Private External Debt
What is private External Debt?
Private External Debt and FDI
Private External Debt and its Relation to Public
Data Collection and Statistical Issues.
What Are External Commercial Borrowings?
Positive and Negative end use restrictions.
Varun Singh (Case Study)
Landmark case of De Shaw to show the regulatory
enforcement of ECB Guidelines and consequences
of non compliance with ECB guidelines.
What happens on default of repayment of Private
External Debt: impact of default on recovery
We learnt that external or foreign debt is
represented by that portion of the whole of the debt
owed by a country which is payable to outsiders i.e
(Persons or Corporations not resident in India
and/or foreign governments) it is imperative to
appreciate the demarcations and underlying
compositions of such debt.
External Debt is recognized as Private External Debt
when it is raised by private corporations or private
households in India irrespective of from whom the
debt is raised i.e. foreign corporation, bank or
Meaning of External Commercial
Subset/Type of Private External Debt.
The definition of commercial borrowing includes:
Loans from commercial banks,
Other commercial financial institutions,
Money raised through issue of securitized instruments
like Bonds (FCCB)
Borrowings through Buyers’ credit & Supplier credit
mechanism of the concerned countries,
International Finance Corporation, and private sector
borrowings from Asian Development Bank (ADB).
Even loans from Foreign Equity Holders are considered
Thus ECBs essentially mean foreign
currency loans raised by residents from
Financial leases and Foreign Currency
Convertible Bonds are also covered by ECB
Regulation go External Commercial
In order to maintain a favourable balance of
payment, the RBI under the Foreign Exchange
Management Act, 1999 (FEMA) regulates the
raising of such External Commercial Borrowings.
Raising ECBs by Indian residents directly adds to
India’s external debt and foreign exchange
exposure and therefore, the same is highly
regulated by the RBI.
Therefore, many restrictions are placed by RBI to
ensure that short-term borrowings are not used
for long-term use and vice versa
Regulation go External Commercial
External Commercial Borrowings availed of by
residents are governed by
Clause (d) of sub-section 3 of section 6 of the
Foreign Exchange Management Act, 1999 read with
Notification No. FEMA 3/ 2000-RB which is the
Foreign Exchange Management (Borrowing or
Lending in Foreign Exchange) Regulations,
2000, dated May 3, 2000 .
ECB Master Circular
The RBI has recently released a Master
Circular dated July 1st 2011 consolidating the
existing instructions on the subject of
"External Commercial Borrowings and Trade
Credits" at one place revised up to January
There are three broad schemes — or more
appropriately, following facilities as per which
ECB are raised and regulated under the
Trade Credit Regulation
Trade Credits’ (TC) refer to credits extended for
imports directly by the overseas supplier, bank and
financial institution for original maturity of less
than three years.
Depending on the source of finance, such trade
credits include suppliers’ credit or buyers’ credit.
Suppliers’ credit relates to credit for imports into
India extended by the overseas supplier, while
buyers’ credit refers to loans for payment of
imports into India arranged by the importer from
a bank or financial institution outside India for
maturity of less than three years.
Trade Credit Regulation
Authorized Dealer Banks (ADBs) are permitted to approve trade
credits for imports into India up to US$ 20 million per import
transaction for import of all items (permissible under the Exim
Policy) with a maturity period (from the date of shipment) up to
For import of capital goods, ADBs may approve trade credits up
to US$ 20 million per import transaction with a maturity period of
more than one year and less than three years.
No roll-over/extension will be permitted by the Authorised
Dealer beyond the permissible period.
As hitherto, Authorized Dealers shall not approve trade credit
exceeding US$ 20 million per import transaction.
Automatic Route for External
Indian companies registered under the Companies Act, 1956
are permitted to raise ECBs up to US $ 500 million from
reputed lenders in any one financial year (April to March).
Financial intermediaries like banks, financial institutions, housing
finance companies, NBFCs, Trusts, Non-Profit making
Organisations (NPOs), Proprietorship/Partnership Concerns and
Individuals are not eligible to raise ECBs under automatic route.
Non-Government Organisations (NGOs) engaged in micro
finance activities are eligible to avail ECB.
Positive End Use Restrictions
ECBs can be raised only for investment in (import of capital
goods, new projects, modernization/expansion of existing
production units) in a ‘real sector’— which has been understood
to mean the industrial sector including small and medium
enterprises (SME) and infrastructure sector in India.
It has been clarified by RBI that in order to determine what is
‘real sector’ one has to look whether there is a creation of
real asset or not.
Through ECBs, real asset should be a created and not merely
Thus, if one were to set up a BPO centre, acquisition of
premises can be considered as end use of ECBs.
End Use Restrictions
ECB can be raised for first stage
acquisition of shares in the disinvestment
disinvestment programme of PSU shares.
ECB can be raised for direct investment in
overseas JV/WOS subject to the existing
guidelines on Indian Direct Investment in
Negative End Use Restrictions
Borrowers shall not utilise ECB funds for:
Investment in stock market: However, ECB can be used for
first stage acquisition of shares in the disinvestment process.
Investment in residential real estate business: However,
investment in "Integrated Townships" as defined by Ministry of
Commerce and Industry, Department of Industrial Policy and
Promotion, SIA (FC Division), Press Note 3 (2002 Series,
dated 4-1-2002) is permitted.
On lending: One cannot borrow to lend to another and also
Foreign entity cannot lend in India to an Indian entity to
enable the borrowing entity to invest abroad.
Negative End Use Restricitions
General corporate purpose: ECB cannot
be raised for general corporate purposes.
Repayment of existing rupee loans:
ECBs cannot be raised for repayment of
existing rupee loans.