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r g e r s

Me
&
u i s i t i
A cq
o n s
PRESENTATIO
N ON:
ECB
&
FCCB
Presented By :

• Apurv Gourav BA – 0712


• Parikshit Gupta BA – 0731
• Saurabh Dwivedi BA – 0745
External

Commercial

Borrowing
ECB
• A source of funds for financing
expansion of existing capacity and for
fresh investment out of territory

• External Commercial Borrowings (ECB)


refer to commercial loans availed from
non-resident lenders
ECB includes:
• commercial bank loans
• buyer’s credit
• supplier’s credit
• securitized instruments such as
floating rate notes
• fixed rate bonds
• credit from official export credit
agencies,
ECB includes:
• Commercial borrowings from the private
sector

• Window of multilateral financial institutions


such as IFC, ADB, AFIC, CDC etc.

• Investment by Foreign Institutional


Investors (FIIs) in dedicated debt funds
Why ECB

• Scarcity of fund in domestic market

• Cheaper than domestic debts


Regulation
• Clause (d) of sub-section 3 of section
6 of the Foreign Exchange
Management Act, 1999 (FEMA)

• With section 6 of Notification No.


FEMA 3 / 2000-RB dated May 3, 2000
(amended)
Policy
• Permitted by the Government as a source of
finance for Corporate to expand their existing
capacity & for fresh investment
• An annual cap or ceiling on access to ECB,
consistent with prudent debt management
• Greater priority for projects in the
infrastructure, Power, oil, telecom, railways,
Roads & Bridges, Ports, Industrial parks, urban
Infrastructure & export sector.
Ways of raising
ECB

•Automatic route •Approval route


Automatic Route
• ECB for investment in real sector
-industrial sector, especially
infrastructure sector-in India, are
under Automatic Route, i.e. do not
require RBI permission
• Government approval. In case of doubt
as regards eligibility to access
• Automatic Route, applicants may take
recourse to the Approval Route.
Eligible Borrowers
• Corporate (registered under the Companies Act
except financial intermediaries)

• Units in Special Economic Zones (SEZ) are


allowed to raise ECB for their own requirement.

• Individuals, Trusts and Non-Profit making


organizations are not eligible to raise ECB.
Recognized Lenders
• International banks
• International capital markets
• Multilateral financial institutions (IFC,
ADB, CDC)
• Export credit agencies
• Suppliers of equipment
• Foreign collaborators
• Foreign equity holders
Condition for
Foreign Equity
• For ECB up toHolders
$ 5 m - minimum equity of
25% held directly by the lender

• For ECB more than $ 5 m - minimum


equity of 25% held directly by the lender
& debt-equity ratio not exceed 4:1

(The proposed ECB not exceeding four


times the direct foreign equity holding).
Amount & Maturity
Maximum ECB which can be raised is $ 500
m or equivalent during a financial year.

1. ECB up to $ 20 m or equivalent in a
financial year with minimum average
maturity of three years .
2. ECB above $ 20 m and up to USD 500
million or equivalent with a minimum
average maturity of five years.
Utilization
Import of capital goods (as classified by DGFT in the
Foreign Trade Policy), by new or existing production
units, in real sector - industrial sector SME and
infrastructure sector

• Power, Telecommunication, Railways, road


including bridges, sea port and airport, industrial
parks, urban infrastructure (water supply,
sanitation and sewage projects)
• Overseas direct investment in Joint Ventures
(JV)/Wholly Owned Subsidiaries (WOS)
Restricted Areas
• Utilization of ECB is not permitted for on-
lending or investment in capital market or
acquiring a company (or a part thereof) in
India by a corporate
• Utilization of ECB is not permitted in real
estate
• Utilization of ECB is not permitted for
working capital, general corporate purpose
and repayment of existing Rupee loans.
Parking of ECB
• Deposits or Certificate of Deposit or other
products offered by banks
• Deposits with overseas branch of an authorized
dealer in India
• Treasury bills and other monetary instruments of
one year maturity
Rating of above institution – AA (-) by S&P/Fitch
IBCA or Aa3 by Moody’s
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.
Prepayment

• Prepayment of ECB up to $ 500 m is


allowed without prior approval of RBI

• Minimum average maturity period is


applicable to the loan.
Refinancing

• The fresh ECB is raised at a lower


cost than the existing

• Maturity of the original ECB is


maintained.
Procedure
• No prior approval of RBI is required

• The borrower must obtain a Loan


Registration Number (LRN) from RBI
before drawing down the ECB.

