‘External Commercial Borrowings’ INDEX

1. External commercial borrowings. 2. Various form of external commercial borrowings. 3. Importance. 4. How it works. 5. Flow of external commercial borrowings. 6. Why company go for external commercial borrowings. 7. Planning the external commercial borrowings right. 8. How it help company to mange it finance. 9. Guidelines of RBI. 10.Recent trends 11.Company profile 12.Why company raise external commercial borrowings. 13. How much company raise external commercial borrowings. 14. What was currency rate at the time of external commercial borrowings. 15.Current financial position of company. 16.Bank profile. 17. Why does bank’s give external commercial borrowings. 18.Things they need to consider while giving external commercial borrowings. 19. Question nair 20.Conclusion 21.bibliography

Introduction
External Commercial borrowing (ECB) is a term used to refer to commercial loans availed from non-resident lenders with a minimum average maturity of 3 years in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds). A company is free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equityholders, international capital markets etc. However, offers from unrecognized sources are not entertained. ECB can be accessed under two routes -: ➢ Automatic Route and ➢ Approval Route. Under the Automatic Route, the approval of Reserve Bank of India (RBI) or the Governments approval are not required. However, in case of doubt regarding eligibility under the Automatic Route, applicants may take recourse to the Approval Route. The maximum amount of ECB that can be raised by an eligible borrower under the Automatic Route during one financial year is USD 500 million. NGOs engaged in micro finance activities have been permitted to raise ECB up to USD 5 million during a financial year for permitted end-use.

Benefits
The ECBs route provides an Indian company with the foreign currency funds that may not be available in India; the cost of funds at times works out to be cheaper as compared to the cost of rupee funds and the availability of the funds from the International market is huge compared to the domestic market. Moreover corporates can raise a large amount of funds depending on the risk perception of the International market. Corporates (registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB under the automatic route. However Individuals, Trusts and Non-Profit making Organizations are not eligible to raise ECB. The success of Indias debt management policy is reflected in a perceptible improvement in various external debt indicators. The external debt to GDP ratio which is an indicator of an economys debt servicing capability, showed a steady improvement, dropping to 17.4 per cent in March 2005 as compared to 38.7 per cent in end-March, 1992.It is noteworthy to mention that debt owed to the International Monetary Fund (IMF) was fully extinguished by 2000-01.ECBs can be used as a borrowing means for any purpose (rupee-related expenditure as well as imports) except for investment in stock market and speculation in real estate. ECB is a source of finance for Indian corporate, small and medium enterprise, Multi-state cooperative societies and nongovernmental organizations for expansion of existing capacity as well as for fresh investment. External Commercial Borrowing can be raised only for investments such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units in the industrial sector including small and medium enterprises and infrastructure sector - in India. Infrastructure sector is defined as power, telecommunication, railways, road including bridges, sea port and airport industrial parks and urban infrastructure (water supply, sanitation and sewage projects). ECB proceeds can also be utilized for overseas direct investment in Joint Ventures / Wholly Owned overseas subsidiaries subject to the existing

guidelines on Indian Direct Investment. Utilization of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestments process. Small and medium enterprises (SMEs) are increasingly opting for the external commercial borrowings (ECB) route to raise funds, a growing trend, given the current rising interest scenario. Those SMEs that are export-oriented find it economically more viable to raise funds overseas. Also with a view to provide NonGovernmental Organizations (NGOs) an additional channel of resource mobilization and in order to give impetus to the microfinance movement, the Government has permitted NGOs to raise ECB up to US $ 5 million during a financial year.

Recent Trends
The department of Economic Affairs, Ministry of Finance, and Government of India monitors and regulates Indian firms' access to global capital markets. From time to time, they announce guidelines on policies and procedures for ECB.The important aspect of ECB policy is to provide flexibility in borrowings by Indian corporate, at the same time maintaining prudent limits for total external borrowings. The guiding principles for ECB Policy are to keep maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The ECB policy focuses on three aspects: eligibility criteria for accessing external markets, the total volume of borrowings to be raised and their maturity structure as well as the end use of the funds raised. Over the years the RBI and the Indian government have monitored ECBs in accordance with the needs of the Indian economy and laid down various policies and guidelines. It is interesting to note that the trend of how ECB has evolved and played a greater role in the Indian economy under the surveillance of RBI and the Indian government. In its initial stages, the Government had operationalised the automatic route for fresh ECB approvals up to USD 50 million and for all refinancing of

