MAHARASHTRA NATIONAL LAW UNIVERSITY MUMBAI

CORPORATE FINANCE

TOPIC:

EXTERNAL COMMERCIAL BORROWINGS: COMPOSITION, DETERMINANTS AND TRENDS

(Final Draft)

SUBMITTED TO - SUBMITTED BY-

FACULTY OF CORPORATE LAW KARAN SHELKE

PROF. ANAND SHRIVAS

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Table of contents

Introduction 3

Composition of ECBs: Need and demand for desirability of lending by firms and
government 4

Foreign currency borrowing 6

Recent liberalisation/rationalisation of ECB Framework 8

Recent trends in the ECB framework by RBI: 9

Shadow banking sector and liberalised ECB norms: 10

Conclusion 11

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 External commercial borrowings: Composition, Determinants and Trends

Abstract
At the beginning of a new dawn in Indian markets, borrowing aspects have been changed
with additional reforms introduced to boost Indian Economy in light of recent economic
slowdown in India. In this project, I will summarise existing regulations related to external
commercial borrowings (ECBs), review the outcomes with past record and discuss areas of
concern and recent policy changes made by the government in light of 2019 budget. To help
us understand the impact of ECBs on Indian capital markets, one needs to study the impact
and proportion it had on other developing countries. However, with any emerging economy
like India with a managed exchange rate and incomplete markets with information
asymmetry, foreign currency borrowing poses systemic risks when left unchecked by large
firms that constitute a significant proportion of GDP. This project recommends that
focusing on domestic economic fundamentals and adopting a cautious approach to capital
account will be a strong determinant while identifying success of ECBs in India.

Introduction
An External Commercial Borrowing (ECB) is an instrument deployed by India companies to
facilitate the process of raising money in foreign currencies from other countries. The Indian
government permits companies to seek foreign funding leveraging on ECB with a view to
expanding their business capacity, as well as to create fresh investments.

External commercial borrowings (ECBs) have emerged as one of the main source for Indian firms
to strengthen the Indian corporate debt market. However, it comes with its caveats. RCom, a listed
Indian telecom firm managed by Anil Ambani with an external debt worth `443 billion, defaulted on
its interest payments on two outstanding non-convertible debentures on 13 November 2017. It was
regarded as first high profile default by an Indian firm with such high amount of money at stake.
Whether the RCom incident is a stand-alone event or a precursor to similar such events, it needs to
be explored to safeguard Indian economy from potential vulnerability from ECBs.

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Bond markets in almost all currencies are becoming more internationalised due to
integration of markets and the need for them as a tool for financing. The aim is to have
better and viable financing options available to borrowers and increase the range of assets
available to investors. In India, foreign currency borrowing has grown seven-fold, from $20
billion in 2004 to $140 billion in 20141. In this way it helps all the stakeholders involved in
the process of financing from lender to borrower including the intermediaries. The process
is not as simple as mentioned above but requires compliance with all the law and
regulations to be kept in perspective. Competition from foreign markets may help to focus
improvements in domestic markets such as strengthening of domestic market infrastructure,
improving investor protection programme and removing tax implications that might hinder
domestic market development. Foreign currency borrowing can be a powerful means of
raising domestic currency funding for Indian companies.

Different scenarios arise in case a firm wants to finance its business through ECBs.
However, two kinds of arguments have been offered on why some firms may choose to hold
unhedged foreign currency exposure. The first argument is that government eliminate the
probability of high exchange ratios between the domestic currency and foreign currency.
This will incentivise the firms to borrow money from overseas. Second argument is
grounded in a combination of financing constraints and incomplete markets, a situation
termed “original sin” which have been explained in many literatures to identify the typical
limitations of underdeveloped economies.2 In applying this case with the Indian scenario, it
is easily comparable with Eichengreen’s situation where the markets are not as developed as
western countries and lack infrastructure.

Composition of ECBs: Need and demand for desirability of lending by

firms and government
Benefits of ECBs are matter of importance due to its inherent advantages over domestic
borrowings. Borrowing money from external sources are usually cheaper. The debtors in the

