GBF Unit - VI

8/3/2019 GBF Unit - VI

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Course Leader:

K. Srinivasan

Department of Management Studies

Christ University, Bangalore.


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Meaning of ECB

ECB is the most fancied (imaginary) three-letter word inCorporate India. ECB s lends money from investors outside Indiaare being permitted by the Government as a source of finance forIndian Corporates. ECBs are defined to include Commercial BankLoans, Fixed and Floating Rate Bonds and Borrowings from Private

Sector windows of Multilateral Financial Institutions such asInternational Finance Corporation, Official Export Credit Agencies,Euro-issues include Euro-convertible bonds and GDRs.

In India, External Commercial Borrowings are being permitted

by the Government for providing an additional source of funds toIndian Corporates and PSUs for financing expansion of existingconcern and as well as for fresh investment etc. ECBs can be used forany purpose except for investment instock market and speculation inreal estate.


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Sources of Funding Agencies

Corporates are free to raise ECB from any

internationally recognized source such as

Banks

Export Credit Agencies

Suppliers of Equipment

Foreign Collaborators

Foreign Equity-Holders and International Capital Markets etc.

However, offers from unrecognized sources will not

be entertained.


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Regulators of ECBThe Department of Economic Affairs, Ministry of

Finance, and Government of India with support of

Reserve Bank 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 and Euro-issues. The Government

also puts restrictions for short-term borrowers to

participate in ECB.


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ECB GuidelinesThe important aspect of ECB policy is to provide

flexibility in borrowings by Indian Corporates, atcosts low and encourage infrastructure and exportsector financing which are crucial for overall growthof the economy. The ECB policy focuses on threeaspects:

Eligibility criteria for accessing external markets.The total volume of borrowings to be raised and

their Maturity Structure.

End use of the funds raised.


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Status of ECB in IndiaTable: 1 Year

wise Flow of ECB from (1990-1991 to 2006-2007)

(US$ Million)Year Approvals Gross Payment Amortization Interest Total Debt Services

1992-93 2200 1001 1357 917 2274

1993-94 2585 1859 1703 896 2599

1994-95 4469 2670 2513 1091 3604

1995-96 6286 4538 3311 1162 4473

1996-97 8581 7018 4032 1177 5209

1997-98 8712 7400 3411 1406 4817

1998-99 5200 6927 3153 1575 4728

1999-00 3398 2289 3460 1635 5095

2000-01 2837 9295 5043 1683 67262001-02 2653 2933 4013 1534 5547

2002-03 4235 3033 5001 1180 6181

2003-04 6671 5149 8015 2031 10046

2004-05 11490 9094 3571 959 4530

2005-06 17175 14606 11554 3015 14569

2006-07 26156 20058 4182 1772 5954


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Automatic Route The Indian government has decided to place fresh ECB loans approvals up to

$ 50 million without any approval from the Government or the RBI underautomatic route.

After signing the loan agreement with the overseas lender, the company hasto submit three copies to the concerned regional office of the RBI through anauthorized dealer. The regional office of the RBI would then acknowledgethe receipt of the copy of the loan agreement and allot a loan identificationnumber to the company.

The RBI has the full rights to notices any violation of rules, initiate actionagainst the company under the Foreign Exchange Management Act (FEMA).

The Companies are required to file quarterly returns in a prescribed formatthrough a authorized dealers.

Earlier there were separate formats for filing applications with the RBI andthe government, now it has been simplified into one uniform format.


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USD 5 Million Schemes

Raising of ECB under the scheme does not exceedUSD 5 million (USD 3 million earlier) or itsequivalent

The borrowing should be for a minimum simple

maturity of three years.


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USD 100 Million SchemeThe amount raised from ECBs does not

exceed USD 100 million or its equivalentThe minimum average maturity of the loan

should be of three years.

The RBI is the sanctioning authority for allproposals received under this scheme.


