External Commercial Borrowings-The Automatic And Approval Route
External Commercial Borrowings-The Automatic And Approval Route

 

India is one of the few countries that has promoted the inflow of capital as part of its developmental policy. Historically, the lack of deficit and domestic capital compelled the Indian government to go after foreign capital. Simply put, foreign capital is the money sourced from foreign countries for the purpose of making domestic investments.

There are various types of foreign capital ranging from Foreign Direct Investment (FDI) to Foreign Portfolio Investment (FPI). Conversely, there are other categories of foreign capital such as NRI Deposits, Trade Credits, as well as External Commercial Borrowings (ECBs), which is the most important foreign capital in India.

In view of the above, this article will take a look at the External Commercial Borrowings in India. Without further ado, let’s get started.

WHAT ARE EXTERNAL COMMERCIAL BORROWINGS (ECBs)?

An ECB is an instrument deployed by Indian companies to facilitate the process of raising money in foreign currencies from other countries.  The Indian government permits companies to seek foreign funding leveraging on external commercial borrowings with a view to expanding their business capacity, as well as to create fresh investments. Other schemes designed to aid companies’ quest in sourcing for funds internationally are FCEBs and FCCBs. Although the issuance of foreign currency convertible bonds is mainly to raise finance, the ECB is primarily a commercial loan which can come in the form of bonds, loans, buyers’ credit, securitized instruments, and suppliers’ credit obtained by non-resident lenders. It comes with a minimum maturity period of 3 years.

BENEFITS OF ECB

The following are the benefit of External Commercial Borrowings;

  • Cost: Borrowing money from external sources are usually cheaper, especially from countries whose lending rate is low. Indian companies will enjoy a lower interest rate when they borrow from the United States and some other countries from the Eurozone.
  • Large market: ECB makes the availability of a large market possible which companies can leverage on to satisfy large requirements. Ordinarily, it would have been difficult to enjoy this leverage domestically.
  • Debtors do not enjoy voting right: ECB is a loan, hence does not dilute stake in the company. It can be done without giving out the control of the company.
  • The borrowers can diversify the investor base
  • ECB provides a lot of opportunities for companies on a global scale
  • Access to international market
  • The economy will benefit greatly since the government will channel the capital inflow into creating people-driven policies.

DISADVANTAGES OF ECB

The following are some of the demerits of External Commercial Borrowings;

  • Excessive borrowing: Since the lending rate is low, companies may take advantage of this to indulge in excessive borrowings. This will result in a higher debt.
  • Rating agencies may downgrade any company whose debt profile is higher than expected.
  • Exchange rate risk: The borrowers will be exposed to exchange rate risk since repayment would be in foreign currency.

GUIDELINES OF EXTERNAL COMMERCIAL BORROWINGS

Access to External commercial borrowing is through two routes – Automatic and Approval Routes. We’ll now discuss these two routes in details.

AUTOMATIC ROUTE-

Eligible Borrowers

The following are the proposal covered under the Automatic Route;

  • Companies such as those in hospital, hotel, as well as Infrastructure Finance Companies are eligible to access ECBs provided they are duly registered under the 1956 Companies Act. However, individual, Non-profit making organization, and Trusts are not eligible to access ECBS.
  • Corporations under Special Economic Zones are also permitted to raise money via ECBS
  • Non-Government Organizations that are into the business of micro-finance are eligible to enjoy the benefits of ECBs, provided they have at least 3 years borrowing a relationship with a commercial bank that deals in foreign exchange and will also provide a certificate of due diligence.
  • Micro Finance Institutions (MFIs) registered under the 1860 Societies Registration Act are equally eligible to access ECBs.

Recognized Lenders

The following are the recognized lenders;

  • Borrowers can raise ECB from internationally recognized sources such as
  • International banks
  • International capital markets
  • Suppliers of equipment
  • Foreign collaborators
  • Foreign equity holders (other than erstwhile Overseas Corporate Bodies (OCBs).
  • Export credit agencies
  • Regional financial institutions
  • Multilateral financial institution

Amount and Maturity

The following are the amount with its corresponding maturity:

  • During a financial year, the maximum amount companies other than those in hospital, hotels, and software sectors can borrow is USD 750 million.
  • In a financial year, companies in the service sector such as hotel, hospital, and software sectors can borrow up to USD 200 million in order to meet Rupee capital spending for permissible end-uses.
  • External Commercial Borrowings that is up to USD 200 million in a financial year will attract a maturity period of 3 years
  • External Commercial Borrowings up to USD 750 million in a financial year will attract a maturity period of at least 5 years.
  • During a financial year, a Non-Governmental organization can raise up to USD 10 million.