1Ila Patnaik, Ajay Shah and Nirvikar Singh, Foreign currency borrowing by Indian firms: Towards a
new policy framework, Indian policy forum (2015)
2Eichengreen, B., Hausmann, R. and Panizza, U.,. The pain of original sin. Other people’s money:
Debt denomination and financial instability in emerging market economies, pp.13-37 (2003).
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case of borrowing do not enjoy voting rights. Hence there is not dilution of stake in the
company.
In September 2016, IL&FS a financial company engaged in activities of providing financial
services in sectors related to transportation, e-Governance, power, waste water, education
and tourism defaulted on the repayments towards interest on external commercial borrowing
amounting to Rs. 2.19 crore. The company also defaulted on its other obligations which
were of enormous amount creating a liquidity squeeze was in the market which created
panic among the investors in the various shares. Banking shares were already noticing a
pattern of downward swirl with the further news of a IL&FS aggravated the market. Heavy
exposure to ECBs can be detrimental to the economy. “To big to fail”3 phenomenon has
seen its fair share of criticism as IL&FS was giant lending company which had undertaken
various big projects to serve the purpose. The recent default made the company lenders to
file for insolvency before NCLT4 . Hence it can be concluded that ECBs have exposure
irrespective of the size of the firm who wants to borrow money from overseas market

The ECBs is used in India to denote foreign currency borrowing by Indian firms. Under the
present framework given by RBI, regulation of borrowing through the ECB route has been
described briefly by various alternative routes. A detailed administrative system is in place
where all transactions are prohibited unless explicitly permitted, and rules specify what is
done in great detail with each and every transaction.

ECBs can be accessed under an ‘automatic’ and an ‘approval’ route5. This depends on the
criteria determined by the RBI. In the earlier guidelines, the approval of the ECB was on
case to case basis. However, the framework was subsequently amended for a more liberal
version for allowing the firms to exploit the mean of financing through foreign lenders.

3 Stern, Gary H., and Ron J. Feldman. Too big to fail: The hazards of bank bailouts. Brookings
Institution Press, (2004).
4Shashank Pandey, Explainer: The IL&FS Insolvency case, Bar&Bench (2019)

https://barandbench.com/ilfs-insolvency-the-journey-so-far/
5 External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank of India
(2019)
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The borrowers may approach the RBI with an application in prescribed format for
examination. This has been dictated in the guidelines. In both cases, there are restrictions
governing who can borrow, who can lend, the terms of the borrowing (amount and tenor)6,
the uses to which the borrowed amount can be put (‘end use restrictions’)7, and the maximal
interest rate that can be paid (‘all-in-cost restrictions’).

Further, the restrictions on ECBs also raise concerns about engaging of the firm in ill-
defined or poorly justified industrial policy, about the scale of economic knowledge which
the ECB Lender might not have. Hence it might be required to write down the detailed
prescriptive regulations, the impact upon the cost of business it can take and about rule of
law. Changes in the regulations making process currently being undertaken for framing of
all regulations should also improve the ECB regulatory framework.

Foreign currency borrowing

ECB is foreign borrowing that is not trade credit, with a maturity greater than three years as
per mandated framework by RBI Master circular. There are two routes for doing ECB.
Some classes of firms are permitted to borrow under certain conditions through an
“automatic” route. When the loan size is above USD 750 million, firms have to apply for
“approval”.

Following are the key elements of control on foreign borrowing which are summarised
below
1. Eligible borrowers: The RBI’s regulatory framework lists down the eligibility criteria
for being a borrower under ECB. As an example companies, port trusts, NBFCs,
NGOs, and Micro-Finance Institutions are allowed to borrow under the regulatory
framework.8 There are certain entities who are allowed to borrow money under ECB

6Para 1.7, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank
of India (2019)
7 Para 4, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank of
India (2019 )
8 Part I, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank of
India (2019 )

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 through approval mode only. Corporates like Housing financial companies, NBFCs are
permitted.

2. Eligible lenders: The framework puts restriction on the lending process on which entity
or financial institution can lend to Indian firm. Below these, there are many
internationally recognised lenders with a certificate of due diligence. Foreign equity
holders are also recognised lenders, under certain specified conditions.

3. Cap on maximum amount that can be borrowed under ECB: The regulations specifies
the maximum amount that can be borrowed under the ‘automatic rule’9. There are
separate criteria for determining various limits which are to be set for the lenders. This
cap has been increased from USD 500 million in 2006 to USD 750 million at present10.

4. All-in-cost ceilings: The regulator specifies a maximum level for the overall interest
cost at which the borrowing can happen. Only potential borrowers who are able to
access funds within this interest cost ceiling set as per the framework which can be
amended from time to time are allowed to do so; others may not borrow.

