by the Government.
- ECB with minimum average maturity of 5 years by NBFC to finance import of
infrastructure equipment for leasing to infrastructure projects.
- Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by RBI
(beyond 50% of their owned funds) for on-lending to the infrastructure sector as
defined under the ECB policy and subject to compliance of certain stipulations.
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B. Recognized lenders
- ECB can be raised by borrowers from internationally recognized sources such as
(i) International banks,
(ii) International capital markets,
(iii) Multilateral financial institutions (such as IFC, ADB, CDC, etc.)/ Regional
Financial Institutions and Government owned Development Financial
Institutions,
(iv) Export Credit Agencies,
(v) Suppliers of Equipments,
(vi) Foreign Collaborators and
(vii) Foreign Equity Holders (other than erstwhile Overseas Corporate Bodies).
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D. All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of
withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
E. End use
- ECBs can be raised for investment (import of capital goods as classified by DGFT in
Foreign Trade Policy (FTP)) in new projects, modernization/expansion of existing
units in industrial and service sectors including infrastructure sector.
- Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS)
subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.
- First stage acquisition of shares in the disinvestment process and also in the
mandatory second stage offer to the public under the Government’s disinvestment
program of PSU shares.
- NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail
ECBs including outstanding in existing ECBs up to 50% of their owned funds under
Automatic Route for on lending to infrastructure sector and beyond 50% of owned
funds under Approval Route.
- For lending to self-help groups or for micro-credit or for bonafied micro finance
activity including capacity building by NGOs engaged in micro finance activities, etc.
- The payment by eligible borrowers in the Telecom sector, for spectrum allocation
may, initially, be met out of Rupee resources by the successful bidders, to be
refinanced with a long-term ECB, under the approval route, subject to certain
conditions outlined in the circular.
F. Restrictions
- Utilization for on-lending or investment in capital market or acquiring a company (or
a part thereof) in India by a corporate, investment in real estate sector, for working
capital, general corporate purpose and repayment of existing Rupee loans.
- Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, FIs and NBFCs from India relating to ECB.
- The borrower has the option to offer security against the ECB. Creation of charge
over immoveable assets and financial securities, such as shares, in favor of the
overseas lender is subject to FEMA regulations and ECB guidelines.
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G. Other provisions
- Indian Infrastructure companies (as defined under the extant ECB policy) are
permitted to import capital goods by availing of short term credit (including buyers’
/ suppliers’ credit) in the nature of 'bridge finance', under the approval route,
subject to the conditions prescribed.
- Airline companies registered under the Companies Act, 1956 and possessing
scheduled operator permit license from DGCA for passenger transportation are
eligible to avail of ECB for working capital with a minimum average maturity period
of three years within the overall ceiling of USD one billion for the entire civil aviation
sector and the individual maximum permissible ceiling of USD 300 million. The
liability should be extinguished from foreign exchange earnings of the companies
only.
- Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, FIs and NBFCs from India relating to ECB in case of SME as also for
facilitating capacity expansion and technological up gradation in Indian Textile
industry can be considered on merit subject to prudential norms.
- The borrower has the option to offer security against the ECB. Creation of charge
over immoveable assets and financial securities, such as shares, in favor of the
overseas lender is subject to FEMA regulations and ECB guidelines.
- Borrowers are permitted to either park the ECB proceeds abroad for foreign
currency expenditure pending utilization or to remit these funds to India for rupee
expenditure pending utilization. ECB proceeds parked abroad can be utilized in
various liquid assets as per regulation, and for investment in Treasury Bills and other
monetary instruments of one year maturity and having minimum rating etc. The
funds should be invested in such a way that the investments can be liquidated as
and when funds are required by the borrower in India.
- Upon compliance of minimum maturity period applicable to the loan, prepayment of
ECB up to USD 500 Mn. can be made by AD banks without prior approval of RBI. Pre-
payment of ECB for amounts exceeding USD 500 Mn. would be considered by the
Reserve Bank under the Approval Route.
- Existing ECB may be refinanced by raising a fresh ECB subject to the condition that
the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the
original ECB is maintained.
- The designated AD bank has the general permission to make remittances of
installments of principal, interest and other charges in conformity with the ECB
guidelines.
H. Procedure
Applicants are required to submit an application in form ECB through designated AD
bank to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve
Bank of India, Central Office , Central Office , External Commercial Borrowings Division,
Mumbai – 400 001, along with necessary documents.
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I. Guarantee
Issuance of guarantee standby letter of credit, letter of undertaking or letter of comfort
by banks, financial institutions and NBFCs relating to ECB is not normally permitted
Applications for providing guarantee / standby letter of credit or letter of comfort by
banks, financial institutions relating to ECB in the case of SME will be considers on merit
subject to prudential norms. With a view to facilitating capacity expansion and
technological up gradation in Indian Textile industry issue of guarantees, standby letters
of credit, letters of undertaking and letters of comfort by banks in respect of ECB by
textile companies for modernization or expansion of textile units will be considered
under the Approval Route subject to prudential norms.
