Presentation on External Commercial Borrowing ( ECB )

1. BY- ANAND PRABHUDESAIBY- ANAND PRABHUDESAI
COL. SUNDARANCOL. SUNDARAN
COL. IRSHAD KHANCOL. IRSHAD KHAN
MBA EE 2014-17 BATCHMBA EE 2014-17 BATCH
PRESENTATION ON:
External CommercialExternal Commercial
BorrowingBorrowing

2. External
Commercial
Borrowing

3. General Borrowing Guidelines

4. ECB
 Generally External Commercial Borrowings (ECB) refer to
commercial loans availed from non-resident lenders i.e.
from foreign sources
 A source of funds for financing expansion of existing
capacity and for fresh investment out of territory
 Its an instrument used in India to facilitate the access to
foreign money by Indian corporations & PSUs

5. ECB includes:
ECB are defined to include commercial loans
 buyer’s credit
 Bank loans
 supplier’s credit
 securitized instruments such as floating rate notes & fixed
rate bonds
 credit from official export credit agencies,
availed from non-resident lenders with min avg maturity of
3 years

6. ECB includes:
 Commercial borrowings from the private sector
 Window of multilateral financial institutions such as IFC,
ADB, AFIC, CDC etc.
 Investment by Foreign Institutional Investors (FIIs) in
dedicated debt funds

7. Why ECB
 Scarcity of fund in domestic market
 Cheaper than domestic debts i.e. lower interest rates
 Freedom from Exchange Risk
 Non-encumbrance on assets

8. Govt Policy
 Permitted by the Government as a source of finance for
Corporate to expand their existing capacity & for fresh
investment
 An annual cap or ceiling on access to ECB, consistent with
prudent debt management
 Greater priority for projects in the infrastructure, Power,
oil, telecom, railways, Roads & Bridges, Ports, Industrial
parks, urban Infrastructure & export sector.

9. ECB FDI FII
ECB is borrowings from foreign sources
for commercial purpose, used generally
forbusiness development.
FDI is investment of foreign assets
into domestic structures, equipment,
and organizations.
FII denotes all those investors or investment
companies that are not located within the territory
of the country in which they are investing
It utilizes the low interest rates
prevailing in the international markets.
It is much cheaper than the domestic
borrowings.
It does not include foreign investment
into the stock markets.
“SEBI’s definition of FIIs presently includes foreign
pension funds, mutual funds,
charitable/endowment/university funds etc. as well
as asset management companies and other
money managers operating on their behalf.”
ECB is commercial loans taken from
banks, buyers credit, suppliers credit,
securitized instruments taken from non
residents lenders with minimum
maturity of 3 years.
FDI is thought to be more useful to a
country than investments in the equity
of its companies because equity
investments are potentially "hot
money" which can leave at the first
sign of trouble, whereas FDI is
durable and generally useful whether
things go well or badly.
Aim is to increase capital availability. FII results in
only capital inflows.FII flows into the secondary
market.FII is eligible for capital gain tends to be
speculative. No direct impact on employment of
labor and wages
Abiding interest in management. Abiding interest in mgt. Fleeting interest in mgt.
Difference between ECB, FDI, FII

10. Ways of raising
ECB
•Automatic route •Approval route

11. ECB
Automatic
Route

12. Automatic Route
 ECB for investment in real sector -industrial sector,
especially infrastructure sector-in India, are under
Automatic Route, i.e. do not require RBI permission
 Government approval. In case of doubt as regards
eligibility to access to Automatic Route, applicants may
take recourse to the Approval Route.

13. Eligible Borrowers
 Corporates (registered under the Companies Act except financial
intermediaries) , housing finance companies & NBFCs.
 NGOs engaged in micro-finance activities. Such a NGO should have a
satisfactory borrowing relationship for atleast 3 years with a scheduled
commercial bank authorized to deal in foreign exchange.
 Units in Special Economic Zones (SEZ) are allowed to raise ECB for
their own requirement.
 Individuals, Trusts and Non-Profit making organizations are not
eligible to raise ECB.

14. Recognized Lenders
 International banks
 International capital markets
 Multilateral financial institutions (IFC, ADB, CDC)
 Export credit agencies
 Suppliers of equipment
 Foreign collaborators
 Foreign equity holders

15. Condition for Foreign Equity
Holders
 For ECB up to $ 5 m - minimum equity of 25% held
directly by the lender
 For ECB more than $ 5 m - minimum equity of 25% held
directly by the lender & debt-equity ratio not exceed 4:1

16. Amount & Maturity
 Maximum ECB which can be raised is $ 500 m or
equivalent during a financial year.
 ECB up to $ 20 m or equivalent in a financial year with
minimum average maturity of three years .
 ECB above $ 20 m and up to USD 500 million or
equivalent with a minimum average maturity of five
years.
 NGOs engaged in micro finance activities can raise ECB
up to $ 5m during a financial year