existing ECBs with effect from September 1, 2000. However, at present the maximum amount of ECB that can be raised by an eligible borrower under the Automatic Route during one financial year is USD 500 million. Further, with a view to enable the Indian corporate to become a global player by facilitating their overseas direct investment, permitted end-use for ECB was enlarged to include overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS). This would facilitate corporates to undertake fresh investment or expansion of existing JV/WOS including mergers and acquisitions abroad by harnessing resources at globally competitive rates. ECB for overseas direct investment should also be in conformity with other parameters of the ECB guidelines.Other important aspects being that housing finance companies, with approval from the Reserve Bank of India, would be allowed to issue foreign currency convertible bonds.The government also relaxed rules for external commercial borrowings, allowing non-banking finance companies to raise overseas loans. It is pertinent to note, that though external commercial borrowing has been an aid to the Indian economy, the government has continued to regulate the creation of debt from overseas. For instance on September 16, 2003, Overseas Corporate Bodies (OCBs) were derecognized as an eligible 'class of investor' under various routes / schemes available under the extant Foreign Exchange Management Regulations. It was also, reiterated that OCBs not being recognized as investors cannot be recognized lenders. ECB policies have been modified as recently as on 21st May 2007 regarding the end-use of ECBs. As per the extant ECB policy, utilisation of ECB proceeds is not permitted in real estate. Earlier, the term real estate excluded development of integrated township as defined by Press Note 3 (2002 Series) dated January 4, 2002. However at present, the exemption accorded to the 'development of integrated township' as a permissible end-use of ECB has been withdrawn. In accordance with the recent master circular on foreign policy, utilization of ECB proceeds is not permissible in real estate, without any exemption.

ECB has indeed found its place in the Indian market and the flexibility in managing the borrowings have been facilitated by the RBI. Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares/ preference shares, subject to the following conditions and reporting requirements. Firstly, the activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company. Secondly, the foreign equity after conversion of ECB into equity is within the sectoral cap, if any. Thirdly, pricing of shares is as per SEBI regulations /erstwhile CCI guidelines/ in the case of listed/unlisted companies as the case may be. Finally, the need for compliance with the requirements prescribed under any other statute and regulation in force.

Modes of raising ECBs➢ Commercial Bank Loans : in the form of term loans from banks outside India ➢ Buyer's Credit ➢ Supplier's Credit ➢ Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs), Syndicated Loans etc. Syndicated Loan, CP ➢ Credit from official export credit agencies ➢ Commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC,

➢ Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognized credit rating agency ➢ Lines of Credit from foreign banks and financial institutions ➢ Financial Leases ➢ Import Loans ➢ Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds ➢ External assistance, NRI deposits, short-term credit and Rupee debt ➢ Foreign Currency Convertible Bonds ➢ Non convertible or optionally convertible or partially convertible debentures ➢ Redeemable preference shares are considered as part of ECBs ○ As per Indian corporate law, all preference shares are mandatorily redeemable unless they are convertible ○ Hence, convertible preference shares will not be ECB (will be Foreign Direct Investment) ○ Non convertible, partly convertible or optionally convertible preference shares are treated as ECBs ➢ Bonds, Credit notes, Asset Backed Securities, Mortgage Backed securities

Not expressly covered but Guidelines refer to securitised notes

Documentation:
Following documents, (as relevant) certified by authorised dealer, should be forwarded with the application: (i) A copy of offer letter from the overseas lender/supplier furnishing complete details of the terms and conditions of proposed ECB. (ii) A copy of the import contract, proforma/commercial invoice/bill of lading. __________________________________________________________________ ____________ PART-A- GENERAL INFORMATION ABOUT THE BORROWER 1. Name of the applicant (BLOCK LETTERS) Address __________________________________________________________________ ____________ 2. Status of the applicant i) Private Sector ii) Public Sector

