By:-

PROF. G. SRINIVASAN
NITIE, Mumbai
What were the limits on ECB

INTRODUCTION
The successful handling of Balance of
payments (BOP)
Implementation of structural reforms
GUDIELINES FOR ECB
To ensure that debt is kept at a sustainable
level.
ECB are to be used for only meeting the
foreign exchange cost of capital investment.
ECB is defined to include suppliers credits
from officially sponsored agencies but
excludes all borrowings less than 1-year.
External commercial loans proposed for total
export production purposes are given priority.
Applicants are free to raise commercial loans
from any internationally reconised source.
 Contd..
The choice of repayment schedule within the
final maturity is left to the borrowers.
The choice of security to be provided to the
external commercial lenders will be left to the
borrowers.
After getting approvals from the govt.,
applicants are required to obtain additional
approval from RBI under FERA.
To streamlining the procedure, it is proposed
to introduce a single-window clearance
whereby only the approval of the govt. will be
required for all commercial borrowings.
EURO-DOLLAR MARKET
The market consists of international banks,
finance companies, foreign exchange banks &
special institutions.
The market is dominated by Euro-Dollars
which consists of dollar denominated deposits
in bank outside the U.S., including Canadian
banks and overseas branches of U.S. banks.
Loans were initially granted to corporate
customers that were going multinational
As the time passed, it spread to a wide variety
of unknown firms.
 TABLE-I
Top-Twenty Arrangersof Euro-
Market Loans
1) National Westminster Bank
2) CSFB/Credit Suisse
3) Barclays Bank
4) ABN-AMRO Bank
5) Citicorp
6) J.P. Morgan
7) Chase Manbatton
8) Union Bank of Switzerland
9) Smithkline Beecham Group
10)Hongkong Bank/ Midland Group
Contd..
11) Bank of America
12) Deutsche Bank
13) Chemical Bank
14) Lloyds Bank Capital Market Group
15) N M Bothschild & Sons
16) Hanson Plc.
17) Sumitano Bank
18) Royal Bank of Canada
19) West LB
20) Bankers Trust Co.
TYPES OF EURO-DOLLAR
CREDITS
Two types of credits
Term Loan Credit
Revolving Credit

Term Loan Credit

Three stages
Draw down period
Grace period
Redemption Period
 There are three levels of banks
Lead Banks

LOAD SYNDICATION
Managing Banks
Participating Banks

Size of Loans- $ 500,000 to several billions

Duration of Syndication About 6 weeks

 TABLE II
TOP TEN LEAD
MANAGERS
1) Fuji Bank
2) Banque Nationale de Paris
3) Sumitomo Bank
4) Societe Generate
5) Citicorp
6) National Westminster
7) Credit Lyonms
8) Da-Ichi kangyo Bank
9) Barclays Bank
10) CSFB/ Credit Suisse
It reflect the nature of the market in which

PRICING OF EURO-
funds are brought and solid.

DOLLAR LOAN
The lending banks cost of funds varies

directly with the level of short term rates.

Interest on syndicated loans is altered every 3

or 6 months bearing fixed relationship to the

LIBOR.
Contd..
Annual charges on a syndicated loans

(LIBOR + Spread ) x Amount of loan + Praecipium x

Amount of loan+ commitment fee x amount of loan
undrawn +annual agent fee, if any.
Front-end Charges

Participation Fee x amount of loan + Management

Fee x amount of loan + Initial agents fee, if any.
LOAN AGREEMENT
PROVISIONS
Simpler & contain fewer restrictive covenants

as compared to loans from domestic financial

institutions.
Reflects international character of loan
PLACE AND METHODS OF
PAYMENT
Guarantee Clause
Pari passu Clause
Reserve Requirement Clause
Subroutine Clause
Free and Clear of taxes
Euro Dollar Availability Clause
Loan Repayment
EURO ISSUES
Global Depository Receipts

Permission for Issue

Guidelines for Issue of GDR and FCCB

Modification to Guidelines

Advantages of GDR for the Issuer

Advantage to the Investor

GLOBAL DEPOSITORY
RECEIPTS
Nature and Definition
GDRs are negotiable certificates that usually represent a
companys publically traded equity and are
denominated in US dollars.

