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TABLE OF CONTENTS
Overview ........................................................................................................................................................................................ 3 Regulations.................................................................................................................................................................................... 3 Eligible Borrowers ............................................................................................................................................................... 3 Recognized Lenders ............................................................................................................................................................ 4 Amount and Maturity ......................................................................................................................................................... 4 All-in-cost ceilings ................................................................................................................................................................ 4 End Use ...................................................................................................................................................................................... 5 Procedure ................................................................................................................................................................................. 5 Guarantees ............................................................................................................................................................................... 5 Security ...................................................................................................................................................................................... 5 Parking of ECB proceeds overseas .............................................................................................................................. 6 Prepayment ............................................................................................................................................................................. 6 Refinance of existing ECBs ............................................................................................................................................... 6 Debt servicing ......................................................................................................................................................................... 6 Policy Impact: Tightening in ECB norms .................................................................................................................. 6 Market Analysis .......................................................................................................................................................................... 7 Amount of ECB raised over the previous year on a monthly basis ............................................................. 7 Purpose wise distribution of ECBs raised during March10-February11 .............................................. 7 Modes of raising ECBs ........................................................................................................................................................ 8 Reasons for ECBs attractiveness to ............................................................................................................................ 8 Benefits of ECBs over other sources of funds ........................................................................................................ 8 Investment Scenario................................................................................................................................................................. 8 Major Indian Companies availing ECB facility:- .................................................................................................... 8 Major arrangers for ECBs in India ............................................................................................................................... 9 Recent Major ECB deals ..................................................................................................................................................... 9 Future Outlook ....................................................................................................................................................................... 9 Key issues with ECB policy ................................................................................................................................................... 9
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OVERVIEW
Foreign currency borrowings raised by the Indian companies from sources outside India are called External Commercial Borrowings (ECBs). These are commercial loans with minimum average maturity of 3 years. The ECBs include: Bank Loans Buyers Credit Suppliers Credit Securitized instruments (e.g. floating rate notes and fixed rate bonds) Credit from official export credit agencies Commercial borrowings from the private sector window of multilateral financial institutions Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds
ECBs act as an additional source of funds for companies to finance its investment needs. Balance of payment and foreign exchange reserves position are two important drivers to decide the level of ECBs.
REGULATIONS
In India, ECBs can be accessed through automatic and approval route. Major regulators governing the ECBs in India are Exchange Control Department of RBI and ECB Division in Department of Economic Affairs at Ministry of Finance. ECB policy aims at keeping maturities long, costs low and encourages infrastructure and export sector financing so as to ensure overall growth of the economy. ECB policy focuses on three aspects: Eligibility criteria for accessing external markets Total amount of borrowings to be raised and their maturity structure End use of the funds raised
APPROVAL ROUTE
1. Infrastructure or export finance companies such as IDFC, IL&FS, Power Finance Corporation, IRCON, Power trading corporation and EXIM bank 2. Banks and financial institutions which participated in the textile or steel restructuring package 3. NBFCs to finance import of infrastructure equipment for leasing 4. Multistate Co-operative society engaged in manufacturing activities Page 3
RECOGNIZED LENDERS
1. Internationally recognized sources such as international banks, international capital markets, and multilateral financial institutions such as IFC, ADB and CDC, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders. 2. Overseas organizations and individuals with a certificate of due diligence from overseas bank adhering to host country regulations (applicable only under the automatic route). In case of foreign equity holders,
AUTOMATIC ROUTE
For ECBs up to USD 5 million at least 25 percent to be held directly by the lender For ECBs more than USD 5 million - at least 25 percent to be held directly by the lender and proposed ECB should not exceed four times the direct foreign equity holding
APPROVAL ROUTE
At least 25 percent to be held directly by the lender but proposed ECB exceeds four times the direct foreign equity holding.
APPROVAL ROUTE
Corporate can avail an additional amount of USD 250 million with average maturity of more than 10 years over and above the existing limit of USD 500 million under the automatic route.
ALL-IN-COST CEILINGS
All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, withholding tax payment and fees payable in Indian Rupees. Following are the all-in-cost ceilings:-
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A research report on External Commercial Borrowing by Indian Companies Average Maturity Period Three to five years More than five years All-in-cost Ceilings over 6 month LIBOR 300 basis points 500 basis points
END USE
Permitted for 1. Investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in industrial sector including SMEs and infrastructure sector. 2. Overseas direct investment in Joint ventures and Wholly owned subsidiaries 3. First stage acquisition of shares in the disinvestment process and in the mandatory second stage offer under the Governments disinvestment programme of PSU shares. 4. NGOs engaged in micro finance activities can utilize the proceeds for a. lending to self-help groups b. micro credit c. bonafide micro finance activity including capacity building Not permitted for 1. On-lending or investment in capital market or acquiring a company 2. Investment in real estate 3. Working capital, general corporate purpose and repayment of existing rupee loan
APPROVAL ROUTE
Borrower submits the application through Authorized Dealer (AD) to RBI
GUARANTEES
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not permitted.
SECURITY
Choice of security is left to the borrower but in case of creation of charges over immovable assets and financial securities such as shares is subjected to FEMA regulations.
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PREPAYMENT
Prepayment up to USD 200 million is allowed by ADs without prior approval of RBI but minimum average maturity period needs to be maintained. For prepayment more than USD 200 million, approval from RBI is required.
DEBT SERVICING
Designated Authorized Dealers (ADs) make remittances of installments of principal, interest and other charges.
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MARKET ANALYSIS
AMOUNT OF ECB RAISED OVER THE PREVIOUS YEAR ON A MONTHLY BASIS
US $ Billions
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.1 0.3 0.4 0.6 2.7 1.9 1.5 1.9 1.5 0.7 0.7 0.9 1.1 3.1 3.2 4.3
1.1 1.1
1.3 0.8
2009 2010
22.01% 30.09%
10.18%
10.25% 2.84% 0.39% 7.42% 12.31% 2.26% 2.16% 0.01%
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BORROWER
Large amounts of funds can be raised Easy availability of funds for large reputed borrowers Diversification of lenders base
INVESTMENT SCENARIO
MAJOR INDIAN COMPANIES AVAILING ECB FACILITY:1. Telecom companies such as Idea, Aircel, Tata Teleservices , Vodafone and Sistema Shyam Teleservices 2. Reliance Industries
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A research report on External Commercial Borrowing by Indian Companies 3. Financing companies in power sector such as Power Finance Corporation, Rural Electrification Corporation 4. Infrastructure companies such as Jai Prakash Associates, IVRCL and Larsen & Toubro
FUTURE OUTLOOK
We can expect an increase in demand for ECBs amongst the Indian Companies because of the following reasons:1. Plans for Huge Spending on Infrastructure project 2. Domestic interest rates are moving upwards
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