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ECB&

PRESENTATION

ON:


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PresentedBy :Apurv Gourav BA0712Parikshit Gupta BA0731

Saurabh Dwivedi BA0745


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ExternalCommercial


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ECBA source of funds for financing expansion of existing

capacity and for fresh investment out of territory

External Commercial Borrowings (ECB) refer tocommercial loans availed from non-resident lenders


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ECB includes: commercial bank loans

buyers credit

suppliers credit securitized instruments such as floating rate notes

fixed rate bonds

credit from official export credit agencies,


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ECB includes: Commercial borrowings from the private sector

Window of multilateral financial institutions such asIFC, ADB, AFIC, CDC etc.

Investment by Foreign Institutional Investors (FIIs)in dedicated debt funds


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Why ECB Scarcity of fund in domestic market

Cheaper than domestic debts


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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)


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Policy Permitted by the Government as a source of finance

for Corporate to expand their existing capacity & forfresh investment

An annual cap or ceiling on access to ECB, consistentwith prudent debt management

Greater priority for projects in the infrastructure,

Power, oil, telecom, railways, Roads & Bridges,Ports, Industrial parks, urban Infrastructure &export sector.


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Ways of raisingECB

Automatic route Approval route


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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.


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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.


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Recognized Lenders International banks

International capital markets

Multilateral financial institutions (IFC, ADB, CDC) Export credit agencies

Suppliers of equipment

Foreign collaborators Foreign equity holders


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Condition forForeign Equity Holders For ECB up to $ 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 notexceed 4:1

(The proposed ECB not exceeding four times the directforeign equity holding).


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Amount & MaturityMaximum 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.


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UtilizationImport of capital goods (as classified by DGFT in theForeign Trade Policy), by new or existing production

units, in real sector - industrial sector SME andinfrastructure sector

Power, Telecommunication, Railways, road includingbridges, sea port and airport, industrial parks, urban

infrastructure (water supply, sanitation and sewageprojects)

Overseas direct investment in Joint Ventures

(JV)/Wholly Owned Subsidiaries (WOS)


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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.


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Parking of ECB Deposits or Certificate of Deposit or other products

offered by banks

Deposits with overseas branch of an authorizeddealer in India

Treasury bills and other monetary instruments of oneyear maturity

Rating of above institutionAA (-) byS&P/Fitch IBCA or Aa3 by Moodys

The funds should be invested in such a way that theinvestments can be liquidated as and when funds arere uired b the borrower in India.


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Prepayment Prepayment of ECB up to $ 500 m is allowed

without prior approval of RBI

Minimum average maturity period is applicable to the

loan.


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Refinancing The fresh ECB is raised at a lower cost than the

existing

Maturity of the original ECB is maintained.


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Procedure No prior approval of RBI is required

The borrower must obtain a Loan RegistrationNumber (LRN) from RBI before drawing down the

ECB.

The procedure for obtaining LRN is detailed in para

II (i) (b). of FEMA


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Approval

Route


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FIs dealing exclusively with infrastructure or exportfinance such as IDFC, IL&FS, Power FinanceCorporation, Power Trading Corporation, IRCONand EXIM Bank are considered on a case by case

basis.

Banks & FIs which had participated in the textile orsteel sector restructuring package as approved by the

Government are permitted to the extent of theirinvestment in the package and assessment by ReserveBank based on prudential norms. Any ECB availedfor this purpose so far will be deducted from their

entitlement.

Eligible Borrowers


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Eligible Borrowers ECB with minimum average maturity of 5 years byNBFCs from multilateral financial institutions reputable

regional financial institutions, official export credit

agencies and international banks to finance import of

infrastructure equipment for leasing to infrastructureprojects.

Corporate in services sector viz. hotels, hospitals andsoftware companies can avail ECB for import of capital

goods


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Eligible Borrowers Special Purpose Vehicles, or any other entity notified

by the Reserve Bank, set up to finance infrastructurecompanies / projects exclusively, will be treated asFinancial Institutions and ECB by such entities willbe considered under the Approval Route.

Multi-State Co-operative Societies engaged inmanufacturing activity satisfying the followingcriteria

i) the Co-operative Society is financially solvent and

ii) the Co-operative Society submits its up-to-dateaudited balance sheet.