• The procedure for obtaining LRN is


detailed in para II (i) (b). of FEMA
Approval
Route
Eligible Borrowers
• FI’s dealing exclusively with infrastructure or export
finance such as IDFC, IL&FS, Power Finance
Corporation, Power Trading Corporation, IRCON and
EXIM Bank are considered on a case by case basis.

• Banks & FI’s which had participated in the textile or


steel sector restructuring package as approved by the
Government are permitted to the extent of their
investment in the package and assessment by
Reserve Bank based on prudential norms. Any ECB
availed for this purpose so far will be deducted from
their entitlement.
Eligible Borrowers
• ECB with minimum average maturity of 5 years by 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.

• Corporate in services sector viz. hotels, hospitals and


software companies can avail ECB for import of capital
goods
Eligible Borrowers
• Special Purpose Vehicles, or any 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
i) the Co-operative Society is financially solvent and
ii) the Co-operative Society submits its up-to-date
audited balance sheet.
• Corporate engaged in industrial sector and infrastructure
sector in India can avail ECB for Rupee expenditure for
permissible end-uses.
Eligible Borrowers
Foreign Currency Convertible Bonds (FCCBs) by
housing finance companies satisfying the
following minimum criteria:
(i) the minimum net worth of the financial
intermediary during the previous three years
shall not be less than Rs. 500 crore,
(ii) a listing on the BSE or NSE,
(iii) minimum size of FCCB is USD 100 million,
(iv) the applicant should submit the purpose /
plan of utilization of funds.
Eligible Borrowers
• NGOs engaged in micro finance activities are eligible to
avail ECB for Rupee expenditure for permissible end-uses.
The maximum limit for NGOs are $ 5 m.
Such NGO
(i) should have a satisfactory borrowing relationship for at
least 3 years with a scheduled commercial bank authorized
to deal in foreign exchange
(ii) Would require a certificate of due diligence on `fit and
proper’ status of the board/committee of management of
the borrowing entity from the designated Authorized Dealer
bank.
Recognized Lenders
• ECB’s can be raise from international
sources such as
(i) international banks
(ii) international capital markets
(iii) multilateral financial institutions (such
as IFC, ADB, CDC
(iv) export credit agencies
(v) suppliers' of equipment
(vi) foreign collaborators
(vii)Foreign equity holders
Condition for
Foreign Equity
Holders
• The minimum equity held directly by
the foreign equity lender is 25 % but
debt-equity ratio exceeds 4:1

(The proposed ECB not exceeding


four times the direct foreign equity
holding).
Borrowing from
Overseas
Organizations
Overseas Organizations proposing to lend ECB would have to
furnish a certificate of due diligence from an overseas bank
which in turn is subject to regulation of host-country
regulator and adheres to Financial Action Task Force (FATF)
guidelines to the AD bank of the borrower. certificate
should contain
(i) The lender maintains an account with the bank for at least
a period of two years
(ii) The lending entity is organized as per the local law and
held in good esteem by the business/local community and
(iii) that there is no criminal action pending against it.
Amount & Maturity
• Maximum ECB which can be raised is $ 500
m or equivalent during a financial year.

• ECB up to $ 20 m or equivalent in a financial


year with minimum average maturity of
three years .

