External Commercial Borrowings [ECBs]

CONTENT

• EXTERNAL COMMERCIAL BORROWINGS
• ROUTES FOR ECB
• ELIGIBLE BORROWER UNDER ECB GUIDELINES
• RECOGNISED LENDERS / SOURCES FROM WHERE THE COMPANY CAN BORROW EXTERNALLY
• EXCHANGE RATE FOR CONVERSION OF ECB
• ADVANTAGES OF ECBS
• DISADVANTAGES OF ECBS
• CONCLUSION

EXTERNAL COMMERCIAL BORROWINGS

• ECB is basically a loan availed by an Indian entity from a nonresident lender
• Most of these loans are provided by foreign commercial banks and other institutions
• It refers to commercial loans availed from non-resident lenders with a minimum average maturity of 3 years
• External commercial borrowings (ECB) means borrowing by an eligible resident entity from outside India in accordance with framework decided by the Reserve Bank of India (‘RBI’) in consultation with the government of India.
• Further, the eligible borrowers can avail ECB either in foreign currency or in Indian currency

ROUTES FOR ECB

ECB can be availed by either Automatic Route or by Approval Route

• ECB through Automatic Route: No Prior RBI Approval
  Under automatic route, the government has permitted some eligibility norms with respect to industry, amounts, end-use etc. If a company passes all the prescribed norms, it can raise money without any prior approval.
• ECB through Approval Route: Prior RBI Approval Needed
  Under the approval route, the prospective borrowers are required to send their requests to the Reserve Bank through their Authorized Dealer (AD) Banks for examination. (Authorized dealer: Means a person authorized as an authorized dealer under subsection (1) of section 10 of the Foreign Exchange Management Act, 1999)

ELIGIBLE BORROWER UNDER ECB GUIDELINES

• Port Trusts;
• Units in SEZ;
• SIDBI;
• EXIM Bank;
• Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/cooperatives and Non Government Organizations (permitted only to raise INR ECB).

Recognised lenders / Sources from where the company can borrow externally:

• The lender should be resident of FATF* or IOSCO** compliant country, including on transfer of ECB. However, Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad;
• FATF compliant country: A country that is a member of the Financial Action Task Force (FATF) or a member of a FATF-Style Regional Body; and should not be a country identified in the public statement of the FATF
• A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply;
• IOSCO Compliant Country: A country whose securities market regulator is a signatory to the International Organisation of Securities Commission's (IOSCO’s) Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the SEBI for information sharing arrangements.

Exchange rate for conversion of ECB:

• In case of foreign currency denominated ECB: Change of currency of FCY ECB into INR ECB can be at the exchange rate prevailing on the date of the agreement for such change between the parties concerned or at an exchange rate, which is less than the rate prevailing on the date of the agreement, if consented to by the ECB lender.
• In case of Indian Rupee denominated ECB: For conversion to Rupee, the exchange rate shall be the rate prevailing on the date of settlement.

ADVANTAGES OF ECBS

• ECBs provide opportunity to borrow large volume of funds
• The funds are available for relatively long term
• Interest rate are also lower compared to domestic funds
• ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.
• Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, international capital markets etc.

DISADVANTAGES OF ECB

• Availability of funds at a cheaper rate may bring in lax attitude on the company’s side resulting in excessive borrowing. This eventually results in higher debt on the balance sheet which may affect many financial ratios adversely.
• Higher debt on the company’s balance sheet is usually viewed negatively by the rating agencies which may result in a possible downgrade by rating agencies which eventually might increase the cost of debt. This may also tarnish the company’s image in the market and market value of the shares too in eventual times.
• Since the borrowing is foreign currency denominated, the repayment of the principal and the interest needs to be made in foreign currency and hence exposes the company to exchange rate risk.

CONCLUSION

All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework.

Further, for approval route cases, the borrowers may approach the RBI with an application in prescribed format for examination through their AD Category I bank and would be subject to the recommendation of the Empowered Committee of the RBI.