2. External Commercial Borrowings
External Commercial Borrowings (ECB) refer to commercial loans [in the form
of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g.
floating rate notes and fixed rate bonds)] availed from non-resident lenders
with minimum average maturity of 3 years.
Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian
company expressed in foreign currency, and the principal and interest in
respect of which is payable in foreign currency.
Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in
foreign currency, the principal and interest in respect of which is payable in
foreign currency, issued by an Issuing Company and subscribed to by a
person who is a resident outside India in foreign currency and exchangeable
into equity share of another company, to be called the Offered Company, in
any manner, either wholly, or partly or on the basis of any equity related
warrants attached to debt instruments.
4. AUTOMATIC ROUTE
Corporates (other than financial intermediaries such as banks,
financial institutions (FIs), housing finance companies and NBFCs) are
eligible to raise ECB up to US $500 million in a financial year for
investment in real sector, i.e., industrial sector, infrastructure sector
under Automatic Route, i.e. do not require RBI / Government
approval.
NGOs engaged in micro-finance.
Units in Special Economic Zones (SEZ) for their own requirement.
They cannot transfer or on-lend ECB funds to sister concerns or any
other unit in the Domestic Tariff Area.
Individuals, Trusts and Non-Profit making Organisations are not
eligible to raise ECB.
5. Approval Route
Financial Institutions (FIs) dealing exclusively with infrastructure or
export finance
Banks and FIs who had participated in the textile or steel sector
restructuring package
NBFCs for import of infrastructure equipment for leasing
Housing Finance Companies for FCCB
SPVs financing infrastructure companies / projects exclusively
Units in Special Economic Zones
Any corporate for structured obligations
Multi-state co-operative Societies engaged in manufacture in real
sector
Any corporate requiring more than US $ 500 million of ECB in a
year
Any other not covered by automatic route
6. APPROVAL ROUTE
Financial institutions dealing with infrastructure or export finance such as
IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation,
IRCON and EXIM Bank
Banks and financial institutions which had participated in the textile or steel
sector restructuring package to the extent of their investment in the
package
ECB with minimum average maturity of 5 years by Non-Banking Financial
Companies (NBFCs) to finance import of infrastructure equipment for
leasing to infrastructure projects.
Issue of Foreign Currency Convertible Bonds (FCCBs) by housing finance
companies provided:
Minimum net worth during previous three years is not less than Rs.
500 crore,
Company is Listed on the BSE or NSE,
Minimum size of FCCB is USD 100 million,
Applicant to submit the purpose / plan of utilization of funds.
7. APPROVAL ROUTE Contd.
Special Purpose Vehicles, or other entity
notified by the Reserve Bank, set up to
finance infrastructure companies / projects
exclusively, will be treated as Financial
Institutions and ECB by such entities will be
considered under the Approval Route.
Multi-State Co-operative Societies engaged in
manufacturing activity satisfying the following
criteria
8. APPROVAL ROUTE Contd.
Corporates engaged in industrial sector and infrastructure sector in
India can avail ECB for Rupee expenditure for permissible end-uses.
Non-Government Organisations (NGOs) engaged in micro finance are
eligible to avail ECB for Rupee expenditure for permissible end-uses
provided
they have a satisfactory borrowing relationship for at least 3 years
with a scheduled commercial bank
Submit a certificate of due diligence on `fit and proper’ status
Corporates in services sector viz. hotels, hospitals and software
companies can avail ECB for import of capital goods
Cases falling outside the purview of the automatic route limits and
maturity period
9. Recognised Lenders
Internationally recognised sources such as (i) international banks, (ii)
international capital markets, (iii) multilateral financial institutions (e.g. IFC,
ADB, CDC, etc.,), (iv) export credit agencies, (v) suppliers of equipment,
(vi) foreign collaborators and (vii) foreign equity holders (other than
erstwhile OCBs).
Foreign equity holder to be eligible as “recognized lender” under the
automatic route would require minimum holding of equity in the borrower
company as under:
For ECB up to USD 5 million - minimum equity of 25 per cent held
directly by the lender,
For ECB more than USD 5 million - minimum equity of 25 per cent held
directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the
proposed ECB not exceeding four times the direct foreign equity
holding).
10. Amount and Maturity
ECB up to US$ 20 million or equivalent in a
financial year with minimum average maturity of
three years .
ECB above US$ 20 million and up to US$ 500
million or equivalent in a financial year with a
minimum average maturity of five years.
ECB up to US$ 20 million can have call/put
option provided the minimum average maturity
of three years is complied with before exercising
call/put option.
11. Amount and Maturity/2
Corporates can avail of ECB of an additional amount of USD 250
million with average maturity of more than 10 years under the
approval route, over and above the existing limit of USD 500 million
under the automatic route, during a financial year.