• ECB above $ 20 m and up to USD 500 million


or equivalent with a minimum average
maturity of five years.
Amount & Maturity
Apart from above automatic route norms:

• Additional amount of $ 250 m with average


maturity of more than 10 years under the
approval route
• Corporate in infrastructure sector can avail ECB
up to $ 100 m
• Corporate in industrial sector can avail ECB up to
$50 m
• Corporates in the services sector i.e. hotels,
hospitals and software companies can avail ECB
up to $100 m
Utilization
• Power, Telecommunication, Railways, road
including bridges, sea port and airport,
industrial parks, urban infrastructure (water
supply, sanitation and sewage projects)
• Overseas direct investment in Joint Ventures
(JV)/Wholly Owned Subsidiaries (WOS)
• Import of capital goods by corporate in the
service sector, viz., hotels, hospitals and
software companies.
Restricted Areas
• On-lending or investment in capital
market or acquiring a company

• Real estate

• For working capital, general


corporate purpose and repayment of
existing Rupee loans.
Parking of ECB
• Deposits or Certificate of Deposit or other
products offered by banks
• Deposits with overseas branch of an
authorized dealer in India
• Treasury bills and other monetary
instruments of one year maturity
Rating of above institution – AA (-) by
S&P/Fitch IBCA or Aa3 by Moody’s
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.
Prepayment

• Prepayment of ECB up to $ 500 m is


allowed without prior approval of RBI

• Pre-payment of ECB for amounts


exceeding $ 500 m would be considered
by the Reserve Bank under the Approval
Route.
(Minimum average maturity period is
applicable to the loan.)
Refinancing

• The fresh ECB is raised at a lower


cost than the existing

• Maturity of the original ECB is


maintained.
Procedure
• No prior approval of RBI is required

• The borrower must obtain a Loan


Registration Number (LRN) from RBI
before drawing down the ECB.

• The procedure for obtaining LRN is


detailed in para II (i) (b). of FEMA
All-in-cost ceilings
Expenses paid in foreign Currency
• Interest
• Other fees & expenses
Expenses paid in Indian Currency
• Commitment fee
• Pre-payment fee

(The payment of withholding tax in Indian


Rupees is excluded for calculating the all-in-
cost.)
Expense Ceiling
Average All-in-cost Ceiling
Maturity Period over 6 month
LIBOR*
Three years and up 200 basis points
to five
years
More than five 350 basis points
years
Empowered
Committee

A committee established to
accept the proposal scrutiny
it and forward application to
RBI for permission for
Approval route ECB
Compliances with ECB
Guidelines
• Contravention of the ECB guidelines
will be viewed seriously
• Penal action will be taken under FEMA
1999 (cf. A. P. (DIR Series) Circular No.
31 dated February 1, 2005)
• The designated AD bank is required to
ensure that raising / utilization of ECB
is in compliance with ECB guidelines at
the time of certification.
Conversion of ECB
into Equity
• The 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 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.
$ 5 Million Scheme
AD banks are permitted to approve elongation of
repayment period for loans raised under the
$ 5 m Scheme, provided
• The overseas lender has given letter for such
reschedulement without any additional cost.
• Such approval with existing and revised repayment
schedule along with the Loan Key/Loan Registration
Number should be initially communicated to the Chief
General Manager-in-Charge, Foreign Exchange
Department, Reserve Bank of India, Central Office,
ECB Division, Mumbai within seven days of approval
and subsequently in ECB - 2.
Application

The complete application should be


submitted by the applicant through
the designated authorized dealer to the

Chief General Manager-In-


Charge, Foreign Exchange
Department, Central Office,
ECB Division, Reserve Bank
of India, Mumbai 400 001.
Documentation
(i) A copy of offer letter from the
overseas lender/supplier furnishing
complete details of the terms and
conditions of proposed ECB.
(ii) A copy of the import contract,
proforma/commercial invoice/bill of
lading.
Year ECB Inflows $ (mn approx)

2001-02 2652.64

2002-03 4234.96

2003-04 8175.50
Inflow of ECB
Month (2008) ECB Inflows $ (mn approx)