All-in-cost ceilings

The all-in-cost ceilings include the following;

  • Rate of interest
  • Expenses in foreign currency
  • Other fees as applicable

The all-in-cost ceiling doesn’t include the following;

  • Commitment fee
  • Pre-payment fee
  • Fees payable in Indian Rupees

In order to calculate the all-in-cost, the payment of withholding tax will be excluded. The table below shows the valid ceilings;

AVERAGE MATURITY PERIOD ALL-IN-COST CEILINGS OVER 6 MONTHS
Three years and up to five years 350 basis points
More than five years 500 basis points

 

End-users not permitted

The following are the end-uses that are not permitted;

  • For real estate sector
  • For a general corporate purpose, working capital, and repayment of loans in Rupee
  • For investment in the capital market (such as Money Market Mutual Funds or Special Purchase Vehicles) by a company

Guarantees

The following are not permitted from India;

  • Issuance of guarantee
  • A standby letter of credit
  • Letter of undertaking
  • Letter of comfort by banks or Non-Banking Financial Companies (NBFCs)

Procedure For Application

The following are the procedure to apply for ECB via the Automatic Route;

  • Under Automatic Route of accessing ECB, participating borrowers are free to enter into a loan agreement with the recognized lenders provided the agreement complies with the External Commercial Borrowing guidelines with the prior approval of RBI.
  • A Loan Registration Number (LRN) must be obtained by borrowers from the Reserve Bank before submitting an application
  • The RBI may issue the Loan Registration Number after carefully perusing the borrowers’ credentials.

Approval Route-

Eligible borrowers

The following are the categories of bodies that are eligible to access ECB under Approval Route;

  • Lending by EXIM bank shall be acceptable only on a case by case basis
  • Financial institutions that had participated in the steel or textile sector are permitted to borrow money through the External Commercial Borrowings
  • International banks and agencies involved in the importation of infrastructure equipment
  • Non-Banking Financial Companies (NBFCs) are permitted to access ECB
  • Housing Finance Companies whose net worth is not less than Rs. 500 crore.
  • Under the Approval Route, Special Purpose Vehicles involved in the financing of infrastructure are also permitted, subject to the approval of RBI.
  • Multi-State Cooperative Societies that are into manufacturing business.
  • SEZ developers are permitted to avail ECBs provided they deploy the funds to infrastructures such as railway, roads, bridges, telecommunication, and industrial parks, among others.
  • Companies in the services sector like hospitals, hotels, as well as the software sector can also benefit from ECB.
  • Only under the Approval Route, companies under investigation by RBI can avail ECB.

Recognized Lenders

Under the Approval Routes, the following are the recognized lenders;

  • Borrowers can raise ECB from internationally recognized sources such as
  • international banks
  • international capital markets
  • suppliers of equipment
  • Foreign collaborators
  • Foreign equity holders (other than erstwhile Overseas Corporate Bodies (OCBs).
  • Export credit agencies
  • Regional financial institutions
  • Multilateral financial institution

Amount and Maturity

The following are the amount with its corresponding maturity for the Approval Route:

  • During a financial year, the maximum amount companies other than those in hospital, hotels, and software sectors can borrow is USD 750 million.
  • In a financial year, companies in the service sector such as hotel, hospital, and software sectors can borrow up to USD 200 million in order to meet Rupee capital spending for permissible end-uses. However, the funds would not be used to buy landed properties.
  • Companies in the infrastructure sector can obtain ECBs in Renminbi provided the annual ceiling is not more than USD one billion for the sector.

All-in-cost ceilings

The all-in-cost ceilings include the following;

  • Rate of interest
  • Expenses in foreign currency
  • Other fees as applicable

The all-in-cost ceiling doesn’t include the following;

  • Commitment fee
  • Pre-payment fee
  • Fees payable in Indian Rupees

In order to calculate the all-in-cost, the payment of withholding tax will be excluded. The table below shows the valid ceilings;

AVERAGE MATURITY PERIOD ALL-IN-COST CEILINGS OVER 6 MONTHS
Three years and up to five years 350 basis points
More than five years 500 basis points

 

End-users not permitted

For Approval Route, the end-uses not permitted are;

  • For real estate sector
  • For a general corporate purpose, working capital, and repayment of loans in Rupee
  • For investment in the capital market (such as Money Market Mutual Funds or Special Purchase Vehicles) by a company

Guarantees

The following are not permitted from India;

  • Issuance of guarantee
  • A standby letter of credit
  • Letter of undertaking
  • Letter of comfort by banks or Non-Banking Financial Companies (NBFCs)

However, any corporation seeking to apply for a standby letter of credit from a commercial bank in the case of SME shall be considered based on prudential norms on merit.

Prepayment

The following are conditions for repayment;

  • The AD bank will allow a repayment of up to USD 500 million provided it complies with the minimum average maturity period.
  • Any repayment above USD 500 million would be routed through the RBI under the Approval Route.

Debt Servicing

From time to time, the designated AD bank can make remittances of interest, principal, as well as other charges in line with the guidelines of ECB.

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