Corporate engaged in industrial sector andinfrastructure sector in India can avail ECB for

Rupee expenditure for permissible end-uses.


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Eligible BorrowersForeign Currency Convertible Bonds (FCCBs) by housing

finance companies satisfying the following minimum

criteria:

(i) the minimum net worth of the financial intermediaryduring 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.


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Eligible Borrowers NGOs engaged in micro finance activities are eligible

to avail ECB for Rupee expenditure for permissibleend-uses. The maximum limit for NGOs are $ 5 m.

Such NGO

(i)should have a satisfactory borrowing relationshipfor at least 3 years with a scheduled commercial bankauthorized to deal in foreign exchange

(ii)Would require a certificate of due diligence on `fitand proper status of the board/committee ofmanagement of the borrowing entity from thedesignated Authorized Dealer bank.


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Recognized Lenders ECBs 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


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Condition forForeign 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).


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Borrowing from OverseasOrganizationsOverseasOrganizationsproposing to lend ECB would have

to furnish a certificate of due diligence from an overseasbank 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.


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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 yearwith minimum average maturity of three years .

ECB above $ 20 m and up to USD 500 million orequivalent with a minimum average maturity offive years.


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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

Amount & Maturity


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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 servicesector, viz., hotels, hospitals and software companies.


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Restricted Areas On-lending or investment in capital market or

acquiring a company

Real estate

For working capital, general corporate purpose andrepayment of existing Rupee loans.


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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 oneyear maturity

Rating of above institutionAA (-) byS&P/Fitch IBCA or Aa3 by Moodys

The funds should be invested in such a way that theinvestments can be liquidated as and when funds are

required by the borrower in India.


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Prepayment Prepayment of ECB up to $ 500 m is allowed

without prior approval of RBI

Pre-payment of ECB for amounts exceeding $ 500 mwould be considered by the Reserve Bank under the

Approval Route.(Minimum average maturity period is applicable tothe loan.)


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Refinancing The fresh ECB is raised at a lower cost than the

existing

Maturity of the original ECB is maintained.


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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


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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 isexcluded for calculating the all-in-cost.)


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Expense CeilingAverage MaturityPeriod

All-in-cost Ceiling over 6month LIBOR*Three years and up to five

years

200 basis points

More than five years 350 basis points


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Empowered CommitteeA committee established to accept the

proposal scrutiny it and forwardapplication to RBI for permission for

Approval route ECB


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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 withECB guidelines at the time of certification.


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Conversion of ECB into Equity The activity of the company is covered under the

Automatic Route for Foreign Direct Investment orGovernment 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 CCIguidelines/regulations in the case of listed/unlistedcompanies as the case may be.


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$ 5 Million SchemeAD banks are permitted to approve elongation of

repayment period for loans raised under the$ 5 mScheme, 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 ChiefGeneral Manager-in-Charge, Foreign ExchangeDepartment, Reserve Bank of India, Central Office,ECB Division, Mumbai within seven days of

approval and subsequently in ECB - 2.
http://rbi%20ecb.pdf/http://rbi%20ecb.pdf/


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ApplicationThe complete application should be

submitted by the applicant through

the designated authorized dealer to the

Chief General Manager-In-Charge, ForeignExchange Department, Central Office, ECBDivision, Reserve Bank of India, Mumbai400 001.
http://rbi%20ecb.pdf/http://rbi%20ecb.pdf/


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Documentation(i) A copy of offer letter from the overseas

lender/supplier furnishing complete

details of the terms and conditions ofproposed ECB.

(ii) A copy of the import contract,

proforma/commercial invoice/bill oflading.