May 0995.67

June 1446.08

July 2461.82

August 0897.59

September 2834.95

October 1125.23

SOURCE-RBI
Foreign
Currency
Convertible
Bond
FCCB

Foreign Currency Convertible Bonds


(FCCB) are debt instruments issued in
a currency different than the issuer’s
domestic currency with an option to
convert them in common shares of
the issuer company.
Features of FCCB
• A debt instrument which can be converted into a
company’s equity shares if the investor chooses to
do so, at a pre-determined strike rate.
• FCCB issues have a ‘Call’ and ‘Put’ option to suit
the structure of the bond, both the options are
subject to RBI guidelines.
• The interest on FCCBs is generally 30% -40% less
than on normal debt paper or foreign currency
loans or ECBs. This translates to cost saving of
approx 2-3 percent p.a.
Features of FCCB
• FCCB can be secured as well as unsecured.
Most of the FCCB issued by Indian Companies
are generally unsecured.
• FCCB can be converted into Indian Shares or
American Depository Receipts (ADR)
• FCCB are generally listed to improve liquidity,
generally Indian issuer have listed at
Singapore Stock Exchange and in many cases
also on Luxembourg Stock Exchange.
Statutory Guideline &
RBI Regulation
FCCB can be raised by two ways :

i. Automatic Route

ii. Approval Route


Automatic Route

The automatic route is


available to real sector i.e.
Industrial sector, specially
infrastructure sector-in India
Approval Route
• Financial Institutions dealing exclusively 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 as approved by the
Government are also permitted to the extent of their investment in
the package and assessment by RBI based on prudential norms. Any
ECB availed for this purpose so far are deducted from their
entitlement.
Regulations
• Minimum Average Maturity shall be 3
years for borrowing up to $ 20 m and 5
years in case it exceeds $ 20 m

• The maximum amount of ECB to be


raised in a financial year can be $ 500 m
Utilization
(a) Investment purposes like Import of Capital
goods, New projects, modernization/expansion
programs in Industrial and infrastructure sector
(b) Overseas direct investment in JV or wholly
owned subsidiaries abroad
(c) RBI guidelines provide that funds received
through FCCB should be parked abroad till the
actual requirement arises in India.
Ministry of Finance
Guideline for Listed
Companies
• Eligibility of Issuer – Only Companies who
are allowed to raise capital from Indian
market

• Eligibility of Subscriber – Overseas Corporate


Bodies (OCBs) who are eligible to invest in
India through the portfolio route and entities
allowed to buy, sell or deal in securities by
SEBI
Pricing of FCCB
• The pricing should be made at a price not less than the
higher of the following two averages:
(i) The average of the weekly high and low of the closing
prices of the related shares quoted on the stock
exchange during the six months preceding the relevant
date;
(ii) The average of the weekly high and low of the closing
prices of the related shares quoted on a stock exchange
during the two weeks preceding the relevant date.
Buy Back of FCCB
• The buyback value of the FCCB shall be at a
minimum discount of 25% on the book value
• The funds used for the buyback shall be out of
internal accruals, to be evidenced by Statutory
Auditor and designated AD Category – I bank's
certificate
• The total amount of buyback shall not exceed
USD 50 million of the redemption value, per
company.
Issuance of FCCB By
Indian Companies
• FCCBs can be issued by Indian companies in the
overseas market in accordance with Scheme for
Issue of FCCB & Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993.

• The FCCB issue needs to conform to External


Commercial Borrowing guidelines, issued by RBI
vide Notification No. FEMA 3/2000-RB dated May
3, 2000 as amended from time to time.
Suzlon Energy Limited
•  May 16, 2007 launched and priced a Foreign
Currency Convertible Bonds (FCCBs) issuance
for an amount of USD 300 million.
• The FCCBs, which have a maturity of 5 years
and 1 day, are convertible at a conversion
price of Rs 1,800 per share.
• The FCCBs is listed on the Singapore Exchange
Securities Trading Ltd.
• Deutsche Bank is the Sole Bookrunner to the
transaction; and Yes Bank Ltd. advisor to the
Company.
References
 Reserve Bank of India
www.rbi.org.in
 Ministry of Finance
www.finmin.nic.in
 Foreign Exchange Management Act
www.femaonline.com
www.banknetindia.in
www.lawandlaws.sulekha.com
www.indlaw.com