External Commercial Borrowing

Rajat Dixit
 External Commercial Borrowing

● An external commercial borrowing (ECB) is an instrument used in India to facilitate

Indian companies to raise money outside the country in foreign currency.
● ECBs has made it easy for the Indian eligible entities to access foreign capital and
meet its needs.
● ECBs are in simple words commercial loans taken for a commercial purpose in form of
bank loans, suppliers' credit, buyers' credit or securitized instruments, sought from
foreign lenders.
● The ECBs can be obtained through automatic route or approval route or by
combination of both the routes.
 Benefits
● The cost of funds- usually cheaper from external sources if borrowed from economies with a lower
rate of interest.
● Availability of larger market.
● ECB does not dilute stake in the company- as it is in the form of loan.
● The borrower can diversify the investor base.
● ECB provides access to international markets for the borrowers and gives good exposure to
opportunities globally.
● The economy also enjoys benefits, as the government can direct inflows into the sector, have
potential to grow.
● Avenues of lower cost funds can improve the profitability of the companies and can aid economic
growth.
 Disadvantages

● Availability of funds at a cheaper rate may bring in lax attitude on the company’s side
resulting in excessive borrowing. This eventually results in higher (than requirement)
debt on the balance sheet which may affect many financial ratios adversely.
● Higher debt on the company’s balance sheet is usually viewed negatively by the rating
agencies which may result in a possible downgrade by rating agencies which
eventually might increase the cost of debt. This may also tarnish the company’s image
in the market and market value of the shares too in eventual times.
● Since the borrowing is foreign currency denominated, the repayment of the principal
and the interest needs to be made in foreign currency and hence exposes the company
to exchange rate risk. Companies may have to incur hedging costs or assume
exchange rate risk which if goes against may end up negative for the borrowers
resulting into heavy losses for them.
 Historical Development

● Foreign Exchange Management (Borrowing and Lending in Foreign Exchange)

Regulations, 2000
● Foreign Exchange Management (Borrowing and Lending in Rupees), 2000.
● RBI vide its notification number 3(R)/2018-RB consolidated both the regulations into a
single and simple framework.
○ Foreign Exchange Management (Borrowing & Lending) Regulations, 2018.
○ Date of enforcement- January 16, 2019.
 2000 vs. 2018 Regulations

● 2000- 4 types of ECBs

○ Track I- medium term foreign currency loan;
○ Track II- long term foreign currency loan;
○ Track III- INR denominated ECB;
○ Track IV- Rupee Denominated Bonds.
● 2018- 2 types of ECBs
○ Foreign Currency Denomination
○ INR Denomination
● Masala Bonds do not require prior approval from RBI.
● Enhanced scope of eligible person that now include LLP, Special Economic Zones,
SIDBI, Port Trusts etc.
 2000 vs. 2018 Regulations
● Simplified definition of Recognized Lenders that must be a member of Financial Action
Task Force (FATF) or The International Organization of Securities Commissions
(IOSCO).
● Concept of Minimum Average Maturity Period (MAMP) introduced- 3 years with few
exceptions.
○ Companies in the manufacturing sector which raise up to USD $50 million as
ECB have a MAMP of one year.
○ ECBs claimed by Corporates for general debt payoff or other corporate purposes
to have MAMP of 5 years.
● Hedging Requirements: 2000 Regulations mandated 70% of the ECB to be hedged for
a 3-5 years for the NBFCs, companies in the infrastructure sector, AFCs, IFCs, CICs
etc. However, 2018 Regulations has not included the AFCs, IFCs and CICs under the
meaning of "infrastructure space companies".
 2000 vs. 2018 Regulations
● Individual Limits: The new ECB Framework has defined a proper borrowing limits
based on the sectors as:

Sector Eligible Amount

Companies in the manufacturing sector, NBFCs, IFCs, AFCs, 750 Million USD
Holding Companies and CICs

Companies in the Software Development Industry 200 Million USD

Entities engaged in Microfinance Activities 100 Million USD

Others 50 Million USD

 General Rule- Prohibition to Borrow or Lend:
(S. 3)
● No person resident in India shall borrow or lend in foreign exchange from or to a person
resident in or outside India and no person resident in India shall borrow in rupees from,
or lend in rupees to, a person resident outside India:
○ Proviso: RBI may permit a person resident in India to borrow or lend in foreign
exchange from or to a person resident in or outside India and/or permit a person
resident in India to borrow in rupees from, or lend in rupees to, a person resident
outside India for sufficient reasons
● Explanation: Use of Credit Card in India by a person resident outside India or outside
India by a person resident in India shall not be deemed as borrowing or lending in
Indian Rupee/foreign exchange.
 Borrowing from outside India in Foreign
Exchange by a Person Resident in India (S. 4)

Borrowing by an Authorised
Borrowing by Persons other
Dealer or its branch outside
than Authorised Dealers
India
 Borrowing by an Authorised Dealer or its
branch outside India
● An AD may borrow from its Head Office or branch or correspondent outside India- subject to
terms and conditions of RBI.
● A branch outside India of an AD being a bank incorporated or constituted in India, may borrow
in foreign exchange in the normal course of its banking business from outside India- subject to
terms and conditions of RBI.
● An AD may borrow in foreign exchange from a bank or a financial institution outside India, for
the purpose of granting pre-shipment or post-shipment credit in foreign exchange to its
exporter constituent- subject to terms and conditions of RBI.
● An AD may raise ECB from outside India in accordance with the provisions contained in
Schedule I.
 Borrowing by Persons other than Authorised
Dealers
● Eligible resident entities may raise ECB from outside India in accordance with the provisions
contained in Schedule I.
● Trade Credit may be raised from outside India by importers for import of capital or non-capital
goods as permissible under the extant Foreign Trade Policy of the Directorate General of
Foreign Trade (DGFT) in accordance with the provisions contained in Schedule II.
● A person resident in India may borrow, whether by way of loan or overdraft or any other credit
facility, from a bank situated outside India,
● Financial Institutions, set up under an Act of the Indian Parliament, may raise foreign
exchange borrowings with the prior approval of the Government of India for the purpose of
onward lending.
 Borrowing in Indian Rupees by a Person
Resident in India (S. 6)
● Borrowing by an Authorised Dealer
○ An AD may raise Rupee denominated ECB from outside India in accordance with the provisions
contained in Schedule I.
● Borrowing by persons other than Authorised Dealer
○ Eligible resident entities- Schedule I.
○ Eligible resident entities may borrow from overseas Multilateral Financial
Institutions/International Development Financial Institutions, where the source of funds of such
institutions is Rupee denominated bonds issued overseas or resources raised domestically,
○ Trade Credit- Schedule II.
○ Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2017
○ Foreign Exchange Management (Deposit) Regulations, 2016
○ A person resident in India, not being a company incorporated in India, may borrow in Indian
Rupees from a NRI/Relatives who are OCI Cardholders outside India,
○ Financial Institutions, set up under an Act of the Indian Parliament, may raise Rupee
denominated borrowings from outside India with the prior approval of the Government of India
for the purpose of onward lending.
 Schedule- I

● Currency of borrowing
● Forms
● Eligibility of borrowers
● Maturity
● Lenders:
● All-in-cost
● End-uses
● Individual Limits of borrowing
● Security
● Parking of loan amount abroad
● Drawal of Loan
● Reporting
● Debt Servicing
● Hedging