Presentation

on
ECB and Import Trade Credit

Submitted To: Submitted By:

Mr. K.K.Jindal Disha Sogani(09RBA)
Ritu Rani(38A)
Romi(03RBA)
Saurabh Gupta(41B)
Shakun Bishnoi(42A)
Sweta(7RBA)
 Definition
ECB refer to Commercial loan in the form of
bank loans
Buyer’s credit
Supplier’s credit
Securitized instruments (e.g. fixed rate bonds,
non-convertible preference shares).
Availed of from non-resident lenders with a
minimum average maturity of 3 years.
 Access of ECB

Two Criteria
- Automatic route
- Approval route
 Automatic route
Following types of proposals for ECBs are
covered under this route:
Eligible Borrowers: - Companies
- NGOs
- SEZ units
Contd…..
ECB can be raised for investment such as import of
capital goods .
In real sector - industrial sector including small and
medium enterprises (SME), infrastructure sector and
specified service sectors namely hotel, hospital, software
in India.
Infrastructure sector is defined as (i) power, (ii)
telecommunication, (iii) railways, (iv) roads including
bridges.
ECB for investment in industrial sector, infrastructure
sector and specified service sectors in INDIA are under
Automatic Route, i.e. it does not require Reserve Bank /
Government of India approval.
 Automatic route
Recognized lenders:
- International banks
- International capital markets
- Multilateral FIs
- Qualified overseas organizations
- Overseas organization and individuals can
provide ECB to Non-Government Organization
(NGOs) engaged in micro finance activities.
   Amount and Maturity
a) The maximum amount of ECB which can be raised by a corporate
other than those in the hotel, hospital and software sectors is USD 500
million or its equivalent during a financial year.
b) Corporate in the services sector such as hotels, hospitals and
software sector are allowed to avail of ECB up to USD 100 million or
its equivalent in a financial year .
c) ECB up to USD 20 million or its equivalent in a financial year with
minimum average maturity of three years.
d) ECB above USD 20 million or equivalent and up to USD 500 million
or its equivalent with a minimum average maturity of five years.
e) NGOs engaged in micro finance activities can raise ECB up to USD
5 million or its equivalent during a financial year.
 Procedure:
Borrowers may enter into loan agreement complying
with the ECB guidelines with recognized lender for
raising ECB under Automatic Route without the prior
approval of the Reserve Bank
 Approval route
Following types of proposals for ECBs are
covered under this route:
Eligible Borrowers: - Companies
- NGOs
- SEZ units
 Permitted end users

Investment in real sector

Overseas direct investment in joint sector
Recognized lenders

Foreign collaborations
Foreign equity holders
Export credit agencies
Suppliers of equipments
Multilateral FIs
 Procedure
Applicants are required to submit an application
in form ECB through designated AD bank to the
Chief General Manager-in-Charge, Foreign
Exchange Department, Reserve Bank of India,
Central Office, External Commercial Borrowings
Division, Mumbai 400 001, along with
necessary documents.
 Amount

Under automatic route:

- Maximum $5Mn for NGOs
- $500Mn for other companies
Under approval route:
- No limit
Commercial source of raising funds
Huge sum of money can be raised
Foreign currency for importing capital
goods
 Advantages

Cheaper way of raising funds

Ease of usage of funds
 ECB guidelines
ECBs are being permitted by the Government as a source of finance for
Indian Corporate for expansion of existing capacity as well as for fresh
investment.

The policy seeks to keep an annual cap or ceiling on access to ECB,

consistent with prudent debt management.

Average maturity

US $ 5 Mn Scheme: All Corporates and Institutions are permitted to raise

ECB upto USD 5 million equivalent at a minimum simple maturity of 3
years .
 ECB guidelines
Exporters / Foreign Exchange Bankers: Corporates who have foreign
exchange earnings are permitted to raise ECB .

Infrastructure Projects: Holding Companies/promoters will be permitted to raise

ECB upto a maximum of USD 50 million equivalent to finance equity investment in a
subsidiary/joint venture company implementing infrastructure projects . In case the
debt is to be raised by more than one promoter for a single project then the
total quantum of loan by all promoters put together should not exceed USD
50 million.
 ECB guidelines
END-USE REQUIREMENTS

(A) External commercial loans are to be utilised for import of capital goods
and services and for project reletated expenditure in all sectors subject to
following conditions :
(a) ECB raised for project-related expenditure must be brought into the
country immediately.
(b) ECB raised for import of capital goods and services should be utilised at
the earliest and corporates should strictly comply with RBI's extant
guidelines on parking ECBs outside till actual imports. RBI would be
monitoring ECB proceeds parked outside.
(c) ECB raised is not permitted for investment in stock market .
 Security

Security to be provided to the overseas lender / supplier for

securing the ECBs is left to the borrower.

Creation of charge over the immovable assets and financial

securities, such as shares, in favour of the overseas lender are
subject to Regulation 8 of Notification No. FEMA 21/RB-
2000 and Regulation 3 of Notification No. FEMA 20/RB-2000
both dated 3rd May 2000.
 REPORTING ARRANGEMENTS

For allotment of Loan Registration Number

(LRN), borrowers are required to submit
Form 83.
The borrower can draw-down the loan only
after obtaining the LRN from
DSIM(Department of Statistics and
Information Management), Reserve Bank.
Dissemination of Information

For providing greater transparency,

information with regard to the name of the
borrower, amount, purpose and maturity of
ECB under both Automatic and Approval
routes are put on the Reserve Bank
website, on a monthly basis, with a lag of
one month to which it relates.
 Guarantees