__________________________________________________________________ ____________

PART-B-INFORMATION ABOUT THE PROPOSED ECB __________________________________________________________________ ____________ Currency Amount US$equivalent 1. Details of the ECB (a) Purpose of the ECB: (b) Nature of ECB (i) Suppliers’ Credit (ii) Buyers’ Credit (iii) Syndicated Loan (iv) Export Credit (v) Loan from foreign collaborator/equity holder (with details of amount, percentage equity holding in the paid-up equity capital of the borrower company) (vi) Floating Rate Notes (vii) Fixed Rate Bonds (viii) Line of Credit (ix) Commercial Bank Loan (x) Others (please specify) (c) Terms and conditions of the ECB (i) Rate of interest : (ii) Up-front fee : (iii) Management fee : (iv) Other charges, if any (Please specify) : (v) All-in-cost : (vi) Commitment fee : (vii) Rate of penal interest : (viii) Period of ECB : (ix) Details of call/put option, if any. : (x) Grace / moratorium period : (xi) Repayment terms (half yearly/annually/bullet) :

(xii) Average maturity : __________________________________________________________________ ____________ 2. Details of the lender Name and address of the lender/supplier __________________________________________________________________ ____________ 3. Nature of security to be provided, if any. __________________________________________________________________ ____________

PART C – INFORMATION ABOUT DRAW DOWN AND REPAYMENTS Proposed Schedule Draw-down Month Yea Amou r nt Repayment of Principal Mont h Yea r Amou nt Interest Payment Mont h Yea r Amount

PART D – ADDITIONAL INFORMATION 1. Information about the project i) Name & location of the project : ii) Total cost of the project : Rs. USD iii) Total ECB as a % of project cost : iv) Nature of the project : v) Whether Appraised by financial institution/bank : vi) Infrastructure Sector : a) Power b) Telecommunication c) Railways d) Roads including bridges e) Ports f) Industrial parks g) Urban infrastructure - Water supply, Sanitation and sewerage. vii) Whether requires clearance from any : statutory authority ? If yes, furnish the name of authority, clearance no. and date. 2. ECB already availed -(not applicable for the first time borrower)

Year Registration No. Amount disbursed 2003-04 2002-03 2001-02

Currency

Loan

Amount

* net of repayments, if any, on the date of application.

PART E – CERTIFICATIONS 1. By the applicant We hereby certify that (i) the particulars given above are true and correct to the best of our knowledge and belief. (ii) the ECB to be raised will be utilised for permitted purposes __________________________________ ______ (Signature of Authorised Official of the applicant) Place_______________ Name:____________________________ _____ Date________________ Stamp Designation______________________ _______ Phone No. ______________________________ Fax ________________________________

E-mail _________________________________ __________________________________________________________________ ____________ 2. By the authorised dealer – We hereby certify that – (i) the applicant is our customer. (ii) we have scrutinised the application and the original letter of offer from the lender/supplier and documents relating to proposed borrowing and found the same to be in order. _________________________ _______ (Signature of Authorised Official) Place ________________ Name _________________________________ Date_________________ Stamp Name of Bank/branch__________________ A.D.Code______________________ ________

Top sectors to raise ECB in 2007

The top sectors to have raised ECBs more than USD billion April to November 2007 include Aviation, Steel, Telecom and Oil. offshore borrowings raised by these sectors were Aviation ($4.168 billion), Steel (3.139 billion), Telecom ($2.522 billion) and Oil exploration and refining ($1.216 billion).

➢ The • • • •

➢ Another sectors to have borrowed substantially during the period were ○ Auto ($914 million), ○ Construction ($791 million), ○ financial services ($532.21 million), ○ pharmaceuticals ($528.57 million), ○ IT ($527.46 million), ○ Shipping ($461.23 million), • Auto components ($417.73 million).

Top sectors in 2008
During April to November 2008 period, the companies dealing in diversified sectors raised maximum funds to the tune of $2.77 billion. Power sector emerged as the next biggest sectors in terms of foreign borrowings with the ECB amount totaling to $1.82 billion. Telecom sector was the third place with $1.78 billion ECBs amount raised. ➢ The ECB amount raised in all the other sectors were

• • • • • •

Oil ($783 million), Shipping ($692.71 million), Aviation ($585.36 million), Infrastructure ($580.58 million), Textiles and garments ($575.68 million), Metals ($537.67 million).

