Course Leader:

K. Srinivasan Department of Management Studies Christ University, Bangalore.

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.

Sources of Funding Agencies

Corporates are free to raise ECB from any internationally recognized source such as
Banks

Export Credit Agencies Suppliers of Equipment Foreign Collaborators Foreign Equity-Holders and International Capital Markets etc.

However, offers from unrecognized sources will not be entertained.

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.

Status of ECB in India

Table: 1 Year wise Flow of ECB from (1990-1991 to 2006-2007) (US$ Million)
Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Approvals Gross Payment 2200 1001 2585 1859 4469 2670 6286 4538 8581 7018 8712 7400 5200 6927 3398 2289 2837 9295 2653 2933 4235 3033 6671 5149 11490 9094 17175 14606 26156 20058 Amortization 1357 1703 2513 3311 4032 3411 3153 3460 5043 4013 5001 8015 3571 11554 4182 Interest 917 896 1091 1162 1177 1406 1575 1635 1683 1534 1180 2031 959 3015 1772 Total Debt Services 2274 2599 3604 4473 5209 4817 4728 5095 6726 5547 6181 10046 4530 14569 5954

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

number to the company.

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

through a authorized dealers.

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 Schemes

Raising of ECB under the scheme does not exceed

USD 5 million (USD 3 million earlier) or its equivalent The borrowing should be for a minimum simple maturity of three years.

USD 100 Million Scheme

The amount raised from ECBs does not

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.

Exporters/Foreign Exchange Earners

Corporates who have foreign exchange earnings are permitted to raise ECB up to three times the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate. The minimum average maturity will be three years up to USD 20 million equivalent and five years for ECBs exceeding USD 20 million. The maximum level of entitlement in any one year is a cumulative limit and debt outstanding under earlier approvals will be netted out to determine annual eligibility.

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

in Stock Market Speculation in Real Estate

Earlier, Corporates were allowed to use ECB proceeds only for specific project purposes.

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.

Structured Obligation Facility for NBFCs

Non Banking Finance Companies (NBFCs) would also be eligible to avail of credit enhancement scheme on compliance with the following additional conditions: NBFC should be registered with RBI. It should have earned profits during the last three years. It should have secured "AA" or equivalent rating from a reputed Credit Rating Agency. However, in the case of NBFCs where a credit improvement guarantee has been provided by its parent company.

Other Terms & Conditions

Management fee, Legal fee, Penal charges etc. of each ECB

proposal are required to be reasonable and market-related.

The choice of the sourcing of ECB, currency of the loan, and the

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

the mandatory period of six months.

Repayment of Loan/Credit & Payment of Other Charges

In order to simplify the procedures, authorized dealers have been delegated the powers to allow remittance of penal interest, irrespective of period of default and number of occasions. Hence, applications for remittance of penal interest for defaulting in repayment of principal/payment of interest can be referred to the Authorized Dealers.

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.

Refinancing the existing Foreign Currency Loan

The Government has decided to allow all refinancing

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 Permits Microfinance to Rise ECB

Recently,

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.

Our Finance minister P Chidambaram in his annual

budget 2008, had urged the central bank to open a window to enable qualified NGOs engaged in microfinance activities to use the ECB window.

Thank You