Issuance of guarantee, standby letter of credit, letter of undertaking

or letter of comfort by banks, financial institutions and NBFCs
relating to ECBs in favour of overseas lender on behalf of their
constituents for their borrowings in foreign exchange is normally not
permitted.
Issuance of guarantees , in respect of ECBs by textile companies for
capacity expansion and modernisation are considered by RBI under
the approval route subject to prudential norms.
 Guarantees
FEMA allows guarantees in very limited circumstances to
person/corporate resident outside India.
A person resident in India may give guarantee in following
circumstances-:
a) An exporting company may give a guarantee for performance
of a project outside India subject to the regulations
b) A company in India promoting or setting up outside India, a
joint venture company or a wholly-owned subsidiary, may
give a guarantee to or on behalf of the latter in connection
with its business
Debt Servicing, Prepayment And
Refinancing of an existing ECB

The designated AD banks have general permission to make

remittances of instalments of principal, interest and other
charges in conformity with the ECB guidelines.
Prepayment of ECBs up to USD 500 without approval of RBI
subject to compliance with minimum average maturity period,
whereas amounts exceeding USD 500 million can be prepaid
only after obtaining approval of RBI.
 Debt Servicing, Prepayment And
Refinancing of an existing ECB

Existing ECB may be refinanced by raising a fresh ECB

subject to the condition that the fresh ECB is raised at a lower
all-in-cost and the outstanding maturity of the original ECB is
maintained.
 Recent Developments - ECB
Minimum Average Maturity: ECB upto USD 500 million
per borrower per financial year is permitted for rupee
expenditure and/ or foreign currency expenditure for
permissible end-uses under the automatic route
Parking of ECB proceeds: The borrowers have been
provided with a flexibility to either keep their ECB proceeds
offshore or keep it with the overseas branches/ subsidiaries of
Indian banks abroad or to remit these funds to India to credit
to their Rupee accounts with banks in India, pending
utilization for permissible end-uses.
 Recent Developments - ECB

All-in-Cost Ceilings: ECB beyond the permissible all-in-cost

ceiling can be availed of under the Approval Route.
Definition of Infrastructure expanded to include, power,
telecommunication, mining exploration and refining
Recent Changes in ECB Policies as
part of the ‘Second Stimulus Package’
The ‘all-in-cost’ ceilings on such borrowing would be removed,
under the approval route of RBI
To facilitate access to funds for the housing sector, the
‘development of integrated townships’ would be permitted as an
eligible end-use of the ECB, under the approval route of RBI
 Recent Changes in ECB Policies as
part of the ‘Second Stimulus Package’
NBFCs, dealing exclusively with infrastructure financing,
would be permitted to access ECB from multilateral or
bilateral financial institutions, under the approval route of
RBI.
In order to give a boost to the corporate bond market, FII
investment limit in rupee denominated corporate bonds in
India would be increased from US $ 6 billion to US $ 15
billion.
 Why ECB is attractive?
 Investor

 ECB is for specific period, which can be as short as

three years.
Fixed Return, usually the rates of interest are fixed.
The interest and the borrowed amount are repairable.
No owners risk as in case of Equity Investment.
 Why ECB is attractive?

 Borrower

1. No dilution in ownership.
2. Considerably large funds can be raised as per requirements of
borrower.
3. Usually only a fixed rate of interest is to be paid.
4. Easy Availability of funds because ECB is more appealing to
Investors.
 Contd..

 Scarcity of fund in domestic market

 Cheaper than domestic debt

 CONCLUSION

Important source of financing for the Indian companies.

Lower interest rates outside provide an opportunity to pick up

funds at lower costs.

Increase in External Commercial Borrowings by corporate

increases India’s external debt.

Increase in ECB brings the risk of depreciation .

 TRADE CREDITS FOR IMPORTS INTO INDIA

•Trade Credits (TC) refer to credits extended for imports directly

by the overseas supplier, bank and financial institution for maturity
of less than three years.

•Trade credits include supplier’s credit or buyer’s credit.

•Buyer’s credit and supplier’s credit for three years and above
come under the category of External Commercial Borrowings
(ECB) which are governed by ECB guidelines.
a) Amount and Maturity

AD Banks

•Upto USD 20 m per import transaction under the current FTP of DGFT with a
maturity period upto 1 yr (from DoS)

•For Capital Goods

Upto USD 20 m per import transaction with a maturity period >1 & <3 yrs (from
DoS)

b) All-in-cost Ceilings

The current all-in-cost ceilings are as under :

Maturity period All-in-cost ceilings over 6 months LIBOR*
-Up to one year
-More than one year
but less than three years 200 basis points
c) Guarantee

AD banks are permitted to issue LOC/guarantees/LoU/LoC I/f/o

overseas supplier, bank and financial institution, up to USD 20
m/transaction for a period up to one year for import of all non-
capital goods permissible under Foreign Trade Policy (except
gold, palladium, platinum, Rodium, silver etc.) and up to three
years for import of capital goods. The period of such LOC/
guarantees / LoU / LoC has to be co-terminus with the period of
credit, reckoned from the
DoS.
d) Reporting Arrangements

• AD banks are required to furnish details of approvals, drawal,

utilisation, and repayment of trade credit granted by all its
branches, in a consolidated statement, during the month, in form
TC to the Director, Division of International Finance, Department
of Economic Analysis and Policy, Reserve Bank of India, Central
Office Building.

• AD banks are required to furnish data on issuance of LCs /

guarantees / LoU / LoC by all its branches, in a consolidated
statement, at quarterly intervals to the Chief General Manager-in-
Charge, Foreign Exchange Department, ECB Division, Reserve
Bank of India, Central Office Building.