external commercial borrowing


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  • India’s total external debt stock was US $ 251.4 billion at the end of december 2009 Total long term debt has rose to 82 % Short term loans was 18%
  • external commercial borrowing

    1. 1. <ul><li>What is external commercial borrowing? </li></ul><ul><li>ECB is defined as commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years </li></ul><ul><li>Regulators: </li></ul><ul><li>The department of Economic Affairs, Ministry of Finance, Government of India with support of Reserve Bank of India. </li></ul>
    2. 2. <ul><li>Raising funds from other country is cheap </li></ul><ul><li>Investment and resource availability </li></ul><ul><li>Expansion of projects </li></ul><ul><li>Fixed rate of interest </li></ul><ul><li>Alliances </li></ul><ul><li>Can not be used for investment in stocks and real estate sector </li></ul>
    3. 3. <ul><li>Annual cap is maximum amount which can be borrowed during one financial year. </li></ul><ul><li>The cap was $8.3 BN in 2000 which is further raised to $40 BN in 2010 in move to make availability of funds for rapidly recovering economy. </li></ul>
    4. 4. <ul><li>Commercial bank loans </li></ul><ul><li>Buyer’s and suppliers credit </li></ul><ul><li>Securitized instruments such as floating rate notes, govt. bonds </li></ul><ul><li>Credit from official export credit agencies </li></ul><ul><li>Aid from institutions such as IFC, ADB, AFIC, CDC </li></ul><ul><li>Foreign institutional investors invested in debt funds </li></ul>
    5. 5. <ul><li>Loan from foreign equity holder </li></ul><ul><li>Lines of credit from foreign banks and institutions </li></ul><ul><li>Financial lease </li></ul><ul><li>Import loans </li></ul><ul><li>FCCB’s </li></ul><ul><li>Non convertible, partially convertible and optionally convertible debentures and preference shares </li></ul><ul><li>Asset backed securities, Mortgage backed securities. </li></ul>
    6. 7. <ul><li>Approval Route </li></ul><ul><li>Financial institutions dealing with infra or export finance, textile or steel sector restructuring </li></ul><ul><li>Multi-state cooperatives engaged in manufacturing activities </li></ul><ul><li>NGO in microfinance activities </li></ul><ul><li>Corporates in service sector for import of capital goods </li></ul><ul><li>Automatic Route </li></ul><ul><li>- Indian companies (except NBFC’s, Financial institutions, GO) </li></ul><ul><li>SEZ is permitted </li></ul><ul><li>Individuals, trusts not allowed. </li></ul>
    7. 8. <ul><li>International banks, international capital markets, multilateral financial institutions such as IFC, ADB, CDC) </li></ul><ul><li>Foreign equity holder can also be lender </li></ul><ul><li>-person must hold atleast 25% equity capital </li></ul><ul><li>-debt-equity ratio shoud not exceed 25%, in case of approval route it may exceed 25% if RBI permits </li></ul><ul><li>Individual lender has to acquire certificate of due diligence </li></ul>
    8. 9. <ul><li>For Automatic route </li></ul><ul><li>Amount upto $20 mn or equivalent- 3 years </li></ul><ul><li>Amount exceeding $20 mn to $500 mn- 5 years </li></ul><ul><li>Maximum amount eligible during one financial year- $ 500 MN </li></ul><ul><li>For Automatic Route </li></ul><ul><li>Additional amount of $250 mn with maturity over 10 years </li></ul><ul><li>ECB upto $ 100 mn for infrastructure projects and industrial sector </li></ul><ul><li>ECB upto $50 mn for rupee capital expenditure </li></ul><ul><li>For NGO’s in microfinance activity, amount upto $5 mn </li></ul><ul><li>Corporates in service sector - $ 100 mn, per borrower for import of capital goods </li></ul>
    9. 10. <ul><li>Automatic Route </li></ul><ul><li>Import of capital goods in real estate sector, industrial sector </li></ul><ul><li>For infra sector </li></ul><ul><li>Overseas investment in joint ventures and wholly owned subsidies </li></ul><ul><li>Payment to govt. for obtaining license </li></ul><ul><li>Approval Route </li></ul><ul><li>Implementation of new projects, modernization and expansion of projects </li></ul><ul><li>Import of capital goods by service sector companies </li></ul><ul><li>First stage of acquisition of shares and also in second stage offer to public </li></ul><ul><li>Refinancing of existing ECB </li></ul>
    10. 11. <ul><li>Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB’s are not permitted. </li></ul><ul><li>Issuance of guarantees in case of textiles company for expansion, modernization is permitted under RBI approval route. </li></ul><ul><li>FEMA gives guarantees to a person/corporate outside India under certain circumstances. </li></ul><ul><li>Choice of security is left with the borrower. </li></ul><ul><li>Banks have been delegated powers to NOC certificate. </li></ul><ul><li>Transactions are controlled and secured by FEMA act. </li></ul>
    11. 13. <ul><li>Only approved if done through foreign equity inflow </li></ul><ul><li>On permission of RBI, Govt. it may be undertaken within permitted period with </li></ul><ul><li>residual maturity upto 1 year. </li></ul><ul><li>Prepayment of 10% outstanding ECB is permitted during the life of loan once. </li></ul><ul><li>Permitted with Approval of RBI, Govt and Dept. Of Economic Affairs </li></ul>
    12. 16. <ul><li>It refers to credit extended by for imports directly by overseas supplier, financial institutions for maturity less than 3 years. </li></ul><ul><li>Two types: buyers credit and suppliers credit </li></ul><ul><li>AD banks are permitted to approve trade credits upto $20 Mn per transaction with maturity period >1 year and less than < 3 years. </li></ul><ul><li>Not permitted above $2o mn. </li></ul><ul><li>All in cost ceiling includes: </li></ul><ul><li>Up to 1 year: 75 basis points </li></ul><ul><li>3< Maturity period >1: 125 basis points </li></ul>
    13. 18. <ul><li>Top sectors or top raisers of ECB were power being the first followed by telecom and financial institutions . </li></ul>
    14. 19. <ul><li>In 2008 the total amount raised to the tune of 2.77$ Bn </li></ul><ul><li>Power sector emerged as biggest borrower with $1.82 Bn </li></ul><ul><li>The ECB amount raised in all the other sectors were oil ($783 million), shipping $692.71 million), aviation ($585.36 million), infrastructure ($580.58 million), textiles and garments ($575.68 million), metals ($537.67 million). </li></ul>
    15. 20. <ul><li>Orchid chemicals and pharmaceuticals has opted for he ECB route to partly buyback its FCCB </li></ul><ul><li>Move helped the company to bring down it s debt-equity ratio </li></ul><ul><li>ECB route gave company longer tenure of repayment </li></ul><ul><li>The company reduced its outstanding FCCB’s from $194Mn to $154Mn. </li></ul>
    16. 21. <ul><li>with a liberalization stance NBFC are involved in financing of the infra sector are now allowed to raise ECB </li></ul><ul><li>With a view to give thrust to infra sector a separate category of NBFC’s were created as IFC, proposals for which will be considered through approval route </li></ul><ul><li>All in cost ceilings limits were extended </li></ul><ul><li>-For 3 to 5 years – 300bps </li></ul><ul><li>-More than five years- 500bps </li></ul><ul><li>To augment growth of agriculture definition of infrastructure was expanded </li></ul><ul><li>ECB beyond $ 100 mn in service sectors under approval route </li></ul>