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Exporters/Foreign Exchange EarnersCorporates who have foreign exchange earnings are

permitted to raise ECB up to three times the averageamount of annual exports during the previous three

years subject to a maximum of USD 200 million withoutend-use restrictions, i.e. for general corporate objectivesexcluding investments in stock markets or in real estate.The minimum average maturity will be three years up to

USD 20 million equivalent and five years for ECBsexceeding USD 20 million. The maximum level ofentitlement in any one year is a cumulative limit and debtoutstanding under earlier approvals will be netted out todetermine annual eligibility.


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Infrastructure ProjectsIt is clarified that the following sectors will

qualify as infrastructure sectors under the ECBguidelines: -

Power Telecommunication

Railways

Roads including bridges

Ports Industrial parks

Urban infrastructure Water supply, sanitation andSewage projects.


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End-Use Requirements

ECBs can be used for any purpose (rupee-related expenditure as well as imports) except thefollowing - Utilization of ECB proceeds have beenspecifically disallowed for

Investment in Stock Market

Speculation in Real Estate

Earlier, Corporates were allowed to use ECBproceeds only for specific project purposes.


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New ProjectsAll infrastructure and Greenfield projects are

permitted to avail ECBs to an extent of 50% of thetotal project cost, as appraised by a recognizedfinancial institution/bank. ECB limits for telecomprojects are 50% of the total project cost includinglicense fee. Infrastructure projects in power andsome other sectors will be permitted to have ECB

exposure of more than 50% depending on themerits of the case.


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Structured Obligation Facility for

NBFCs

Non Banking Finance Companies (NBFCs) wouldalso be eligible to avail of credit enhancementscheme on compliance with the following additional

conditions: - NBFC should be registered with RBI.

It should have earned profits during the lastthree years.

It should have secured "AA" or equivalent ratingfrom a reputed Credit Rating Agency.

However, in the case of NBFCs where a creditimprovement guarantee has been provided by its

parent company.


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Other Terms & Conditions Management fee, Legal fee, Penal charges etc. of each ECB

proposal are required to be reasonable and market-related.

The choice of the sourcing of ECB, currency of the loan, and theinterest rate basis (i.e. floating or fixed), will be left to theborrowers.

The Finance Ministry has also decided to permit companies whichhave approval for ECBs to carry out payments in foreign exchangeto their overseas lawyers and bankers, through the currentaccount, even if the loan agreement has not been signed.

Indian firms should able to firm up their loan agreements withinthe mandatory period of six months.


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Repayment of Loan/Credit &

Payment of Other ChargesIn order to simplify the procedures, authorizeddealers have been delegated the powers to allow

remittance of penal interest, irrespective of period ofdefault and number of occasions. Hence,

applications for remittance of penal interest fordefaulting in repayment of principal/payment ofinterest can be referred to the Authorized Dealers.


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Validity of ApprovalAll approvals are valid for a period of six months, i.e. the

executed copy of the loan agreement is required to besubmitted within this period.

Bonds, Debentures, FRNs and other such instruments willhave additional validity period of three months for all theECB approvals across the board.

In case of power projects, the approval is valid for 1 year.

In case of telecom projects, it is valid for 9 months fromthe date of approval.

In case of Infrastructure projects, financial closure mayget delayed for reasons beyond the investors control, soextension will be considered on merits.


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Refinancing the existing Foreign

Currency Loan

The Government has decided to allow all refinancing

to existing ECBs under the automatic route. Rollingover of ECB will not be permitted.

Further, a corporate borrowing overseas for financing

its rupee - related expenditure can swap its externalcommercial borrowings with another corporatewhich requires Foreign Currency Funds.


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RBI Permits Microfinance to Rise ECBRecently, RBI allowed Non Government

Organizations (NGOs) engaged in Micro Financeactivities to raise external commercial borrowing(ECB) up to $5 million during a financial yearrecently.

Our Finance minister P Chidambaram in his annual

budget 2008, had urged the central bank to open awindow to enable qualified NGOs engaged in micro-finance activities to use the ECB window.


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Thank You

Documents

GBF Unit - VI