Corporates in infrastructure sector can avail ECB up to USD 100
million and corporates in industrial sector can avail ECB up to USD 50
million for Rupee capital expenditure for permissible end uses within
the overall limit of USD 500 million per borrower, per financial year,
under Automatic Route.
NGOs engaged in micro finance activities can raise ECB up to USD 5
million during a financial year.
Corporates in the services sector viz. hotels, hospitals and software
companies can avail ECB up to USD 100 million, per borrower, per
financial year, for import of capital goods.
12. All-in-cost ceilings
Average Maturity
Period
All-in-Cost ceilings over
6 Months LIBOR*
Three years and up
to five years
200 basis points
More than five
years
350 basis points
* for the respective currency of borrowing or applicable benchmark
13. All-in-cost ceilings/2
All-in-cost includes rate of interest,
other fees and expenses in foreign
currency except commitment fee, pre-
payment fee, and fees payable in Indian
Rupees.
Payment of withholding tax in Indian
Rupees is excluded for calculating the
all-in-cost.
14. End-use
Import of capital goods by new or existing units, in real sector in India
industrial sector including small and medium enterprises (SME)
infrastructure sector
Infrastructure sector includes: (i) power, (ii) telecommunication, (iii)
railways, (iv) road including bridges, (v) sea port and airport, (vi)
industrial parks, and (vii) urban infrastructure (water supply, sanitation
and sewage projects);
Overseas direct investment in Joint Ventures (JV)/Wholly Owned
Subsidiaries (WOS) as per the guidelines on Indian Direct Investment in
JV/WOS abroad.
First stage acquisition of shares in the disinvestment process and also in
the mandatory second stage offer to the public under the Government’s
disinvestment programme of PSU shares.
Import of capital goods by corporates in the service sector, viz., hotels,
hospitals and software companies.
15. ECB not Permitted
For on-lending or investment in capital
market or acquiring a company (or a part
thereof) in India by a corporate except banks
and financial institutions .
In real estate,
For working capital, general corporate
purpose
Repayment of existing Rupee loans.
16. Parking proceeds overseas
ECB raised for foreign currency expenditure for permissible end-uses shall
be parked overseas and not to be remitted to India.
ECB proceeds parked overseas can be invested in the following liquid
assets
Deposits or Certificate of Deposit or other products offered by banks
rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by
Moody’s;
Deposits with overseas branch of an Authorised Dealer in India; and
Treasury bills and other monetary instruments of one year maturity
having minimum rating as indicated above.
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.
17. Prepayment
Prepayment of ECB up to USD 500 million can be
allowed by AD banks without prior approval of RBI
subject to compliance with the stipulated minimum
average maturity period as applicable to the loan.
Pre-payment of ECB for amounts exceeding USD 500
million would be considered by the Reserve Bank under
the Approval Route.
18. Refinancing of an existing ECB
The existing ECB may be refinanced by
raising a fresh ECB subject to the
condition that the fresh ECB is raised at
a lower all-in-cost and the outstanding
maturity of the original ECB is
maintained.
19. CONVERSION OF ECB INTO EQUITY
Activity of the company is covered under the Automatic
Route for Foreign Direct Investment or Government
approval for foreign equity participation has been
obtained by the company,
Foreign equity holding after such conversion of debt into
equity is within the sectoral cap, if any,
Pricing of shares is as per SEBI and erstwhile CCI
guidelines/regulations in the case of listed/unlisted
companies as the case may be.
20. Global Depositary Receipts
Instrument in the form of a depositary receipt
or certificate created by an Overseas
Depositary Bank outside India and issued to
non-resident investors against the issue of
ordinary shares or Foreign Currency
Convertible Bonds of an Indian issuing
company
The Scheme was effective from April 1992
but announced in 1993
21. Global Depositary Receipts Contd
The issuing company issues ordinary shares / bonds
to a domestic custodian bank who in turn instructs
the overseas depository bank to issue Global
Depository Receipts to non-resident investors against
the shares / bonds held by the domestic custodian
bank in fiduciary capacity
Global depository receipts may be issued as
negotiable instruments and got listed on any
international stock exchange - generally London /
Luxembourg
22. Eligibility to make the Issue
Activity of the company is covered under the Automatic Route for Foreign
Direct Investment or Government approval for foreign equity participation
has been obtained by the company
The issuing company should have a consistent track record of good
performance for a minimum period of three years
Three years track record requirement relaxed in case of infrastructure
projects - power generation, telecom, petroleum exploration and refining,
ports, airports and roads
23. Limits of foreign investment
Ordinary shares / Foreign Currency
convertible bonds issued against global
depository receipts treated as foreign direct
investment in the issuing company.
The aggregate of the foreign investment not
to exceed the prescribed sectoral limits.
24. Taxation
Interest payments on bonds and dividend on shares subject to
deduction of tax at source at 10%.
