Private External DebtIshita BhardwajVarun VaishVarun SinghPuneeth N.Bhushan I.
Scheme Ishita:• What is private External Debt?• Private External Debt and FDI• Private External Debt and its Relation to Public External Debt• Data Collection and Statistical Issues. Varun Vaish:• What Are External Commercial Borrowings?• ECB Regulations.• Positive and Negative end use restrictions.
Scheme 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.• Bhushan:• What happens on default of repayment of Private External Debt: impact of default on recovery strategies.• Puneeth:
Introduction 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 sovereign government.
Meaning of External Commercial Borrowings (ECB) 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 as ECBs.
Meaning Contd:• Thus ECBs essentially mean foreign currency loans raised by residents from recognised lenders.• Financial leases and Foreign Currency Convertible Bonds are also covered by ECB guidelines.
Regulation go External CommercialBorrowings (ECBs) 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 CommercialBorrowings (ECBs) 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 05, 2012.
Master Circular: There are three broad schemes — or more appropriately, following facilities as per which ECB are raised and regulated under the master circular: Trade Credit Automatic Route
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 one year. 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 ExternalCommercial Borrowings 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 financial asset. 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 process under the Government’s 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 JV/ WOS abroad.
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.