5. Issuance of guarantee: The framework prohibits any issuance of guarantee for the
proceeds under ECB, standby letter of credit, letter of undertaking, or letter of comfort
by banks or financial institutions and non-banking financial companies from India
relating to ECB proceeds.11

9Para 1.4, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank
of India (2019 )
10 Para 2.2, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank
of India (2019 )
11Para 3, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank of
India (2019)
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6. Prepayment: The framework allows prepayment subject to compliance with the
stipulated minimum maturity restrictions which is 3 years under the current
framework.12

7. Refinancing of existing ECB: Borrowers are allowed to refinance their existing ECB by
raising a fresh ECB, subject to the condition.

The rational of having specific set of regulations have to be assumed in light of recent
events in the market. The decision of RBI to to remove sector specific and different ECB
limits per financial year is to boost investments in not just any particular sector but all the
sectors which have been affected. The decision of RBI to have automatic approval route for
borrowing up to USD 750 million at present is to have smooth approval process without any
"red tapes” which if present can result in additional borrowing costs for the company. Thus
the purpose of raising finance from foreign in recent circular would be defeated if there is
no laxity in the automatic approval route.

Recent liberalisation/rationalisation of ECB Framework

The Department of Economic affairs (DEA), Ministry of Finance and Government of India are the
principal regulators of the Indian conglomerate’s access to the international capital market.
However, RBI is the defacto regulator in such a case. The relevant aspect of ECB policy is to
provide flexibility in the borrowings and also imposing reasonable restrictions for the total external
borrowings. The underlying principles of ECB policy are to keep maturities long, costs low and
overall growth of the economy.

ECB have been an important route for the corporates to finance its projects and other
operations which have been mandated and regulated by RBI. Recently, TATA Capital went
for ECB worth $150 Million13 . Piramal capital raised its offshore loan by $400 million thus

12 Para 8.1, External Commercial Borrowings (ECB) Policy – New ECB Framework, Reserve Bank
of India (2019)
13The Economic times, https://economictimes.indiatimes.com/markets/stocks/news/tata-capital-
looking-to-raise-100-million-via-ecb/articleshow/68546375.cms?from=mdr
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creating a buzz in the market for external borrowing.14 The recent spike in ECBs can be
attributed to lower interest rates from foreign firms while lending. Year 2018-19 recorded
highest amount of ECB by Indian firms at a staggering amount of $41 billion.15 However,
India has suffered from heavy external borrowings in the past during the 80s. With such
leniency comes certain responsibility which if not adhered can caused tremendous pressure
on the market leading to uncertain consequences.

Given prevailing market conditions post 2019 budget with effects of slowing economy, Indian
corporates have increasingly been facing issues in accessing credit from domestic markets has
Indian banks have been reluctant to give a credit line which have a reasonable interest rate. The
standards of such interest rates should reflect upon the rates which have a foreign standard while
determining the lending rate. Recent Securities and Exchange Board of India regulations aimed at
growing the debt capital market in India and reducing dependence of corporate India on loans from
the Indian banking sector require that certain Indian companies must necessarily comply with the
regulations which might be seen as a burden with extravagant interest rates.16 The implementation
of these provisions is yet to be seen in the market as majority of them have to be enforced in view
of market demand and its association.

Recent trends in the ECB framework by RBI:

RBI in January 2019 made some recommendatory amendments under the FEMA Act. These
amendments are a push towards more liberal borrowing for private Indian companies from overseas
markets. Proceeds of ECBs can now be used towards repayment of INR loans availed onshore
where proceeds of such loans have been utilised for capital expenditure, meeting working capital
requirements and general corporate purposes.

14 Saloni Shukla, Piramal capital looks to raise $400 million, The Economic Times (2019)

https://economictimes.indiatimes.com/industry/banking/finance/piramal-capital-looks-to-
raise-400-million-via-offshore-loan/articleshow/69935752.cms?from=mdr (Accessed on
03/09/2019)
15 Narayanan V, With $41 billion borrowings in 2018-19, Hindu Businessline (2019).
16Pranav Sharma and Mallika Chopra, Amendments to the ECB Policy - A big boost for cross
border financing, India corporate law (SAM) (2019)

https://corporate.cyrilamarchandblogs.com/2019/08/ecb-policy-amendments-big-boost-cross-
border-financings/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-
Original (Accessed on 03/09/2019)
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Companies registered with the RBI as (NBFCs) are also now eligible to raise ECBs for on lending
to their clients for the purposes set out above provided they comply with the applicable minimum
average maturity norms set out above. This move of allowing NBFC come under a time when most
of the NBFCs have been under the scanner of government and RBI for defaulting on various
obligations that it owed to other financial lenders. Hence it is to be seen what measures and
regulations will RBI and government adopt to have a better mechanism for NBFCs so that they
fully intend to pay back the money that they owe to foreign institutions.

