External Commercial Borrowings and Trade Credits

Abhijit Nagee
abhijit@vinodkothari.com Vinod Kothari & Company Practicing Company Secretaries

Kolkata Office 1012, Krishna 224, AJC Bose Road Kolkata 700 017 Ph: 2281 7715

Mumbai Office 222, Ashoka Shopping Centre 2nd, Floor, LT Road Near GT Hospital Mumbai – 400 001

External Commercial Borrowings (ECB)

Foreign Currency Convertible Bonds (FCCBs)

At present, Indian companies can access funds from abroad in these ways-

Preference shares (i.e. nonconvertible, optionally convertible or partially convertible)

Foreign Currency Exchangeable Bond (FCEB)

buyers’ credit. as per discussion in further slides compulsorily convertible debentures. floating rate notes and . compulsorily convertible preference shares. suppliers’ credit. FCEBs. securitized instruments. equity investments . securitized instruments (e. financial leases Excludes: trade credit – supplier and buyers’ credit. optionally convertible or partially convertible preference shares) . non convertible bonds. non-convertible.bank loans. ECBs with a minimum maturity of 3 years Includes: optionally convertible debentures.g. FCCBs.availed of from non-resident lenders with a minimum average maturity of 3 years.External Commercial Borrowings (“ECB”) refer to commercial loans in the form of: fixed rate bonds.

ECBs can be accessed under two routes Automatic Route Approval Route .

Guarantees Securities Parking of ECB proceeds Prepayment options Refinancing of an existing ECB Debt Servicing Procedure . All-in-cost ceilings End uses of the funds raised. Eligibility criteria for accessing international financial markets Eligible borrower  Eligible lender            Total quantum limit of funds that can be raised through ECBs. Maturity period and the cost involved.

they cannot transfer or onlend ECB funds to sister concerns or any unit in the Domestic Tariff Area. • NBFCs. • Multi-State Co-operative Societies engaged in manufacturing activities. Trusts and Non-Profit making organisations are not eligible to raise ECBs) Approval route • Banks and Financial Institutions which participated in the textile or steel sector restructuring package • ECBs with minimum average maturity of 5 years by NBFCs to finance import of infrastructure equipment for leasing to infrastructure projects. beyond 50 per cent of their owned funds. • Corporates in the service sector • Corporates engaged in industrial & infrastructure sector . • SEZ developers for providing infrastructure facilities within SEZ. • (Individuals. including the outstanding ECBs. by the RBI. • NGOs and Micro Finance Institutions (MFIs) engaged in micro finance activities are eligible to avail ECB. hospital. Housing Finance companies and NBFCs). Financial Institutions (FIs). set up to finance infrastructure companies / projects. • FCCBs by housing finance companies satisfying the prescribed criteria • SPVs or any other entity notified by RBI. software sectors and infrastructure Finance companies except financial intermediaries (such as Banks. for on-lending to the infrastructure sector.Automatic route • Indian Companies including those in hotel. categorized as Infrastructure Finance Companies (IFCs) . satisfying the prescribed criteria. • Units in Special Economic Zones (SEZ) are allowed to borrow funds through ECBs for their own requirements.

foreign collaborators).ECB above USD 5 M – minimum equity of 25% and debt-equity ratio not exceeding 4:1 • Internationally recognized sources (international banks. • . if the RBI permits. capital markets.In such cases the debt-equity ratio may exceed 4:1. multilateral financial Institutions. equipment suppliers. Automatic route Approval route . export credit agencies. equipment suppliers.• Internationally recognized sources (international banks. • .such 'foreign equity holder' directly holds minimum 25 % of the paid up equity capital of the borrowing company.ECB up to USD 5 M – minimum equity of 25% directly held by lenders. export credit agencies. capital markets. multilateral financial Institutions. foreign equity holders (other than erstwhile OCBs) if: • . foreign collaborators) foreign equity holders (other than erstwhile OCBs) if: • .

hotel. hotels. *The proceeds of ECBs should not be used for land acquisition. hospitals and software sector NGOs engaged in micro finance activities and MFIs ECB up to MUSD 200 or equivalent in a FY. hospital and software Corporates in the services sector viz. hospitals and software sector Indian companies which are in the infrastructure Amount ECB beyond MUSD 750 or equivalent per FY. ECBs in Renminbi. ECB up to MUSD 10 or equivalent during a FY.Automatic route Eligible Borrowers Corporates other than those in the hotel. hospital and software sectors Amount Permitted ECB upto MUSD 750 or equivalent during a FY Corporates in the services sector viz. hotels. subject to an annual cap of USD . Amount ECB up to MUSD 20 or equivalent ECB above MUSD 20 and up to MUSD 750 or equivalent Max amount of ECB by eligible borrower ECB up to MUSD 20 can have call/ put option 3 years 5 years Maturity MUSD 750 during a FY If the minimum maturity of 3 years is complied before exercising call/ put option Approval route Eligible borrower Eligible borrowers under the automatic route other than corporates in the services sector viz. ECB beyond MUSD 200 or equivalent in a FY.