GDRs can be treated as direct investment

GDRs simplify cross border trading and settlement,

enhance liquidity , minimize transaction costs,
accommodate legal restrictions or direct ownership of
shares, realize tax advantages and broaden investor base.
Permission for Issue
Companies seeking to raise funds abroad

through the issue of GD Rs. need prior

permission from the Ministry of Finance, GOI
 GUIDELINES FOR ISSUE
OF
1. Consistent track record of god performance for a

2.GDRS AND FCCBS

minimum period of three years
The aggregate of the foreign investment made
either directly or indirectly should not exceed 51% of
the issued and subscribed capital of the issuing
company
3. GDR may be issued for one or more underlying
shares or bonds.
4. There is no lock in period for GDR issued under this
scheme.
5.Capital gains on account of transactions in
GDR/FCCB among non resident investor outside India
are free from any income tax liability in India.
Modification to
Guidelines
1.Any Group of Companies will not be allowed
more than two Euro issues during a financial
year
2.There must be a minimum gap of 12 months
between two issues floated by a single firm
3.Euro issue, 85% should be utilised within 1
year from the date of issue
4. The balance of 15% can be utilized for other
general uses like corporate restructuring.
ADVANTAGES OF GDR FOR
THE ISSUER
1. Euro Issues cost less than domestic right
issues

2.The Indian company does not bear any

foreign exchange risk since the securities

are denominated in rupees.
ADNATAGES TO THE
INVESTOR
They enjoy the benefits of international diversification

Free of foreign exchange risk

GDRs are quite as liquid as the underlying shares

GDR transactions do not involve the foreign investor

in SEBI approval as a foreign investor

GDRs are attractive to foreign investors because the

returns are large.
AMERICAN DEPOSITORY
RECEIPTS
The Indian GDRs are based upon American

Depository Receipts(ADRs)

They are identical from a legal, operational,

technical and administrative point of views

TYPE OF ADRS
There are three different types of ADRs;

1. Level 1

2. Level 2

3. Level 3
MANAGEMENT OF GDR
ISSUE
1. Lead Manager:-
The lead manager has to coordinate the syndicate members and
prevent market distortions.

2. Marketing :-
Road shows are held to contribute company research reports ,
to explain the expected future earning potentials and
fundamentals
governing industry . promote marketing activity.

3. Pricing :-
The company has to demonstrate to the sponsor and investor
that it has a reasonably strong historical performance, an
adequate asset base and prospects for growth.
ISSUE OF FOREIGN CURRENCY
CONVERTIBLE BONDS
These bonds are issued in accordance with
the scheme and subscribed by a non resident
in foreign currency and convertible into
ordinary shares of the issuing company.

Advantages:-
The main advantage of FCCB over GDR is that
it is easier to Market
Comparison of GDRs with
FCCBs
GDRs FCCBs
Advantages
Lowers leverage and Shares sold at a higher
reduces interest rate premium
burden. No immediate EPS dilution
No cash redemption. Tax deduction on interest
Free of foreign exchange payments.
risk. Appeals to defensive
Stabilization effect from investors.
enhancing trading No bond repayment if
liquidity. converted.
Contd..
Disadvantages
Immediate EPD dilution. Increase leverage.
Dividends not tax Increase interest burden.
deductible. Foreign exchange risk.
Typically shares sold as
price lower than CB. Investor option to force
No downside protection cash redemption.
fro investors.
ECBs- CURRENT
In May 2007, government lowered the cap on

SCENARIO
interest rates on ECBs.
Notified that ECBs were no longer permitted
for development of integrated townships.
Government announced curbs on overseas
borrowings by companies.
Result-- banking & technology stocks looked
up.
ECBs refer to funds (debts) raised by Indian
companies abroad in foreign currencies.
Contd..
ECBs include
Bank loans
Suppliers & Buyers Credits
Bonds including FCCBs
Credit from export credit agencies

ECBs originally intended to finance projects in strategic

sectors such as power, railways, telecom, ports &
industrial parks.
Overseas borrowings can also be used for export
financing.
Contd..
Government fixes an annual ceiling on the total
amount that can be borrowed.
Currently a single company is allowed to raise up
to $ 500 million in a year through ECB route.

Why close monitoring of ECBs ?

ECBs result flow of FC into INDIA
Bring in inflationary pressures in the economy
Present case of dollar . An excess flow of dollars
in the form of FDI/FII/FCBs have resulted in rupee
appreciation.
Demand for rupee increasing
Contd..
Leads to increased money supply in the economy
leading to inflation
Availability of cheap credit abroad encouraged
many corporates.
Even mid sized companies with not so
impressive balance sheets are taking ECBs.
Leads to sharp expansion in overseas liabilities
for corporate India.
In May 2007 Government lowered interest rates
at which companies could raise funds abroad.
Contd..
One reason is to flush out smaller companies (with
lower credit ratings) from approaching foreign
lenders as they would not find it easy to raise debts
at lower rates.
Second the dollar inflows into the economy would
get curbed and inflation can be curbed.
The current announcement is that dollars raised
(on borrowing above $20m) via ECB would have to
be spent overseas and can not be used to finance
rupee expenditure.
Corporate raising below $ 20 million to finance
rupee expenditure will now have to take permission
of RBI to do so.
Contd..
WHAT IMPACT ?
Positive sentiment in the stock market.
Restricting conversion of ECBs into rupee trade
would bring down interest arbitrage
opportunities.
Companies could become favorably disposed
towards domestic borrowings.
Banking stocks moved expecting higher loan off
take for them when they are flush with liquidity.
IT stocks inched forward on expectations of
halting appreciating rupee.