Meaning of ECB
ECB is the most fancied (imaginary) three-letter word in Corporate India. ECB s lends money from investors outside India are being permitted by the Government as a source of finance for Indian Corporates. ECBs are defined to include Commercial Bank Loans, Fixed and Floating Rate Bonds and Borrowings from Private Sector windows of Multilateral Financial Institutions such as International Finance Corporation, Official Export Credit Agencies, Euro-issues include Euro-convertible bonds and GDRs. In India, External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian Corporates and PSUs for financing expansion of existing concern and as well as for fresh investment etc. ECBs can be used for any purpose except for investment in stock market and speculation in real estate.
Export Credit Agencies Suppliers of Equipment Foreign Collaborators Foreign Equity-Holders and International Capital Markets etc.
Regulators of ECB
The Department of Economic Affairs, Ministry of Finance, and Government of India with support of Reserve Bank of India monitors and regulates Indian firms access to Global Capital Markets. From time to time, they announce guidelines on policies and procedures for ECB and Euro-issues. The Government also puts restrictions for short-term borrowers to participate in ECB.
ECB Guidelines
The important aspect of ECB policy is to provide flexibility in borrowings by Indian Corporates, at costs low and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The ECB policy focuses on three aspects: Eligibility criteria for accessing external markets. The total volume of borrowings to be raised and their Maturity Structure. End use of the funds raised.
Automatic Route
The Indian government has decided to place fresh ECB loans approvals up to $ 50 million without any approval from the Government or the RBI under
automatic route.
After signing the loan agreement with the overseas lender, the company has to submit three copies to the concerned regional office of the RBI through an authorized dealer. The regional office of the RBI would then acknowledge the receipt of the copy of the loan agreement and allot a loan identification
The RBI has the full rights to notices any violation of rules, initiate action against the company under the Foreign Exchange Management Act (FEMA). The Companies are required to file quarterly returns in a prescribed format
Earlier there were separate formats for filing applications with the RBI and the government, now it has been simplified into one uniform format.
USD 5 million (USD 3 million earlier) or its equivalent The borrowing should be for a minimum simple maturity of three years.
exceed USD 100 million or its equivalent The minimum average maturity of the loan should be of three years. The RBI is the sanctioning authority for all proposals received under this scheme.
Infrastructure Projects
It is clarified that the following sectors will qualify as infrastructure sectors under the ECB guidelines: Power Telecommunication Railways Roads including bridges Ports
Industrial parks
Urban infrastructure Water supply, sanitation and
Sewage projects.
End-Use Requirements
ECBs can be used for any purpose (rupeerelated expenditure as well as imports) except the following - Utilization of ECB proceeds have been specifically disallowed for
Investment
New Projects
All infrastructure and Greenfield projects are permitted to avail ECBs to an extent of 50% of the total project cost, as appraised by a recognized financial institution/bank. ECB limits for telecom projects are 50% of the total project cost including license fee. Infrastructure projects in power and some other sectors will be permitted to have ECB exposure of more than 50% depending on the merits of the case.
interest rate basis (i.e. floating or fixed), will be left to the borrowers.
The Finance Ministry has also decided to permit companies which
have approval for ECBs to carry out payments in foreign exchange to their overseas lawyers and bankers, through the current account, even if the loan agreement has not been signed.
Indian firms should able to firm up their loan agreements within
Validity of Approval
All approvals are valid for a period of six months, i.e. the
executed copy of the loan agreement is required to be submitted within this period. Bonds, Debentures, FRNs and other such instruments will have additional validity period of three months for all the ECB approvals across the board. In case of power projects, the approval is valid for 1 year. In case of telecom projects, it is valid for 9 months from the date of approval. In case of Infrastructure projects, financial closure may get delayed for reasons beyond the investors control, so extension will be considered on merits.
to existing ECBs under the automatic route. Rolling over of ECB will not be permitted.
Further, a corporate borrowing overseas for financing
its rupee - related expenditure can swap its external commercial borrowings with another corporate which requires Foreign Currency Funds.
RBI allowed Non Government Organizations (NGOs) engaged in Micro Finance activities to raise external commercial borrowing (ECB) up to $5 million during a financial year recently.
budget 2008, had urged the central bank to open a window to enable qualified NGOs engaged in microfinance activities to use the ECB window.
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