Conversion of FCCB into shares and transfer of FCCB outside India not
to invite any capital gain tax in India
The holding of the depositary receipts by non-resident investors and
the holding of the underlying securities by the Overseas Depositary
Bank in a fiduciary capacity and the transfer of the Global Depository
Receipts between non-resident investors and the Overseas Depositary
Bank is exempt from Wealth Tax and Gift Tax.
25. Transfer and redemption
Non resident holder of GDRs free to transfer
the receipts to another non resident or seek
redemption from the overseas depository
bank
In case of redemption overseas depository
bank to get the corresponding underlying
shares in favour of the non resident investor
from the domestic custodian bank
26. Application of Funds
Capital mobilised through GDRs can be used for
financing capital goods imports
capital expenditure including domestic purchase/ installation
of plants, equipment and building and investments in
software development
prepayment or scheduled repayment of earlier external
borrowings
investments abroad where these have been approved by
competent authorities
equity investment in JVs/WOSs abroad.
27. Advantages
Issuing company gets foreign currency resources
Access to a wider set of investors at relatively lower
cost
better pricing as compared to the domestic market
risks of foreign exchange born by the GDR holders
International recognition for the company leading to
better liquidity for its scrips
28. American Depositary Receipt -
ADR
A negotiable certificate issued by a U.S. bank representing a specified
number of shares (one or more) in a foreign stock that is traded on a U.S.
exchange.
ADRs are denominated in U.S. dollars, with the underlying security held by
a U.S. financial institution overseas.
This is a way to buy shares in a foreign company and realizing any
dividends and capital gains in U.S. dollars.
ADRs do not eliminate the currency and economic risks for the underlying
shares in another country.
For example, dividend payments in Rupees would be converted to U.S.
dollars, net of conversion expenses and foreign taxes and in
accordance with the deposit agreement.
ADRs are listed on either the NYSE, AMEX or Nasdaq.
29. ADRs vs GDRs
ADRs - American Depository Receipts used to tap the US retail
investors require adherence to the disclosure standards laid
down by the US Securities Exchange Commission
SEC requires recast of accounts as per US GAAP and periodic
quarterly reporting thereafter
Costs and commissions are generally higher
The quantum of resources that can be mobilised from the US
market are much higher than those from the Euro market
30. Pricing consideration
Pricing is an iterative process taking into account the following points:
An objective valuation of the company based on past performance and future
prospects
A possible discounting cannot be ruled out in case of an unlisted company
The ruling industry / comparable companies within the industry price -
earning ratios, price to book value, earning growth etc.
Cross market comparison of the profitability ratios
In case of a listed company price movement of its shares in the recent past,
volatility in prices, the liquidity and ability of foreigners to directly invest in its
stocks are prime constituents
The final pricing is based on the theoretical valuation, the market conditions,
pricing of recent issues, price discovery through book building, etc.
31. The cost structure
The total commission in an Euro issue works
out to about 3% of the capital mobilised
About 180 basis points are the selling
expenses to the syndicate - group of
merchant/investment bankers which solicit
investments from various entities
60 basis points towards underwriting
commission
50 basis points towards management fee
32. Pricing of FCEB
The rate of interest payable on Foreign Currency Exchangeable
Bond and the issue expenses incurred in foreign currency shall be
within the all in cost ceiling as specified for External Commercial
Borrowings.
The exchange price of the offered listed equity shares shall not be
less than the higher of the following two :-
Average of the weekly high and low of the closing prices of the
shares of the offered company quoted on the stock exchange
during the six months preceding the relevant date; and
Average of the weekly high and low of the closing prices of the
shares of the offered company quoted on a stock exchange
during the two week preceding the relevant date.
33. Minimum Maturity
Minimum maturity of the Foreign Currency Exchangeable Bond
shall be five years for purposes of redemption.
The exchange option can be exercised at any time before
redemption.
While exercising the exchange option, the holder of the Foreign
Currency Exchangeable Bond shall take delivery of the offered
shares.
Cash (Net) settlement of Foreign Currency Exchangeable Bonds
shall not be permissible.
34. Deployment of Proceeds
The proceeds of the Foreign Currency
Exchangeable Bond shall be retained
and/or deployed overseas in accordance
with the policy for the proceeds of
External Commercial Borrowings.
35. Taxation on Exchangeable
Bonds
Interest payments on the bonds, until the exchange
option is exercised and tax on dividend on the
exchanged portion of the bond, is subject to deduction
of tax at source
Exchange of Foreign Currency Exchangeable Bonds
into shares shall not give rise to any capital gains liable
to income-tax in India.
Transfers of Foreign Currency Exchangeable Bonds
made outside India by an investor who is a person
resident outside India to another investor who is a
person resident outside India shall not give rise to any
capital gains liable to tax in India.