INTRODUCTIION:
ECBs as the name itself suggest external commercial borrowings are one of the important mode of raising funds from abroad. ECBs are one of the modes of raising funds from abroad. ECBs refer to commercial loans, in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g.,floating rate notes and fixed rate bonds).ECBs have become very popular amongst Indian companies during the past few years due to the limitations in the Indian debt market in the form of short maturity period and high rate of interest. In developing nations like India, business houses raise capital through ECBs when the cost of domestic borrowing is higher than that of international funding. Raising ECBs by Indian residents directly adds to India’s external debt and foreign exchange exposure and therefore, the same is highly regulated by the Reserve Bank of India (RBI).
ECB ROUTES
ECB can be accessed under two routes
(i) Automatic Route
(ii) Approval Route.
ECB for investment in real sector -industrial sector, especially infrastructure sector-in India, are under Automatic Route, i.e. do not require RBI / Government approval. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route.
AUTOMATIC ROUTE
Eligible Borrowers: Corporates except financial Intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB. Individuals, Trusts and Non- Profit making Organisations are not eligible to raise ECB. Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement.
Recognised lenders: Borrowers can raise ECB from internationally recognised sources such as:
(i) International banks,
(ii) International capital markets,
(iii) Multilateral financial Institutions (such as IFC, ADB, CDC, etc.),
(iv) Export credit agencies,
(v) Suppliers of equipment,
(vi) Foreign collaborators and
(vii) Foreign equity holders (other than erstwhile OCBs).
Amount and maturity:
(a) The maximum amount of ECB which can be raised by a corporate is USD 500 million or equivalent during a financial year.
(b) ECB up to USD 20 million or equivalent in a financial year with Minimum average maturity of three years.
(c) ECB above USD 20 million and up to USD 500 million or equivalent with a minimum average maturity of five years.
(d) ECB up to USD 20 million can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option.
APPROVAL ROUTE:
Eligible Borrowers: Financial institutions dealing exclusively with infrastructure or export finance ;Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government, Foreign Currency Convertible Bonds by housing finance Companies, Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, Multi-State Co-operative Societies engaged in manufacturing activity, Corporates engaged in industrial sector and infrastructure sector, NGOs engaged in micro finance activities are eligible to avail ECB for Rupee expenditure for permissible end-uses; Corporates in services sector
Recognised lenders: Borrowers can raise ECB from internationally recognised sources such as International banks, International capital markets etc. From ‘foreign equity holder’ where the minimum equity held directly by the foreign equity lender is 25 per cent but debt-equity ratio exceeds 4:1 ; NGOs engaged in micro finance activities.
Amount and Maturity:
(a) Corporates can avail of ECB of an additional amount of USD 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of USD 500 million under the automatic route, during a financial year.
(b) Corporates in infrastructure sector can avail ECB up to USD 100 million and corporates in industrial sector can avail ECB up to USD 50 million for Rupee capital expenditure for permissible enduses within the overall limit of USD 500 million per borrower, per financial year, under Automatic Route.
(c) NGOs engaged in micro finance activities can raise ECB up to USD 5 million during a financial year.
(d) Corporates in the services sector viz. hotels, hospitals and software companies can avail ECB up to USD 100 million, per borrower, per financial year, for import of capital goods.
INDIAN BUSINESS HOUSES/GROUPS RAISING CAPITAL (ECB ROUTE)
Approvals during April-June 2009 at $2.7 billion have been much lower against $4 billion a year ago. The infrastructure sector companies are the one which are leading the share. It is mainly because government has given some relaxation to them to promote the sector.
Large borrowing of foreign funds by indian infrastructure companies to import capital goods can exposes the companies to the risk of currency fluctuation. This was the same thing what happened with asian countries like Singapore, Malaysia and they were unable to pay the loans and ultimately defaulted. This was one one of the major causes of the asian crisis. With the rupee appreciating approximately 5 per cent since the start of this year and US interest rates remaining low, foreign currency has been the most preferred choice of funding for some corporate. The recent changes in the external commercial borrowing (ECB) guidelines issued by the ministry of finance seem aimed at restricting the inflow of foreign currency through this route. The new guideline restricts borrowing to $50 million through automatic route.
The key part to reduce the attractiveness of ECBs are revision of maximum spread payable over Libor, the requirement on hedging and disabling the financial intermediaries from accessing the ECBroute.
The requirement to compulsory hedge the ECB unless matched by uncovered FX recivables restricts the flexibility currently available to corporate.
Example of Unheged Borrowings:
Alok Industries
Alok industries had made a japnese yen borrowing of $100 million. (the yen was trading at 118.) But by the time it brought the money into India, the yen had appreciated to 110.50 and Alok Industries ended up realising about $106 million at the time of the draw-down. Immediately, the treasury team moved in to build a hedge to protect the draw-down rate of 110.50. The team thought the yen was unlikely to appreciate beyond 82. So it structured a knock-in/knock-out option for five years. Underneath complicated layers, the contract had a simple purpose—if the yen hit 113 during the tenure of the contract, Alok Industries would be protected against any appreciation of the yen up till 82. If the yen did not hit 113, there was no protection. The cost of this option was 1.85% a year. Soon, the yen moved beyond 113 to 117. Alok Industries wound up the contract, pre-paid the ECB, and netted a Rs 36-crore gain. If it had waited more, it could have made a bigger profit on the yen movement. (The yen crossed 120 at one time, but is trading at 111.637 now.) But Alok Industries forex policy dictates that a hedge needs to be wound up if the rate-protection objective has been achieved.
CONCLUSION
The objective of ECB Regulations is to provide flexibility in borrowings to the Indian companies on the one hand and on the other hand maintain prudent limits on external borrowings. ECB is not just a three letter word but a lifeline for the Indian corporate sector. In the past few years ECBs have proved to be very effective source of raising funds at economical cost.
However, the recent global financial turmoil, liquidity crunch in the international financial markets and the depreciating Rupee have made it difficult for the corporate sector to raise funds through ECBs, This is amply clear from the fact that the funds raised through ECBs in October 2008 were USD 1.12 billion as compared to USD 2.80 billion raised in September 2008. In view of these problems it has become necessary for the corporates to maintain a balance between the funds to be raised through ECBs and the funds from the domestic borrowings. Nevertheless the significance of ECBs as a source of raising finance can not be undermined.