What are the External Commercial Borrowings ?
The borrowings raised by an Indian corporate from confirmed banking sources outside India are called External Commercial Borrowings (ECBs).
ECBs are defined to include:
- Commercial bank loans
- Syndicated loans
- Buyers' credit and suppliers' credit
- Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
- Credit from official export credit agencies
- Commercial borrowings from the private sector window of Multilateral Financial Institutions such as IFC, ADB, AFIC, CDC, etc.
ECBs are permitted by the Government of India as a source of finance for Indian corporates for expansion of existing capacity as well as for fresh investment.
The ECBs can be raised within the policy guidelines of Government of India / Reserve Bank of India, applicable from time to time. The principal regulation governing the ECBs is the clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 read with section 6 of Notification No. FEMA 3/ 2000-RB dated May 3, 2000 as amended from time to time. The Reserve Bank of India had issued a master circular on the ECBs on July 1, 2004, which gives an exhaustive set of guidelines applicable at present.
ECBs can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route. Approval route is for financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank and for Banks and financial institutions which had participated in the textile or steel sector restructuring package. Moreover, cases falling outside the purview of the automatic route with regard to limits on amount and maturity period also fall under the approval route.
The salient features of the current policy under automatic route are given below:
- Eligible Borrowers
Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible. Individuals, Trusts and Non-Profit Organisations are not eligible to raise ECBs.
The maximum amount of ECBs which can be raised by an eligible borrower under the Automatic Route is US$ 500 million during a financial year.
- Other Conditions
- 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 - The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of overseas lender is subject to Regulation 8 of Notification No. FEMA 21/ RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000, dated May 3, 2000, respectively.
- Parking of ECB proceeds overseas - ECB proceeds should be parked overseas until actual requirement in India.
- Prepayment - Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI, subject to compliance with the stipulated minimum average maturity period as applicable for the loan.
- Refinance of existing ECB - Refinancing of existing ECB by raising fresh loans at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained.
Please refer to the Reserve Bank of India's website www.rbi.org.in for detailed guidelines.