External commercial borrowing (financial)

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  • FEMAThe Foreign Exchange Management Act(FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India.FEMA, which replaced Foreign Exchange Regulation Act(FERA), had become the need of the hour since FERA had become incompatible with the pro-liberalisation policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organization (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005.GUIDELINES ON BORROWINGSFEMA guidelines provide Indian companies to access funds from abroad by following methodsExternal Commercial Borrowings (ECB) It refers to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.Foreign Currency Convertible Bonds (FCCBs) It refers to 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.Preference shares (i.e. non-convertible, optionally convertible or partially convertible)These instruments are considered as debt and denominated in Rupees and rupee interest rate will be based on the swap equivalent of LIBOR plus spread.Foreign Currency Exchangeable Bond (FCEB) FCEB is 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. The FCEB may be denominated in any freely convertible foreign currency.
  • All-in-cost ceilingsAll-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. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
  • External commercial borrowing (financial)

    1. 1. External Commercial Borrowing (ECB) Rakesh Ramchandran (X-MBA 23)
    2. 2. Borrowing Guidelines 2 Foreign Exchange Management Act (FEMA) Guidelines For Borrowing External Commercial Borrowing (ECB) Foreign Currency Convertible Bonds (FCCBs) Preference Shares Foreign Currency Exchangeable Bonds (FCEB)
    3. 3. External Commercial Borrowing (ECB) 3 ECB is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings) Its a source of funds for financing expansion of existing capacity and for fresh investment out of territory
    4. 4. Ways of raising ECB 4 Automatic Route • Does not require RBI approval Approval Route • Approval required from RBI
    5. 5. Automatic Route 5
    6. 6. Borrowers 6 Corporate including hotel, hospital and software sector Infrastructure Finance companies (IFCs) Units in SEZ zones NGO involved in Micro finance
    7. 7. Limits for Raising ECB 7 Category Amount (USD) per unit /per financial year Corporate other than those in service sector (i.e. hotel, hospital and software) Up to 750 M or equivalent Corporate in service sector (ECB not applicable for Land acquisition) Up to 200 M or equivalent NGO engaged in Micro Finance Up to 10 M or equivalent (Forex exposure to be fully hedged)
    8. 8. Approval Route 8
    9. 9. Eligible Borrowers (1) 9 Foreign Investors deleing with Infrastructure and export finance such as EXIM bank Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government. ECB with minimum average maturity of 5 years by NBFC to finance import of infrastructure equipment for leasing to infrastructure projects. Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by RBI (beyond 50% of their owned funds) for on-lending to the infrastructure sector as defined under the ECB policy and subject to compliance of certain stipulations.
    10. 10. Eligible Borrowers (2) 10 Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies. Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up to finance infrastructure companies / projects exclusively. Financially solvent ulti-State Co-operative Societies engaged in manufacturing. SEZ developers for providing infrastructure facilities within SEZ.
    11. 11. Eligible Borrowers (3) 11 Eligible Corporate under automatic route other than in the services sector i.e. hotels, hospitals and software sector can avail of ECB beyond USD 750 million per financial year. Corporate in the service sector for availing ECB beyond USD 200 Mn. per financial year. Cases falling outside the purview of the automatic route limits and maturity indicated, etc.
    12. 12. Limits for Raising ECB 12 Category Amount (USD) per unit /per financial year Corporate other than those in service sector (i.e. hotel, hospital and software) Beyond to 750 M or equivalent Corporate in service sector (ECB not applicable for Land acquisition) Beyond 200 M or equivalent
    13. 13. Lenders and Permitted End Use 13 Automatic & Approval Route Common Factors
    14. 14. Recognized Lenders 14 International banks International capital markets Multilateral financial institution (such as IFC, ADB, DCD etc)/ Regional Financial Institution and Government owned Financial Institution Export Credit Agencies Supplier of Equipment Foreign Collaborators Foreign Equity Holders
    15. 15. End use permitted (1) 15 Import of Capital goods Executing new projects Modernization/Expansion of existing units Infrastructure projects for PWD works Payment for Natural resources (like spectrum allocation)
    16. 16. End use permitted (2) 16 First and second stage acquisition of shares in disinvestment process under the Government’s disinvestment program of PSU shares Overseas direct investment in Joint Ventures (JV)/ Wholly Owned Subsidiary (WOS) Interest during Construction (IDC) for Indian companies in Infrastructure sector Lending to NGO engaged in Micro finance activities
    17. 17. Average Maturity on Amount Borrowed 17 Limits Minimum Average Maturity Period Up to USD 20 M or its equivalent 3 years Above USD 20 M and up to 750 M or equivalent 5 years
    18. 18. 19

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