Year ECB Inflows $ (mn approx)
http://ecb%20in%2002%2C03%2C04.pdf/http://ecb%20in%2002%2C03%2C04.pdf/


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Year ECB Inflows $ (mn approx)

2001-02 2652.64

2002-03 4234.96

2003-04 8175.50

I fl f ECB
http://ecb%20in%2002%2C03%2C04.pdf/http://ecb%20in%2002%2C03%2C04.pdf/


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Inflow of ECB

0

1000

2000

3000

4000

5000

6000

7000

Jan-Mar 06 Apr-Jun 06 Jul-Sep 06 Oct-Dec 06 Jan-Mar 07 Apr-JUN 07 Jul-Sep 07 Oct-Dec 07 Jan-Mar 08 Apr- Jun 08

3934 3959

1761

4077

6673

6990

4136

6212

4827

1559

$(mn)

SOURCE

DNA Money,20 Dec 08

Month (2008) ECB Inflows $ (mn approx)


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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
http://may.pdf/http://june.pdf/http://jul.pdf/http://aug.pdf/http://ecb%20sep.pdf/http://ecb%20in%20oct.pdf/http://ecb%20in%20oct.pdf/http://ecb%20sep.pdf/http://aug.pdf/http://jul.pdf/http://june.pdf/http://may.pdf/


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Foreign CurrencyConvertible Bond


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FCCBForeign Currency Convertible Bonds (FCCB)

are debt instruments issued in a currencydifferent than the issuers domesticcurrency with an option to convert them incommon shares of the issuer company.


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Features of FCCBA debt instrument which can be converted into a

companys equity shares if the investor chooses to doso, at a pre-determined strike rate.

FCCB issues have a Call and Put option to suit thestructure of the bond, both the options are subject toRBI guidelines.

The interest on FCCBs is generally 30% -40% lessthan on normal debt paper or foreign currency loansor ECBs. This translates to cost saving of approx 2-3percent p.a.


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Features of FCCB FCCB can be secured as well as unsecured. Most of

the FCCB issued by Indian Companies are generallyunsecured.

FCCB can be converted into Indian Shares orAmerican Depository Receipts (ADR)

FCCB are generally listed to improve liquidity,generally Indian issuer have listed at Singapore StockExchange and in many cases also on LuxembourgStock Exchange.


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Statutory Guideline & RBIRegulationFCCB can be raised by two ways :

i. Automatic Route

ii. Approval Route


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Automatic RouteThe automatic route is available to real

sector i.e. Industrial sector, speciallyinfrastructure sector-in India


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Approval Route Financial Institutions dealing exclusively withinfrastructure 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.


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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


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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 ownedsubsidiaries abroad

(c) RBI guidelines provide that funds received through

FCCB should be parked abroad till the actualrequirement arises in India.


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Ministry of Finance Guideline forListed Companies Eligibility of IssuerOnly Companies who are

allowed to raise capital from Indian market

Eligibility of SubscriberOverseas 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


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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 stockexchange during the six months preceding the relevant

date;

(ii) The average of the weekly high and low of theclosing prices of the related shares quoted on a stock

exchange during the two weeks preceding the relevant

date.


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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 StatutoryAuditor and designated AD CategoryI bank's

certificate

The total amount of buyback shall not exceed USD50 million of the redemption value, per company.


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Issuance of FCCB By IndianCompanies FCCBs can be issued by Indian companies in the

overseas market in accordance with Scheme for Issueof FCCB & Ordinary Shares (Through Depository

Receipt Mechanism) Scheme, 1993.

The FCCB issue needs to conform to ExternalCommercial Borrowing guidelines, issued by RBI vide

Notification No. FEMA 3/2000-RB dated May 3,2000 as amended from time to time.


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Suzlon Energy Limited

May 16, 2007 launched and priced a Foreign CurrencyConvertible Bonds (FCCBs) issuance for an amount ofUSD 300 million. The FCCBs, which have a maturity of 5 years and 1 day,are convertible at a conversion price of Rs 1,800 pershare. The FCCBs is listed on the Singapore Exchange

Securities Trading Ltd. Deutsche Bank is the Sole Bookrunner to thetransaction; and Yes Bank Ltd. advisor to the Company.


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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.comwww.indlaw.com
http://www.rbi.org.in/http://www.finmin.nic.in/http://www.femaonline.com/http://www.banknetindia.in/http://www.lawandlaws.sulekha.com/http://www.indlaw.com/http://www.indlaw.com/http://www.lawandlaws.sulekha.com/http://www.banknetindia.in/http://www.femaonline.com/http://www.finmin.nic.in/http://www.rbi.org.in/


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