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Importance of ECBs i.

Access to Funds in Foreign currency: Foreign currencies funds are needed by companies for many purposes such as for payments to suppliers in foreign countries. ii. Cheaper Funds: The cost of borrowing funds from external sources at times works out to be cheaper as compared to the cost of funds borrowed in Rupee domestically. iii. Diversification of Investor Base: ECB also help in the addition of more investors thus help in diversifying the investor base. iv. Funding Large requirements: The international market is a better option in case of large requirements, as the availability of the funds is huge when compared to domestic market. The government with the ECB policies is trying to nourish 2 sectors: i. Infrastructure ii.SME In these two sectors the policies do not require any approval for investment under a limit. Therefore it is easy to obtain foreign loans for enterprises of these two sectors. ECBs also provides the SMEs funds at low costs by providing access tp the low cost of funds in the global market and thus bringing in more money in these sectors. Disadvantages of ECBs Funds raised through ECBs are in foreign currency and hence the interest & redemption proceeds are also payable in the foreign currency, the company issuing ECB has to hedge its foreign exchange exposure, which involves expenditure. If the company decides to keep its foreign exchange exposure unhedged, there exists a huge risk due to fluctuation in foreign exchange rates. In view of this problem RBI has instructed the banks to put in place a system for monitoring the unhedged foreign exchange exposure of small and medium enterprises. The funds obtained through ECBs have to be utilized in compliance with the end uses permitted under the guidelines; also these funds cannot be utilized for working capital or general corporate purposes. v) End-uses a) ECB can be used to raise funds for investment such as import of capital goods, new projects, modernization/expansion of existing production units in real sector - industrial sector including SME, infrastructure sector and specified service sectors, namely, hotel, hospital, software in India. b) For acquisition of shares in the disinvestment process at first stage. c) Interest During Construction (IDC) for Indian companies which are in the infrastructure sector d) For lending to self-help groups or for micro-credit or for micro finance activity including capacity building by NGOs engaged in micro finance activities. e) For payment of Spectrum Allocation. vi) End-uses not permitted ECB borrowings shall not be utilized for any other purpose including the following purposes: (a) For on-lending or investment in capital market or acquiring a company in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds etc., are also considered as investment in capital markets].

(b) For real estate sector (c) For working capital, general corporate purpose and repayment of existing rupee loans. Benefits of FCCB For Issuers Coupon payment on bond is lower due to equity side of bond Conversion premium adds to the capital reserves Fewer covenants as compared to a syndicated loan or a debenture For Investors Assured returns in the form of fixed coupon rate payments Ability to take advantage of price appreciation in the stock by the means of warrants attached to the bonds Lower tax liability as compared to pure debt instruments due to lower coupon rate Disadvantage of FCCBs In a falling stock market, there is no demand When converted into equity, FCCB bring down earnings per share and dilute the ownership In the long run, equity is costlier than debt and hence when interest rates are falling, FCCB are not preferred. Exchange rate risk due to conversion at a future date.