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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)

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

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

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

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

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

hotels. hotels. 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. hospital and software Corporates in the services sector viz. ECB up to MUSD 10 or equivalent during a FY. hotel. ECB beyond MUSD 200 or equivalent in a FY. hospitals and software sector Indian companies which are in the infrastructure Amount ECB beyond MUSD 750 or equivalent per FY. hospital and software sectors Amount Permitted ECB upto MUSD 750 or equivalent during a FY Corporates in the services sector viz.Automatic route Eligible Borrowers Corporates other than those in the hotel. subject to an annual cap of USD . hospitals and software sector NGOs engaged in micro finance activities and MFIs ECB up to MUSD 200 or equivalent in a FY. *The proceeds of ECBs should not be used for land acquisition. ECBs in Renminbi.

The payment of withholding tax in Indian Rupees is excluded for calculating the all-incost.AUTOMATIC ROUTE  APPROVAL ROUTE    All-in-cost includes rate of interest. other fees and expenses in foreign currency except commitment fee. (to be reviewed after March 31. 2012 and are subject to review thereafter. 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. and fees payable in Indian Rupees. . In the case of fixed rate loans. pre-payment fee. ECB beyond the permissible all-incost ceiling can be availed of under the Approval Route. the swap cost plus the margin should be the equivalent of the floating rate plus the applicable margin.

infrastructure sector and specified service sectors. Automatic Route Approval route . including the outstanding ECBs. are permitted to avail of ECBs. for on-lending to the infrastructure sector. • 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. • 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. 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. • In addition. • Investment in infrastructure sector • Payment for Spectrum Allocation. • NBFCs categorized as IFCs by the RBI. • 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. modernization/expansion of existing production units in real sector .industrial sector including SME. • Refinancing of an existing ECB subject to certain conditions. up to 50 per cent of their owned funds.

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

Financial Institutions and NBFCs from India relating to ECB is not permitted. Applications in the case of SME will be considered on merit subject to prudential norms. 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. Issuance of guarantees.Issuance of guarantees. letter of undertaking or letter of comfort by banks. standby letters of credit. .

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

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. will not be permitted to be used for investment in capital markets.Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India. 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. pending utilization for permissible end-uses ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization The rupee funds. . and (c) deposits with overseas branches /subsidiaries of Indian banks abroad.

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

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 .

Foreign Exchange Department. along with necessary documents for approval . LRN obtained by Borrower from the RBI 3. Automatic Route  Approval Route 1. 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. RBI.

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issued by an Issuing Company and subscribed to by a person resident outside India. or partly or on the basis of any equity related warrants attached to debt instruments.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. in foreign currency and exchangeable into equity share of the Offered Company. The FCEB may be denominated in any freely convertible foreign currency . either wholly.

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.

• a listed company. 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 .

• 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. • 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 .

• 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. subject to the existing guidelines on overseas investment in Joint Ventures / Wholly Owned Subsidiaries. • (ii) The proceeds of FCEB may be invested by the issuing company in the promoter group companies.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. . • 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 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 .

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.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. .

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

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. • 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. . • 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.

such trade credits include suppliers’ credit or buyers’ credit: • Suppliers’ credit relates to credit for imports into India extended by the overseas supplier. bank and financial institution for maturity of less than three years. Depending on the source of finance. • Buyers’ credit and Suppliers’ credit for 3 years and above come under the category of External Commercial Borrowings which are governed by ECB guidelines. .Trade Credits’ (TC) refer to: • credits extended for imports directly by the overseas supplier. • 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.

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.

management fee. 2012 and is subject to review thereafter. if any. handling/ processing charges. The existing all-in-cost ceiling is applicable upto March 31. . 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. upfront fee. out of pocket and legal expenses.

subject to prudential guidelines issued by RBI from time to time Maturity Upto 1 year Upto 3 years . bank and financial institution. 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.-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.