Companies in the manufacturing or infrastructure sector may raise ECBs for repayment of INR
loans availed onshore where proceeds of such loans have been utilised for capital expenditure.
In a noteworthy liberalisation, onshore lenders may now assign such stressed loans above to persons
who are eligible lenders under the ECB policy, so long as the novated loan complies with the
pricing, tenure and other provisions of the ECB framework.
Foreign branches and subsidiaries of Indian banks, however, are not permitted to extend ECBs for
any of the purposes listed above.
A paradigm shift that has occurred with respect to Eligible Borrowers, recognized Lenders is that
the track-wise segregation that existed under the previous policy is no longer relevant. Considering
the fact that the above three factors are the most essential ingredients for an ECB, their shift to
universality is indicative of the intention of the Government to ease out the ECB norms. Also, the
expansion of the scope of ‘eligible borrowers’ is an appreciable step as it indicates the inclination of
the Government to enable even those entities to receive ECB that are not commercial in the
conventional sense in that their sole aim is not to earn profits.

Shadow banking sector and liberalised ECB norms:

Currently the most aggravated area of concern for the government is the crippling of NBFCs due to
majority of defaults it had made in recent times. Dewan Housing finance limited (DHFL) along
with IL&FS also defaulted on various commercial papers owing to financial mismanagement. The
auditors of both the companies are under scanner with various agencies of government now
investigating them.17 Now with liberalised norms of allowing NBFCs to get borrowings at a better
maturity period and increased amount from external markets in an atmosphere debilitated by many

17 Jayshree Upadhyay, Inside the audit lapses that led to IL&FS crisis, Livemint,

https://www.livemint.com/companies/news/inside-the-audit-lapses-that-led-to-il-fs-
crisis-1558456079750.html (Accessed on 05/09/2019)
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defaults and allegations of financial mismanagement has raised concerns. However, it has been
argued that due to tight liquidity squeeze in the market owing to less lending by some top domestic
financial institutions has created a demand for foreign borrowing. Foreign borrowing has become
cheaper in recent times due to expensive interest rates. With rising Non performing assets (NPAs),
the banks are reluctant to give loans with cheaper interest rates. Mother of need for borrowers is
created for line of credit and need for investment. Certainly, a place has been created in the market
for better financial institutions to increase lending ration.
In case of default of ECB by any company, the lender which includes any foreign bank can certainly
approach NCLT under Insolvency and Bankruptcy Code, 2016. This was highlighted and discussed
in the case of Standard Chartered Bank v. Ruchi Soya Industries limited.18 With respect to
borrowing by corporate applicant in insolvency process, RBI has eased the norms under the IBC.
Under the current guidelines on ECB, proceeds given by borrower cannot be utilised to pay existing
debt in rupee denominated loans. However, in February, RBI announced reforms that would allow
bidders to raise funds through external commercial borrowings to enable them to repay their
existing lenders.

Conclusion
ECBs have emerged as a preferred destination for finance in the credit market and have steadily
gained huge prominence. However, Indian government should tread cautiously and keep a check on
erratic borrowings from foreign lenders. With Government’s move to resettle RBI’s revenue will
hamper RBI from lending money to other public sector banks. Prediction would be, already
bleeding banks and financial institution in domestic market with low capital adequacy ratio and
high NPAs would have a tough time giving suitable interest rates.

However easing of ECB norms has its perks for Indian start-ups. With opening of new sources of
financing for them, companies with identifiable business model will certainly benefit the economy.

NBFCs in the current market are not getting financial support it had earlier from Indian markets due
to recent crisis in multiple NBFCS. Financing from foreign lenders would be a good move for them
till balance is obtained and credit is sufficient to stimulate economic growth. Regulatory practices
play an important role in helping protecting the integrity of the market especially in the lending

18 Standard Chartered Bank v. Ruchi Soya Industries limited, case no. 1371/2017
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process to NBFCs. With recent crisis of statutory negligences and regulatory breaches, RBI and
government must ensure and ascertain proper risk involved.

This is indeed the right time for a revised policy considering that, despite continuous efforts on the
part of the Government to update norms for ECB, the previous policy was incompatible with the
other recent changes that have been incorporated in India’s foreign investment policy in general. It
was felt that substantial and categorical changes need to be incorporated in the existing policy if the
same had to be in consonance with the other contemporaneous changes taking place in regulations
governing various aspects of the economy.

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3. Jeanne, Olivier, “Monetary Policy and Liability Dollarization”, Original Sin Conference.
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