17. Utilization or End Use
 Investment eg -Import of capital goods, implementation of new projects
& expansion of existing production units in real sector - industrial
sector (SME ) and infrastructure sector ( power,
telecommunications, railways, seaport & airport, industrial parks,
urban infrastructure (water supply, sanitation and sewage projects)
 Overseas direct investment in Joint Ventures (JV)/Wholly Owned
Subsidiaries (WOS)
 For lending to self-help groups or for micro-credit or for bona fide micro
finance activity including capacity building by NGOs
 Refinancing of an existing ECB. The existing ECB may be refinanced
by raising a fresh ECB on condition that it is raised at a lower all-in-
cost and the outstanding maturity of original ECB is maintained

18. Restricted Areas
 Utilization of ECB is not permitted for on-lending or
investment in capital market or acquiring a company (or a
part thereof) in India by a corporate
 Utilization of ECB is not permitted in real estate
( excluding development of integrated township {housing,
commercial premises, hotels, resorts, mass rapid transit
systems }
 Utilization of ECB is not permitted for working capital,
general corporate purpose and repayment of existing Rupee
loans.

19. Parking of ECB
 ECB proceeds shall be parked overseas until actual requirement
in India & can be invested in following liquid assets
• Deposits or Certificate of Deposit or other products offered by banks
rated not less than AA(-) by S&P or Aa3 by Moody’s.
• Deposits with overseas branch of an authorized dealer in India
• Treasury bills and other monetary instruments of one year maturity
 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.

20. Prepayment
 Prepayment of ECB up to $ 500 m is allowed by AD
banks without prior approval of RBI
 Minimum average maturity period is applicable to the
loan.
 Prepayment of ECB above $500m would be considered by
RBI under approval route.

21. Procedure ( for application )
 No prior approval of RBI is required
 The borrower must obtain a Loan Registration Number
(LRN) from RBI before drawing down the ECB.
 For allotment of LRN borrowers are required to submit
Form 83 certified by CS or CA to the designated AD bank,
copy of which is forwarded by AD bank to RBI
 Borrowers are required to submit ECB-2 Return certified
by AD bank on monthly basis to RBI.

22. Approval
Route

23. Eligible Borrowers
 FI’s dealing exclusively with infrastructure or export
finance such as IDFC, IL&FS, Power Finance
Corporation, Power Trading Corporation, IRCON and
EXIM Bank are considered on a case by case basis.
 Banks & FI’s which had participated in the textile or steel
sector restructuring package as approved by the
Government are permitted to the extent of their investment
in the package and assessment by Reserve Bank based on
prudential norms.

24. Eligible Borrowers (contd)
 ECB with minimum average maturity of 5 years by NBFCs
from multilateral financial institutions reputable regional
financial institutions, official export credit agencies and
international banks to finance import of infrastructure
equipment for leasing to infrastructure projects.
 Corporate in services sector viz. hotels, hospitals and software
companies can avail ECB for import of capital goods

25. Eligible Borrowers ( contd)
 Special Purpose Vehicles, or any other entity notified by
the Reserve Bank, set up to finance infrastructure
companies / projects exclusively,
 Multi-State Co-operative Societies engaged in
manufacturing activity satisfying the following criteria
i) the Co-operative Society is financially solvent and
ii) the Co-operative Society submits its up-to-date
audited balance sheet.
 Corporate engaged in industrial sector and infrastructure
sector in India can avail ECB for Rupee expenditure for
permissible end-uses.

26. Eligible Borrowers ( contd)
 Foreign Currency Convertible Bonds (FCCBs) by housing
finance companies satisfying the following minimum
criteria:
• The minimum net worth of the financial intermediary during
the previous three years shall not be less than Rs. 500 crore
• A listing on the BSE or NSE,
• Minimum size of FCCB is USD 100 million,
• The applicant should submit the purpose / plan of
utilization of funds.

27. Eligible Borrowers (contd)
 NGOs engaged in micro finance activities are eligible to avail
ECB for Rupee expenditure for permissible end-uses. The
maximum limit for NGOs are $ 5 m.
Such NGO
(i) should have a satisfactory borrowing relationship for at least 3
years with a scheduled commercial bank authorized to deal in
foreign exchange
(ii) Would require a certificate of due diligence on `fit and proper’
status of the board/committee of management of the borrowing
entity from the designated Authorized Dealer bank.

28. Recognized Lenders
 ECB’s can be raise from international sources such as
(i) international banks
(ii) international capital markets
(iii) multilateral financial institutions (such as IFC,
ADB, CDC
(iv) export credit agencies
(v) suppliers' of equipment
(vi) foreign collaborators
(vii)Foreign equity holders

29. Condition for Foreign Equity
Holders
 The minimum equity held directly by the foreign equity
lender is 25 % but debt-equity ratio exceeds 4:1
(The proposed ECB not exceeding four times the direct
foreign equity holding).