J. Security
The choice of security to be provided to the lender / supplier is left to the borrower.
However, creation of charge over immovable assets and financial securities, such as
shares, in favor of the overseas lender is subject to Regulation 8 of Notification No.
FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-
2000 dated May 3, 2000 as amended from time to time, respectively.
L. Prepayment
(a) Prepayment of ECB up to USD 500 million may be allowed by AD bank without prior
approval of Reserve Bank subject to compliance with the stipulated minimum average
maturity period as applicable to the loan.
(b) Pre-payment of ECB for amounts exceeding USD 500 million would be considered by
the Reserve Bank under the Approval route.
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N. Debt servicing
The designated AD bank has general permission to make remittances of installments of
principal, interest and other charges in conformity with ECB guidelines issued by
Government / Reserve Bank of India from time to time.
Borrower
Large amounts of funds can be raised.
Easy availability of funds for large reputed borrowers.
Diversification of lender’s base.
1. Foreign currency funds: companies need funds in foreign currencies for various
purposes such as, paying to suppliers in other countries that may not be available in
India.
2. Cheaper funds: the cost of funds borrowed from external sources at times works out to
be cheaper than cost of rupee funds.
3. Diversification of investor’s base: the other advantage is addition of more investors thus
diversifying the investor base.
4. Satisfying large requirements: the international market is a much better option in case
of large requirements, as the availability of funds huge as compared to domestic
market.
1. Cost of raising ECBs is much lower than that of domestic borrowings (current spread is
around 300 bps without considering cost of hedging.
2. Global financial market is a much bigger source of credit.
3. Foreign lenders provide far more flexibility in terms of providing security for ECBs.
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Disadvantages of ECB:
1. Since the funds are raised through ECBs in foreign currency and their interest and
redemption proceeds are also payable in the foreign currency, the issuing company has
to hedge its foreign exchange exposure, which involves expenditure. In case the
company opts to keep its foreign exchange exposure unhedged, it carries a huge risk to
fluctuations in foreign exchange rates.
2. RBI has also acknowledged this problem and has instructed the banks to put in place a
system for monitoring the unhedged foreign exchange exposure of small and medium
enterprises.
3. The funds raised through ECBs have to be utilized in accordance with the end uses
permitted under guidelines- as such these funds cannot be utilized for working capital
and general capital purposes.
1. ECB means any kind of funding other than equity. If the foreign money is used to finance
the equity capital, it would be termed as FDI.
2. ECB should satisfy the ECB regulations stipulated by Government and its agencies such
as RBI.
3. Instruments included in ECB are, Bonds, Credit notes, Asset backed securities, Mortgage
backed securities etc.
4. Instruments not allowed under ECB are, any investment made towards core capital such
as equity shares, convertible preference shares, convertible debentures. Those
instruments which can be converted into equity are called as convertibles and are
covered by FDI policy.
5. Any other direct capital is not allowed in ECB.
RBI guidelines:
ECBs denominated in INR - Hedging Facilities for Non-Resident Entities
- That the same underlying exposure has not been hedged with any other AD
Category- I bank/s in India.
- If the underlying exposure is cancelled, the customer will cancel the hedge contract
immediately.
The amount and tenor of the hedge should not exceed that of the underlying
transaction and should be in consonance with the extant regulations regarding tenor of
payment / realization of the proceeds.
On due date, settlement is to be done through the correspondent bank’s Vostro or the
AD bank’s Nostro accounts. AD banks in India may release funds to the beneficiaries
only after sighting funds in Nostro / Vostro accounts.
The contracts, once cancelled, cannot be rebooked.
The contracts may, however, be rolled over on or before maturity subject to maturity of
the underlying exposure.
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On cancellation of the contracts, gains may be passed on to the customer subject to the
customer providing a declaration that he is not going to rebook the contract or that the
contract has been cancelled on account of cancellation of the underlying exposure.
Investment scenario:
Major Indian companies availing ECB facility
1. Telecom companies such as Idea, Aircel, Tata Teleservices , Vodafone and Sistema
Shyam Teleservices.
2. Reliance Industries.
3. Financing companies in power sector such as Power Finance Corporation, Rural
Electrification Corporation.
4. Infrastructure companies such as Jai Prakash Associates, IVRCL and Larsen &
Toubro.
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5. Citibank
Future outlook
We can expect an increase in demand for ECBs amongst the Indian Companies because
of the following reasons:-
1. Plans for Huge Spending on Infrastructure project.
2. Domestic interest rates are moving upwards.
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Sources of ECB:
Foreign Currency
Convertible Notes,
18.5%
Almost 60% of external commercial borrowings are through secured loans. Unsecured loans
form about 21% while foreign currency convertible notes form about 18% of total external
commercial borrowings.