ECB beyond the permissible all-incost ceiling can be availed of under the Approval Route.AUTOMATIC ROUTE  APPROVAL ROUTE    All-in-cost includes rate of interest. The payment of withholding tax in Indian Rupees is excluded for calculating the all-incost. In the case of fixed rate loans. . 2012) Average Maturity Period 3 years and upto 5 years All-in-cost Ceilings over 6 month LIBOR* 350 basis points More than 5 years 500 basis points *for the respective currency of borrowing or applicable benchmark *The above ceilings are applicable upto March 31. 2012 and are subject to review thereafter. pre-payment fee. (to be reviewed after March 31. other fees and expenses in foreign currency except commitment fee. and fees payable in Indian Rupees. the swap cost plus the margin should be the equivalent of the floating rate plus the applicable margin.

• Investment in infrastructure sector • Payment for Spectrum Allocation. • NBFCs categorized as IFCs by the RBI.industrial sector including SME. • Refinancing of an existing ECB subject to certain conditions. • Import of capital goods by service sector companies • First stage acquisition of shares of PSUs in the disinvestment process by Government and also in the mandatory second stage offer to the public. for on-lending to the infrastructure sector. • For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities.• Import of capital goods for new projects. including the outstanding ECBs. • Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) • 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. up to 50 per cent of their owned funds. are permitted to avail of ECBs. Automatic Route Approval route . • In addition. modernization/expansion of existing production units in real sector . infrastructure sector and specified service sectors. the ECB proceeds can also be utilised for the following purposes with the prior approval of RBI – • Implementation of new projects and modernization/ expansion of existing production units by the companies engaged in the industrial sector including SME.

• Real estate sector. subject to the approval of RBI. general corporate purpose and repayment of existing Rupee loans. • Same • However. • Working capital. the eligible Financial Institutions and Banks can utilise the ECB proceeds for acquisition of companies in India.• For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate. Automatic route Approval route .

standby letters of credit. letters of undertaking and letters of comfort by banks in respect of ECB by textile companies for modernization or expansion of textile units will be considered under the Approval Route subject to prudential norms. standby letter of credit. . Applications in the case of SME will be considered on merit subject to prudential norms. Issuance of guarantees. letter of undertaking or letter of comfort by banks.Issuance of guarantees. Financial Institutions and NBFCs from India relating to ECB is not permitted.

AD Category I banks may convey their ‘no objection’.Security to be provided to the lender/supplier is left to the borrower.Powers to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA). 2000 and Regulation 3 of Notification No. such as shares. 2000. in favour of the overseas lender is subject to Regulation 8 of Notification No. Security . 1999 for creation of charge on immovable assets.I banks . -. -. as amended from time to time. to secure the ECB to be raised by the borrower has been delegated to AD Category .On compliance with the specified conditions. FEMA 21/RB2000 dated May 3. FEMA 20/RB-2000 dated May 3.Creation of charge over immoveable assets and financial securities.-. -. financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee.

and (c) deposits with overseas branches /subsidiaries of Indian banks abroad. . pending utilization for permissible end-uses ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization The rupee funds. will not be permitted to be used for investment in capital markets. real estate or for inter-corporate lending ECB proceeds parked overseas can be invested in the following liquid assets : (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India.

.Automatic route The 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. Approval route Pre-payment of ECB for amounts exceeding USD 500 million would be considered by the Reserve Bank under the Approval Route.

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 .

 Automatic Route  Approval Route 1. along with necessary documents for approval . RBI. LRN obtained by Borrower from the RBI 3. Borrower can then draw ECB Applicant submit an application to the Chief General Manager-inCharge. Borrower enters into a loan agreement with Recognised lender 2. Foreign Exchange Department.

