Introduction to External Commercial Borrowings (ECB)

Among the other sources of investment in Indian capital markets, entities in India also use alternatives to issue securities from sources outside India which are in the form of - FCCBs, FCEBs & the ECBs. But what are ECBs?  External commercial borrowing is an instrument used in India to aid the entities in India to borrow money from foreign entities or the non-residents or entities in foreign currencies.

While Foreign currency convertible bonds (FCCBs)are issued with an intent to advance loans, with ECB an entity intends to commercial loans through various instruments like bank loans, bonds, securities, securitized instruments, buyer's or supplier’s credit to be received from the non-resident investors with the average maturity of at least 3 years of time. The Government of India permits the corporate in India to borrow over the use of ECB’s for growth of standing capacity as well as for making further new investments. 

In present ECBs are extensively in use in India to access foreign money by the Indian corporate entities and PSUs at specified favourable interest rates where the borrowers are up to a limit of 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should be used for new projects.

However, there are certain limits to the use of ECBs provided by authorities including the Department of Economic Affairs (DEA), the Ministry of Finance, Government of India, and the Reserve Bank of India who is responsible for monitoring and regulating the ECB guidelines policies provided in this behalf. Accordingly, the ECBs can not be used for speculation in the real state sector or for making investments in the stock market.  

Eligible Borrower and Recognized Lenders defined-

As per the directives all the ECBs issued can be availed i.e. the Foreign Currency (FCCB) and the Indian Currency (INR ECBs) by the eligible borrowers which means any entity which is under the scheme Foreign Direct Investment (FDI) in India or such recognized entities like Trusts,  Special economic zone (SEZ) units, Small Industries Development Bank of India (SIDBI) etc. and similar entities.

Similarly, the ECBs can be achieved from ‘recognized lenders’ defined under the act as i.e. an entity that is a participant of the Financial Action Task Force (FATF) and International Organization of Securities Commissions (IOSCO) and adheres to the guidelines.

Besides, certain Multilateral and Regional Financial Institutions where India is a member country, branches/subsidiaries of Indian banks overseas (to applicable prudential norms) and specific individuals, subject to fulfilment of the condition that if they qualify as a foreign equity holder or has subscribed to such bonds/debentures listed overseas, do also come under the purview recognized as” recognized lenders” to obtain ECBs.

Policies for External Commercial Borrowing

Employing a constant arrival of clean funds the Reserve Bank of India in use of its powers bestowed on it has allocated the borrowers as eligible entities and recognized lenders that are non-residents in India and has maintained scrutiny in form of forms of ECB, multiple end-use restrictions, slightest maturity period, etc.

Consequently, the RBI Master Direction provides for a negative list of activities in which the ECBs cannot be used as under:

a. Activities related to real estate;

b. Investment in the capital market;

c. Investment in equity capital;

d. For meeting working capital requirements except provided in points (b) and (c) above.

e. General purposes of corporate except in case of ECB related to points (b) and (c) above.

f. Settlement of Rupee loans, except for the purposes provided (d) and v(e) above.

g. Lending to corporate for the above activities, excluding the case where ECBs have been raised by NBFCs as provided under the RBI Directives.

Advantages of availing ECBs-

a.    Through the ECBs, the cost of the money is usually cheaper when borrowed from e sources outside India along with a lesser rate of interest. 

b.    Accessibility to a larger economy  can prove helpful to satisfy requirements of the corporate to run for intense competition in a  global market in a far better way;

c.    ECBs are just a form of loan and may not necessarily be convertible into equity. Hence it doesn’t lead to a dilution in ownership of the entity which is a great plus point;

d.    It offers access to such borrowing entities to international markets by giving a better opportunity to get exposure global market.

e.     The lower cost monies may help to progress the overall profitability of the entity and finally help to aid in economic growth.

Shortcomings of ECBs –

a.     Cheaper funds may cause a change in the attitude on the company, who will in turn always dependent on borrowing that may ultimately affect the financial ratios of the company;

b.     A Higher amount of debt on the balance sheet of the company might upsurge the costs  for the company and causing a downfall in the rating given by the  prestigious rating agencies;

c.    Meanwhile, as borrowing is denominated in foreign currency, which  means that the repayment of principal and interest to be in foreign currency which will cause the company  to increase the hedging costs;

What changes have been occurred according to RBI directions? 

However, over time, the RBI has relaxed the restrictions levied earlier on the use of ECBs through a circular notified on July 30, 2019, as a result of which the proceeds arrived from the use of ECBs is now permitted for the following requirements but subject to such other requirements provided in the Master Direction-

•    meeting the working capital requirements,

•    general corporate purposes, 

•    repayment of rupee loans and on-lending for such purposes, 

Now, the ECBs can be availed with the intent to fulfil working capital purposes, and also for general corporate purposes can be raised with a minimum average maturity period (MAMP) of ten years where it was only three years earlier. Now the ECB proceeds also be can be used for the settlement of rupee loans borrowed within India for capital expenditure with a minimum average maturity period of 7 years. 

Finally, the Non-Banking Financial Company (NBFCs)  have been allowed to lend such ECBs obtained originally with the intent to repay the rupee loans received within India for capital expenditure with a minimum average time of 7 years.


eStartIndia Team

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