Change in ECB status in 2008 The ECB status of the sectors witnessed drastic change in the year 2008 as a result of the impact of economic slowdown on industry segments and international financialmarket developments during the year. Major Losers Among the sectors which were the top borrowers of offshore funds in 2007, those which have recorded maximum decline in the ECBs include -: ➢ Aviation (-86 per cent), ➢ Steel (91.63 per cent), ➢ Telecom (-29.4 per cent), ➢ Auto and auto components (-78 percent), ➢ Oil exploration and refining (-35.6 per cent), ➢ Construction (-97.34 per cent), ➢ Financial services (-46.6 per cent), ➢ Pharma (-40 per cent), ➢ IT (-95.5 per cent). Major Gainers There are sectors which have bucked the trend and have recorded steep rise in the offshore fund raisings despite the drop in overall ECB amount. Power, infrastructure projects, textiles and garments, metals and paper are few sectors which have recorded multi fold rise in their foreign borrowings. Among the sectors with considerable foreign debt exposure during the April to Novmber 2007 period, the companies with diversified business portfolio, shipping segment and sundry manufacturers have registered growth in the year 2008.

The diversified companies have recorded 4.5 per cent rise, shipping and manufacturing firms raised 50 per cent more ECBs.

Sector-wise Details Aviation
The aviation sector which suffered huge losses in the year 2008 due to rise in fuel prices and demand slowdown, witnessed a major downturn in the amount of external commercial borrowings availed by the sector. The ECB amount raised in the civil aviation sector during April to November 2007 was USD 4.16 billion which fell to mere USD 585 million, hence recording 85 per cent fall. The domestic air traffic fell by 4.1 per cent during April to August 2008, while in the months of July and August the fall was much steeper at 14.9 per cent and 17.1 percent rate. Top foreign borrowers in Aviation Sector Company Air India Charters Ltd. Indian Airlines Limited Jet Airways (I) Ltd Jet Airways (India) Lt National Aviation Company of India Ltd. National Aviation Company Of Ltd Ran Air Services Ltd. 1,020.25 17.72 0 0 2007 42.99 518.65 1 02.18 5 5 9.16 601.13 2008 36.60 0 24.49 287.16 214.12

Garware Offshore Services Ltd.

0

23.00

STEEL
Plagued by demand slowdown in exports and domestic usage in construction, consumer durable and auto segments, the Steel industry has recorded steep fall in the external debt raised through ECB route. Amount raised by the Steel sector fell to USD 262 million during the first eight months of the fiscal as compared to USD 3.12 billion raised in corresponding period of the last financial year. This is almost 91 per cent decline in the borrowed funds. There were 27 steel companies which raised ECBs in 2007 as the sector was witnessing huge demand with booming economy. The number reduced to nine in the year 2007. Top Steel ECB raisers in 2007 Company 2007 (amount in USD million) Tata Steel Ltd. Ispat Industries Ltd JSW Steel Ltd. Jindal Stainless Ltd 500.00 250.00 0 0 875.00 500.00 2008 (amount in USD million) 0 0

Bhushan Steel & Strips Ltd. Jindal Steel & Power Ltd Essar Steel Ltd. Essar Steel (Hazira) Ltd. Monnet Ispat & Energy Ltd. Bhusan Power & Steel Ltd.

205.00

0

200.00

41.95847

190.00 100.00

0 0

90.00

0

50.00

55.00

Auto and Auto Components Sector
The automobile sector has been feeling the heat of demand slowdown primarily due to hike in interest rates brought about by the Reserve Bank of India between October, 2006 and July, 2008. The automobile sector including the ancillaries and auto component segments, had raised USD 1.331 billion during April to November 2007 which dropped by 78 per cent as the ECB amount fell to mere USD 290 million in the corresponding period of FY2008-09. The automobile sector for the period April-October 2008 grew by 8.39 percent in terms of production over April-October 2007. However, in October 2008, overall production fell by 12.32 per cent over the same month last year.

