External Commercial Borrowing (ECB) ECB refers to commercial loans availed from non-resident lenders with minimum average

maturity of 3 years. ECB can be accessed under two routes: a) Automatic Route and b) Approval Route. These borrowings are permitted by the Government for providing an additional source of funds to Indian corporates and PSUs for financing expansion of existing capacity etc. The main aim is to provide flexibility in borrowings by Indian Company, at the same time maintaining prudent limits for total external borrowings, to keep maturities long, costs low, and encourage infrastructure & export sector financing which are crucial for the overall growth of the economy.

Automatic Route: ECB for investment in real sector industrial sector, especially infrastructure sector in India are under Automatic Route. Eligible Borrowers: a. Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institution, housing finance companies & NBFCs) are eligible. Individuals, trusts & non-profit organisation are not eligible. b. NGOs engaged in micro finance activities are eligible to avail ECB on fulfilment of certain conditions. c. Units in Special Economic Zone (SEZ) are also allowed to raise ECB for their own requirement. Amount & Maturity a. ECB up to USD 20 million or equivalent with minimum average maturity of three years; b. ECB above USD 20 million and upto USD 500 million or equivalent with minimum average maturity of five years

Approval Route:

Eligible Borrowers:

1. Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, Exim bank are considered on case by case basis; 2. ECB with minimum average maturity of 5 years by non-banking financial companies (NBFCs) 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; 3. Foreign Currency Convertible Bonds (FCCB) by housing finance companies satisfying specific criteria would be considered;

As a measure of simplification of the existing procedures, it has been decided to delegate powers to the designated AD category-I banks to approve the following requests from the ECB borrowers, (which were earlier approved by RBI) subject to specified conditions:

a) Changes / modifications in the drawdown / repayment schedule Designated AD Category I banks may approve changes / modifications in the drawdown / repayment schedule of the ECBs already availed, both under the approval and the automatic routes, subject to the certain conditions. However, any elongation / rollover in the repayment on expiry of the original maturity of the ECB would require the prior approval of the Reserve Bank.

b) Changes in the currency of borrowing

Designated AD Category I banks may allow changes in the currency of borrowing, if so desired, by the borrower company, in respect of ECBs availed of both under the automatic and the approval routes, subject to all other terms and conditions of the ECB remaining unchanged. Designated AD banks should, however, ensure that the proposed currency of borrowing is freely convertible.

c) Change of the AD bank

Designated AD Category - I banks may allow change of the existing designated AD bank by the borrower company for effecting its transactions pertaining to the ECBs subject to NoObjection Certificate (NOC) from the existing designated AD bank and after due diligence.

d) Changes in the name of the Borrower Company

Designated AD Category - I banks may allow changes in the name of the borrower company subject to production of supporting documents evidencing the change in the name from the Registrar of Companies.

(Source: vide circular no A. P. (DIR Series) Circular No.33, dated 9 February 2010.)

Growth of ECB :

350000 300000 Amount in Rs. Crore

249243

317965

320395

250000 200000 150000 100000

47642 113839 113908 106843 115533 95611 89019 51454 67086 86963 117991 180669

1991-00 2000-10

50000
38782

40915

0 1
0

35711

36367

10

External Commercial Borrowings

Source: RBI Website

The External Commercial Borrowing in India is on rising trend post FEMA; the major reasons of such rise can be attributed to gradually shifting of the Governments policy towards liberal control for the overseas borrowings.

Why ECB is attractive? Investor ECB is for specific period, which can be as short as three years Fixed Return, usually the rates of interest are fixed The interest and the borrowed amount are repatriable No owners risk as in case of Equity Investment Borrower No dilution in ownership Considerably large funds can be raised as per requirements of borrower Usually only a fixed rate of interest is to be paid Easy Availability of funds because ECB is more appealing to Investors

The department of Economic Affairs, Ministry of Finance, and Government of India monitors and regulates Indian firms' access to global capital markets. From time to time, they announce guidelines on policies and procedures for ECB.The important aspect of ECB policy is to provide flexibility in borrowings by Indian corporate, at the same time maintaining prudent limits for total external borrowings. The guiding principles for ECB Policy are to keep maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The ECB policy focuses on three aspects: eligibility criteria for accessing external markets, the total volume of borrowings to be raised and their maturity structure as well as the end use of the funds raised.

Over the years the RBI and the Indian government have monitored ECBs in accordance with the needs of the Indian economy and laid down various policies and guidelines. It is interesting to note that the trend of how ECB has evolved and played a greater role in the Indian economy under the surveillance of RBI and the Indian government. In its initial stages, the Government had operationalised the automatic route for fresh ECB approvals up to USD 50 million and for all refinancing of existing ECBs with effect from September 1, 2000. However, at present the maximum amount of ECB that can be raised by an eligible borrower under the Automatic Route during one financial year is USD 500 million.

Further, with a view to enable the Indian corporate to become a global player by facilitating their overseas direct investment, permitted end-use for ECB was enlarged to include overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS). This would facilitate corporates to undertake fresh investment or expansion of existing JV/WOS including mergers and acquisitions abroad by harnessing resources at globally competitive rates. ECB for overseas direct investment should also be in conformity with other parameters of the ECB guidelines.Other important aspects being that housing finance companies, with approval from the Reserve Bank of India, would be allowed to issue foreign currency convertible bonds.The government also relaxed rules for external commercial borrowings, allowing non-banking finance companies to raise overseas loans.

It is pertinent to note, that though external commercial borrowing has been an aid to the Indian economy, the government has continued to regulate the creation of debt from overseas. For instance on September 16, 2003, Overseas Corporate Bodies (OCBs) were

derecognized as an eligible 'class of investor' under various routes / schemes available under the extant Foreign Exchange Management Regulations. It was also, reiterated that OCBs not being recognized as investors cannot be recognized lenders.

ECB policies have been modified as recently as on 21st May 2007 regarding the end-use of ECBs. As per the extant ECB policy, utilisation of ECB proceeds is not permitted in real estate. Earlier,the term real estate excluded development of integrated township as defined by Press Note 3 (2002 Series) dated January 4, 2002. However at present, the exemption accorded to the 'development of integrated township' as a permissible end-use of ECB has been withdrawn. In accordance with the recent master circular on foreign policy, utilization of ECB proceeds is not permissible in real estate, without any exemption.

On a review of the policy, it has been decided to modify the extant ECB policy in respect of the Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorised as IFCs by the Reserve Bank. As per the extant norms, IFCs have been permitted to avail of ECBs for on-lending to the infrastructure sector, as defined in the extant ECB policy, under the approval route. As a measure of liberalisation of the existing procedures, it has been decided to permit the IFCs to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds under the automatic route, subject to their compliance with the prudential guidelines already in place. ECBs by IFCs above 50 per cent of their owned funds would require the approval of the Reserve Bank and will, therefore, be considered under the approval route.

ECB has indeed found its place in the Indian market and the flexibility in managing the borrowings have been facilitated by the RBI. Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares/ preference shares, subject to the following conditions and reporting requirements. Firstly, the activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company.Secondly, the foreign equity after conversion of ECB into equity is within the sectoral cap, if any. Thirdly, pricing of shares is as per SEBI regulations /erstwhile CCI guidelines/ in the case of listed/unlisted companies as the case may be. Finally, the need for compliance with the requirements prescribed under any other statute and regulation in force.