The interest rates for secured loans are lower for secured loans than for unsecured loans,
hence they are preferred by companies to raise capital. For banks secured loans are safer and
hence prefer to unsecured loans.
FCCBs have lower interest rates than loans, however there is a threat of equity dilution if they
are converted to equity, which lowers their appeal to borrowers. Also, in the present scenario
where company stocks have been battered, the leaders would not prefer FCCBs.
Bear market:
During the bear market of 2011, the rupee depreciated heavily, the impact of which was
clearly seen on the stock price performance of companies with high ECB exposure.
These companies unperformed their respective industry indices by 18%. 15 out of 20
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companies underperformed their respective industry index. Thus the falling profits and
rupee depreciation leads to deterioration of condition of such companies with high ECB
exposure.
External debt of a country indicates the contractual liability of residents to non-residents. Post
2006, Indian’s external debt structure is undergoing a major change. The contribution of
multilateral and bilateral debt is falling, while that of ECB and NRI deposits is increasing sharply.
The changing structure indicates the Indian economy is becoming more market oriented and is
becoming integrated with world economy.
The increase in ECB gives rise to concerns in case of depreciation of rupee as it leads to a higher
debt service burden (in rupee terms) that adversely impacts the profitability and balance sheet.
The analysis reveals that that the sectors which are performing well generally have lower ECB.
For example, AUTO and PHARMA which are laggards in 2007 bull market had ECB/ total
liabilities of 14% and 15% respectively. However, as the performance of these sectors relative
to the market improved in 2012, their ECB/total liabilities reduced to 5% and 1% respectively.
Infrastructure and power are exception to this trend. As these are the sectors where ECB is
encouraged by Government and favored through the Automatic route and at times supported
by even sovereign guarantee.
The reason for the trend is that sectors which are not performing well have to avail domestic
credit at unfavorable stringent terms and so they prefer ECBs which are available at
comparatively favorable terms.
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Market analysis:
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20000
15000
USD million
10000
5000
-5000
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009-
01 02 03 04 05 06 07 08 09 10
Series1 4303 -1585 -1692 -2925 5194 2508 16103 22609 7941 2522
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Approval Route
1 Q-Das Software Private Limited 118,338 General Corporate Purpose 8 Years 1 Month
2 Air India Limited 99,500,000 Import of Capital Goods 1 Year
Sandisk India Device Design Centre Private Limited 28,000,000 17 Years 2
3
Modernisation Months
4 Mercator Limited 18,000,000 Modernisation 6 Years 7 Months
Approval Route Total 145,618,338
Grand Total 637,290,584
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Concluding observations:
The ECBs refer to commercial loans (in the form of bank loans, buyer’s credit, supplier’s
credit, securitized instruments as floating rates notes and fixed interest rate bonds)
availed from non-resident lenders. The policy for ECBs is also applicable to FCCBs. They
can be accessed through two routes: automatic and approval.
The ECBs for investments in real sector-industries and especially infrastructure do not
require Government/RBI approval. Only corporate, other financial intermediaries and
NGOs engaged in micro-finance are eligible borrowers of ECBs/FCCBs. The lenders can
be only recognized sources such as international banks/capital markets, multilateral
financial institutions, export credit agencies, suppliers of equipment, foreign
collaborators and foreign equity holders. Overseas organization/individuals may provide
ECB to NGOs on the basis of a due diligence certificate. The maturity of ECBs may range
between 3-7 years. The minimum and maximum amount of ECB for a corporate (NGO)
would be USD 20 million and 500 million respectively. The ceilings on all-in costs over 6
month LIBOR currently valid are 300 bps for average maturity period of 3-5 years and
350 bps for more than 5 years. It is 500 bps for average maturity of 7 years. The ECBs
cannot be used for on-lending/investment in capital market/acquiring a company, in
real estate: and for working capital/general corporate purpose/repayment of existing
rupee loans. They can be used for investment in industrial and infrastructure sector,
overseas direct investment on JVs/WOSs and acquisition of shares in disinvestment
process of PSUs. Until their actual requirement in India, ECB proceeds should be parked
outside in liquid assets. Refinancing of existing ECBs by fresh ECBs at lower cost is
permitted. Prepayment of ECBs up to USD 200 million is also permitted.
The approval route of ECBs is applicable to financial institutions/banks/cases falling
outside the automatic route limits and maturity period/ ECBs by NBFCs with minimum
average maturity of 5 years/ FCCBs by housing finance companies. All the stipulations
applicable to ECBs under the automatic route are also applicable to ECBs under the
approval route.
S.I.M.S. Page 31