External Commercial Borrowings

  • Instruments
  • Process

Instruments

Indian companies are permitted to borrow funds from abroad in the following methods:

  • External Commercial Borrowings (ECB): ECBs refer to commercial loans in the form of bank loans, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares), buyers’ credit, suppliers’ credit availed of from non-resident lenders with a minimum average maturity of 3 years.
  • Foreign Currency Convertible Bonds (FCCBs): FCCBs mean 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: Preferences Shares (i.e. non-convertible, optionally convertible or partially convertible) for issue of which, funds have been received on or after May 1, 2007 would be considered as debt and should conform to the ECB policy. Accordingly, all the norms applicable for ECB, viz. eligible borrowers, recognized lenders, amount and maturity, end use stipulations, etc. shall apply. Since these instruments would be denominated in Rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread as permissible for ECBs of corresponding maturity.
  • Foreign Currency Exchangeable Bonds (FCEBs): FCEBs 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.

Process

ECB can be accessed under two routes, viz., (i) Automatic Route and Approval route

Automatic Route

The prevailing ECB policy lays down the list of Eligible Borrowers; for instance ECBs can be availed by:

  • Corporates, including those in the hotel, hospital, software sectors
  • NBFCs - Infrastructure Finance Companies (IFCs)
  • NBFCs - Asset Finance companies(AFCs)
  • (SIDBI) except financial intermediaries, such as banks, financial institutions (FIs)
  • Housing Finance Companies (HFCs)
  • Non-Banking Financial Companies (NBFCs), other than those specifically allowed by Reserve Bank, are eligible to raise ECB
  • Individuals, Trusts (other than those engaged in Micro-finance activities) and Non-Profit making organizations are not eligible to raise ECB
  • Units in Special Economic Zones (SEZ) are allowed to raise ECBs

The prevailing ECB policy lays down the list of Recognized Lenders; for instance ECBs can be provided by:

  • international banks
  • international capital markets
  • multilateral financial institutions (such as IFC, ADB, CDC, etc.) / regional financial institutions and Government owned development financial institutions
  • export credit agencies
  • suppliers of equipment’s
  • foreign collaborators
  • foreign equity holders with minimum paid-up equity in the borrower:
  • ECB upto USD 5 mn – Minimum 25% paid up equity held by lender
  • ECB more than USD 5 mn – Minimum 25% paid up equity held by lender and ECB liability equity ratio not exceeding 4:1

The prevailing ECB policy stipulates certain End-Uses; for instance ECBs can be availed for:

  • import of capital goods (as classified by DGFT in the Foreign Trade Policy)
  • new projects
  • modernization/expansion of existing production units in real sector - industrial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors, namely, hotel, hospital and software in India
  • first stage acquisition of shares in the disinvestment process and second stage offer to the public under the Government’s disinvestment programme of PSU shares
  • self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities
  • NBFC-IFCs of ECBs only for on-lending to the infrastructure sector
  • NBFC-AFCs only for financing the import of infrastructure equipment’s for leasing to infrastructure projects
  • Maintenance and operations of toll systems for roads and highways for capital expenditure provided they form part of the original project
  • Refinancing of Bridge Finance (including buyers’ / suppliers’ credit) availed of for import of capital goods by companies in Infrastructure Sector
  • Import of services, technical know-how and payment of license fees

The prevailing ECB policy stipulates certain areas where ECBs cannot be used; for instance:

  • On-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc
  • Real estate sector
  • General corporate purpose which includes working capital and repayment of existing rupee loans

The prevailing ECB policy lays down the list of Eligible Borrowers; for instance ECBs can be availed by:

  • Lending by the EXIM Bank for specific purposes
  • Banks and financial institutions which had participated in the textile or steel sector restructuring package
  • NBFC with minimum average maturity of 5 yrs from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects
  • NBFCs-IFCs beyond 75 per cent of their owned funds (including the outstanding ECBs) for on-lending to the infrastructure sector
  • NBFCs-AFCs beyond 75 per cent of their owned funds (including outstanding ECBs) to finance the import of infrastructure equipment for leasing to infrastructure projects
  • Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively
  • Multi-State Co-operative Societies engaged in manufacturing activity and satisfying the following criteria
  • Co-operative Society is financially solvent
  • Co-operative Society submits its up-to-date audited balance sheet
  • SEZ developers for providing infrastructure facilities within SEZ
  • Developers of National Manufacturing Investment Zones (NMIZs) for providing infrastructure facilities within SEZ
  • Corporates in the services sector viz. hotels, hospitals and software sector can avail ECB beyond USD 200 million or equivalent per financial year
  • ECB from foreign equity holders to services sector other than hotels, hospitals and software
  • SIDBI is eligible to avail of ECB for on-lending to MSME sector, beyond 50 per cent of their owned funds, subject to a ceiling of USD 500 million per financial year provided such on-lending by SIDBI shall be to the borrowers’ for permissible end-use and having natural hedge by way of foreign exchange earnings
  • Low Cost Affordable Housing Projects
  • Corporates Under Investigation
  • Cases falling outside the purview of the automatic route limits and maturity period

The prevailing ECB policy lays down the list of Recognized Lenders; for instance ECBs can be provided by:

  • international banks
  • international capital markets
  • multilateral financial institutions (such as IFC, ADB, CDC, etc.)/ regional financial institutions and Government owned development financial institutions
  • export credit agencies
  • suppliers' of equipment
  • foreign collaborators
  • foreign equity holders with minimum paid-up equity in the borrower:
  • ECB upto USD 5 mn – Minimum 25% paid up equity held by lender
  • ECB more than USD 5 mn – Minimum 25% paid up equity held by lender and ECB liability equity ratio not exceeding 7:1

The prevailing ECB policy stipulates certain End-Uses; for instance ECBs can be availed for:

  • Investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy)
  • implementation of new projects
  • modernization/expansion of existing production units] in the real sector – industrial sector including small and medium enterprises (SME) and infrastructure sector - in India
  • Overseas Direct Investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad
  • Interest During Construction (IDC) for Indian companies which are in the infrastructure sector, being capitalized and forming part of the project cost
  • Import of services, technical know-how and payment of license fees
  • Bridge Finance
  • working capital for civil aviation sector
  • 3G Spectrum Allocation

The prevailing ECB policy stipulates certain areas where ECBs cannot be used; for instance:

  • On-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate except Infrastructure Finance Companies (IFCs), banks and financial institutions
  • Real estate sector
  • General corporate purpose which includes working capital and repayment of existing rupee loans

 

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