The growth of the Passenger Vehicles segment during AprilOctober 2008 was 4.87 percent over April-October 2007. Passenger Cars grew by 3.51 percent, Utility Vehiclesby 6.33 percent and Multi Purpose Vehicles by 18.15 percent in this period. Cumulative sales of commercial vehicles segment declined by 2.97 percent during April-October 2008 as compared to the same period last year. Top Six Foreign Debt raising Firms April to November 2008 Company ECB (in USD million) Bharat Forge Limited. Takata India Pvt. Ltd. CEAT Ltd. Ford India Pvt.Ltd. JBM MA Automotive Pvt. Ltd. Suzuki Motorcycle India Pvt.Ltd. April to November 2007 Tata Motors Ltd. Amtek Auto Ltd. Hyundai Motor India Ltd. Ashok Leyland 60 490 250 150 20 50 42 25 25 20

Limited Mahindra & Mahindra Ltd. Kirloskar Oil Engines Ltd 35 50

Construction Sector
In view of the slowdown in the construction activity led by upsurge in interest rates, the foreign borrowings in the sector dipped by 97 per cent and came down to USD 21 million from the previous USD 791 million. The growth rate came down to 9.7 per cent in the second quarter of the current fiscal from 11.4 per cent in the first quarter and in contrast to 11.8 per cent in the similar period of the financial year 2007-08. Top ECB raisers in construction Sector April to November 2008 Company ECB (USD in million) Hyundai Construction Euqt P.Ltd. Wienerberger Brick Industry Pvt.Ltd. Codina Metalic Private 1.007076 9.00946 10

Ltd. Multibase India Ltd Tenax India Stone Products Pvt. Ltd April to November 2007 Company ECB (USD in million) Jaiprakash Associates Ltd. Larsen & Toubro Limited KSL Reality & Infrastucture Ltd. Sanghi Industries Ltd Gayatri Projects Ltd. Electrotherm (India) Ltd. 38 26 25 150 80 400 0.71934 0.293293

IT Sector
The IT and ITes sector which heavily depends upon the US, UK and rest of Europe for its revenues, has been major problems due to recession in the developed economies. As the expansionary plans in the Sector were put on hold, the fund raisings by the companies also fell.

This was evident by 95 per cent fall in the ECBs raised during April to November 2008 amounting ton mere USD 23.3 million by two companies, as against the 12 IT firms raising USD 527.4 million foreign debt. April to November 2007 ECBs(USD in million)

Company

Rolta India Ltd.

150

Tulip IT Services Ltd

150

3i Infotech Ltd.

100

Core Project & Technologies Ltd.

80

Financial Services
In the finance sector, the ECB amount came down by 46 per cent in one year. The foreign debt during April to November 2008 was USD 234 million as against USD 532 million during the corresponding period of the similar period. Top Borrowers in Financial Services Sector April to November 2008 Borrower ECB (USD in

million) Indian Railway Finance Corporation Ltd. SREI Equipment Finance Pvt. Ltd April to November 2007 Export-Import Bank of India Power Finance Corporation Ltd. Infrastructure Development Finance Corporation SREI Infrastructure Finance Ltd. 50 50 250 180 15 100

Some facts Related To ECB
ECB Policy External Commercial Borrowings (ECBs) are defined to include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs are being permitted by the Government as a source of finance for Indian Corporates 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. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Applicants will be free to raise ECB from any internationally recognised source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. offers from unrecognised sources will not be entertained.

ECBs should have the following minimum average maturities: 1. Minimum average maturity of three years for external commercial borrowings equal to or less than USD 20 million equivalent in respect of all sectors except 100% EOUs 2. Minimum average maturity of five years for external commercial borrowings greater than USD 20 million equivalent in respect of all sectors except 100% EOUs 3. 100% Export oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years for any amount.

USD 5 MILLION SCHEME All Corporates and Institutions are permitted to raise ECB upto USD 5 million equivalent at a minimum simple maturity of 3 years. Borrowers may utilise the proceeds under this window for general corporate objectives without any end-use use restrictions excluding investments in stock markets or in real estate. The loan amount may be raised in one or more tranches subject to the caveat that the total outstanding loan under this scheme at any point of time should not exceed USD 5 million. Each tranche should have a minimum simple maturity of 3 years. (Government have delegated the sanctioning powers to Reserve Bank of India (RBI)).