30. Amount & Maturity
 Maximum ECB which can be raised is $ 500 m or
equivalent during a financial year.
 ECB up to $ 20 m or equivalent in a financial year with
minimum average maturity of three years .
 ECB above $ 20 m and up to USD 500 million or
equivalent with a minimum average maturity of five
years.

31. Amount & Maturity
Apart from above automatic route norms:
 Additional amount of $ 250 m with average maturity of more
than 10 years under the approval route
 Corporate in infrastructure sector can avail ECB upto $ 100 m
 Corporate in industrial sector can avail ECB up to $50 m
 Corporate in the services sector i.e. hotels, hospitals and
software companies can avail ECB up to $100 m

32. Utilization
 Power, Telecommunication, Railways, road including
bridges, sea port and airport, industrial parks, urban
infrastructure (water supply, sanitation and sewage
projects)
 Overseas direct investment in Joint Ventures (JV)/Wholly
Owned Subsidiaries (WOS)
 Import of capital goods by corporate in the service sector,
viz., hotels, hospitals and software companies.

33. Restricted Areas
 On-lending or investment in capital market or acquiring a
company
 Real estate
 For working capital, general corporate purpose and
repayment of existing Rupee loans.

34. Prepayment
 Prepayment of ECB up to $ 500 m is allowed without
prior approval of RBI
 Pre-payment of ECB for amounts exceeding $ 500 m
would be considered by the Reserve Bank under the
Approval Route.
(Minimum average maturity period is applicable to the
loan.)

35. Procedure
 For availing ECB under approval route applicants are
required to submit an application in form of ECB through
designated AD bank to RBI, along with necessary
documentation

36. Empowered Committee
A committee established to accept the
proposal scrutiny it and forward
application to RBI for permission for
Approval route ECB

37. Application
The complete application should be
submitted by the applicant through
the designated authorized dealer to the
Chief General Manager-In-Charge,
Foreign Exchange Department,
Central Office, ECB Division,
Reserve Bank of India, Mumbai 400
001.

38. 2009-10 Data Amount of ECB raised over the previous year
on a monthly basis

39. Purposewise Distribution of ECBs raised during
March 2010- Feb 2011

40. Indian Companies using ECB
option
 Major Indian Companies availing ECB Facility:
• Telecom companies – IDEA, Aircel, Vodafone, TTS
• Reliance Industries
• Financing companies in Power sector such as Power Finance
Corporation, Rural Electrification Corporation
• Infrastructure companies like JP Associates, IVRCL and L&T

41. Major Arrangers for ECB in India
 State Bank of India
 Punjab National Bank
 IDBI
 Standard Chartered Bank
 Citibank

42. RBI Data on ECB for Jan 2015
 ECB - RBI data Jan 15.pdf

43. RBI relaxes ECB norms – 1st
Jan 2015
 The Reserve Bank of India today introduced changes in external commercial borrowings (ECB) norms
under which authorized money changing banks have been allowed to create a charge on securities.
At present, the choice of security to be provided to the overseas lender or the supplier for securing ECB is
left to the borrower.
The decision was taken "with a view to liberalizing, expanding the options of securities and consolidating
various provisions related to creation of charge over securities for ECB at one place," the RBI said in a
notification.
The relaxations are with immediate effect. "It has been decided that AD Category-I banks may allow
creation of charge on immovable assets, movable assets, financial securities and issue of corporate and / or
personal guarantees in favor of overseas lender / security trustee, to secure the ECB to be raised / raised by
the borrower," it added.
 However, the new rules are subject to certain conditions. The underlying ECB must be in compliance with
extant ECB guidelines, there should be a security clause in the Loan Agreement requiring the ECB
borrower to create charge, and a no objection certificate will have to be obtained from an existing domestic
lender.
Additionally, AD Category-I bank may permit creation of charge on immovable assets, movable assets,
financial securities and issue of corporate and / or personal guarantees , the RBI said.

44. ADVANTAGES
 As long as the company's return on invested capital is higher than the
cost of borrowing, it is advantageous for the company to borrow.
 The advantages include the tax shield and more importantly, the effect
of financial leverage.
 Another advantage of ECB is that it does not dilute the value of
shareholders' equity by adding to the number of shares outstanding.
 Another advantage of borrowing is that it is a way of raising capital
without giving away any control, as debt holders don't have voting
rights, etc.
 Debt may also be a more easily hedged form of raising capital, as swaps
and futures can be used to manage interest rate risk.

45. DISADVANTAGES
 Increase in default risk, bankruptcy risk, and a plethora of interest rate and market
risks related to having more debt on a company's balance sheet.
 Having more debt may increase your actual cost of borrowing, i.e. the interest rate
paid on the debt.
 With public companies, the ratings agencies will see the additional debt burden and
possibly lower the company's rating, which automatically boosts borrowing costs.
 This could have a downward spiraling effect on the company as its borrowing costs
go up, but suddenly less capital is available to draw from due to the lower credit
rating.
 In the case of a liquidity crunch, this can dramatically increase the risk of
bankruptcy.
 Effect on earnings due to interest expense payments.