Syndicated Loans Ecbs

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.

Benefits of ECBs

ECBs have numerous benefits:

• It provides the foreign currency funds that may not be available in India.
• The cost of funds at times works out to be cheaper as compared to the cost of Rupee funds.
• ECBs help in diversification of the investor base.
• 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.
• Corporates can raise ECBs from internationally recognised sources such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets etc.

Regulatory Guidelines

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.
• Amounts
  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.

• Maturities for ECBs
  ECBs should have the following minimum maturities:
  • ECBs up to US$ 20 million or equivalent - 3 years average maturity
  • ECBs above US$ 20 million or equivalent - 5 years average maturity
• All-in-cost Ceiling
  All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
  
  The following ceilings are presently valid:
  
  

  Minimum Average Maturity Period	All-in-cost Ceilings over six  month LIBOR*
  Three years and up to five years	200 basis points
  More than five years	350 basis points

  
  

  * for the respective currency of borrowing or applicable benchmark.

  
  
• End Use
  • ECBs can be raised only for investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) ports, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects);
  • ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.
  • Utilisation of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government's disinvestment programme of PSU shares.
  • Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market by corporates.
  • Utilisation of ECB proceeds is not permitted in real estate. The term 'real estate' excludes development of integrated township as defined by Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, SIA (FC Division), Press Note 3 (2002 Series, dated 04.01.2002).
  • End-uses of ECB for working capital, general corporate purpose and repayment of existing Rupee loans are not permitted.

• 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.