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or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency . either wholly. in foreign currency and exchangeable into equity share of the Offered Company.Foreign Currency Exchangeable Bond (FCEB) means : a bond expressed in foreign currency the principal and interest in respect of which is payable in foreign currency. issued by an Issuing Company and subscribed to by a person resident outside India.

Eligible issuer • The Issuing Company shall be part of the promoter group of the Offered Company and shall hold the equity share/s being offered at the time of issuance of FCEB Entities not eligible to issue FCEB • An Indian company. or a company which has been restrained from accessing the securities market by the SEBI shall not be eligible to issue FCEB . which is not eligible to raise funds from the Indian securities market.

which is engaged in a sector eligible to receive Foreign Direct Investment and eligible to issue or avail of Foreign Currency Convertible Bond (FCCB) or ECB Who shall be the offered Company .• a listed company.

• Prior approval of the FIPB. should be obtained • Entities prohibited to buy. sell or deal in securities by the SEBI will not be eligible to subscribe to FCEB Eligible subscriber Entities not eligible to subscribe to FCEB .• Entities complying with the Foreign Direct Investment policy and adhering to the sectoral caps at the time of issue of FCEB can subscribe to FCEB. wherever required under the Foreign Direct Investment policy.

• (ii) The proceeds of FCEB may be invested by the issuing company in the promoter group companies. subject to the existing guidelines on overseas investment in Joint Ventures / Wholly Owned Subsidiaries. • Promoter Group Companies: Promoter group companies receiving investments out of the FCEB proceeds may utilize the amount in accordance with end-uses prescribed under the ECB policy. . • The promoter group company receiving such investments will not be permitted to utilise the proceeds for investments in the capital market or in real estate in India.End-use permitted End-uses not permitted: • Issuing Company: • (i) The proceeds of FCEB may be invested by the issuing company overseas by way of direct investment including in Joint Ventures or Wholly Owned Subsidiaries abroad.

The rate of interest payable on FCEB and the issue expenses incurred in foreign currency shall be within the all-in-cost ceiling as specified by Reserve Bank under the ECB policy All-in-cost ceiling .

At the time of issuance of FCEB the exchange price of the offered listed equity shares shall not be less than the higher of the following two: • (i) The average of the weekly high and low of the closing prices of the shares of the offered company quoted on the stock exchange during the 6 months preceding the relevant date. . and • (ii) The average of the weekly high and low of the closing prices of the shares of the offered company quoted on a stock exchange during the 2 week preceding the relevant date.

-Minimum maturity of FCEB – 5 years -The exchange option can be exercised at any time before redemption. -While exercising the exchange option. -Cash (Net) settlement of FCEB is not permissible . the holder of the FCEB shall take delivery of the offered shares.

• The issuing company should submit audit trail of the end-use of the proceeds by the issuing company / promoter group companies to the RBI duly certified by the designated AD bank. . • The issuing company shall ensure that the proceeds of FCEB are used by the promoter group company only for the permitted end-uses prescribed under the ECB policy.Parking of FCEB proceeds abroad • The proceeds of FCEB may be retained and / or deployed overseas by the issuing / promoter group companies or repatriated to India for credit to the borrowers’ Rupee accounts in India pending utilization for permissible end-uses.

Depending on the source of finance. • Buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years.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. such trade credits include suppliers’ credit or buyers’ credit: • Suppliers’ credit relates to credit for imports into India extended by the overseas supplier. • Buyers’ credit and Suppliers’ credit for 3 years and above come under the category of External Commercial Borrowings which are governed by ECB guidelines. .

.AMOUNT Trade Credits for imports into India up to MUSD 20 per import transaction Trade Credits for import of capital goods upto MUSD 20 MATURITY up to 1 year More than 1 year and less than 3 years   No roll-over/extension is permitted beyond the permissible period. AD banks shall not approve trade credit exceeding MUSD 20 per import transaction.

 All-in-cost Maturity period Up to one year Ceilings: All-in-cost ceilings over 6 months LIBOR* 350 basis points More than one year but less than three years The all-in-cost ceilings include arranger fee. if any. management fee. 2012 and is subject to review thereafter. upfront fee. out of pocket and legal expenses. The existing all-in-cost ceiling is applicable upto March 31. handling/ processing charges. .

-Guarantee for Trade Credits AD banks can issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier. up to MUSD 20 per transaction Eligibility criteria For import of all non-capital goods permissible under Foreign Trade Policy For import of capital goods. subject to prudential guidelines issued by RBI from time to time Maturity Upto 1 year Upto 3 years . bank and financial institution.

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