EXPORTERS/FOREIGN EXCHANGE EARNERS Corporates who have foreign exchange earnings are permitted to raise ECB upto thrice the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate. The minimum average maturity will be three years upto USD 20 million equivalent and five years for ECBs exceeding USD 20 million.

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. This flexibility is being given in order to enable domestic investors in infrastructure projects to meet the minimum domestic equity requirements. 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.

LONG-TERM BORROWERS 1.ECB of eight years average maturity and above will be outside the ECB ceiling, though MOF/RBI's prior approval for such borrowings would continue to be necessary. The extent of debt under this window will be reviewed by the Government periodically. 2.Funds raised under this window will not be subject to end-use restriction other than that relating to investment in real estate and stock market.

ON-LENDING BY DFIs AND OTHER FINANCIAL INTERMEDIARIES While DFIs are required to adhere to the average maturity criteria prescribed, namely, minimum of five years for loans more than USD 20 million equivalent and minimum three years for loans less than or equal to USD 20 million equivalent for their borrowing, they are permitted to onlend at different maturities. They may also on-lend for project-related Rupee expenditure. However, other financial intermediaries are required to adhere to the general ECB guidelines on maturity as well as end-use in their on-lending programs. All financial intermediaries, including DFIs, are required to on-lend their external commercial borrowings within 12 months of drawdown. To enable better utilisation of ECBs by DFIs, it has been

decided that DFIs would be permitted to onlend such Recycled Funds (available with them on account of time mismatch between repayment obligation of their subborrowers vis-à-vis those of DFIs to the offshore lenders), out of original ECBs only for import of capital goods and project-related rupee expenditure.

END-USE REQUIREMENTS (A) External commercial loans are to be utilised for import of capital goods and services (on FOB or CIF basis) and for project related expenditure in all sectors (B) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards. (C) Under no circumstances, ECB proceeds will be utilised for (i) Investment in stock market; and (ii) Speculation in real estate.

PROCEEDS FROM BONDs, FRNs & SYNDICATED LOAN Corporate borrowers who have raised ECB for import of capital goods and services through Bonds/FRN/Syndicated loans are permitted to remit funds into India. The funds can be utilised for

activities as per their business judgement except investment in stock market or in real estate, for upto one year or till the actual import of capital goods and services takes place, whichever is earlier. In case borrowers decide to deploy the funds abroad till the approved end-use requirement arises, they can do so as per the RBI's extant guidelines. RBI guidelines would have to be strictly adhered to. RBI would be monitoring ECB proceeds parked outside.

ECB ENTITLEMENT FOR NEW PROJECTS All infrastructure and greenfield projects will be permitted to avail ECB to an extent of 35% of the total project cost, as appraised by a recognised Financial Institution/Bank, subject to the fulfillment of other ECB guidelines. However, ECB limits for telecom projects are more flexible and an increase from the present 35% to 50% of the project cost (including the license fee) will be allowed as a matter of course. Greater flexibility may also be allowed in case of power projects and other infrastructure projects based on merits.

ECB ENTITLEMENT FOR NEW PROJECTS All infrastructure and greenfield projects will be permitted to avail ECB to an extent of 35% of the total project cost, as appraised by a recognised Financial Institution/Bank, subject to the fulfillment of

other ECB guidelines. However, ECB limits for telecom projects are more flexible and an increase from the present 35% to 50% of the project cost (including the license fee) will be allowed as a matter of course. Greater flexibility may also be allowed in case of power projects and other infrastructure projects based on merits.

INTEREST RATE FOR PROJECT FINANCING At present, interest rate limits on ECB for project financing (i.e. to say non-recourse financing) allow interest spreads above LIBOR/US Treasury to be higher than for normal ECB. Keeping market conditions in mind, some flexibility will be permitted in determining the spread on merits. In order to give borrowers greater flexibility in designing a debt strategy, upto 50% of the permissible debt may be allowed in the form of sub-ordinated debt at a higher interest rate, provided the composite spread for senior and sub-ordinated debt taken together comes within the overall project financing limit.

STRUCTURED OBLIGATIONS In order to enable corporates to hedge exchange rate risks and raise resources domestically, Domestic Rupee Denominated Structured obligations would be permitted to be Credit enhanced by International Banks/International Financial Institutions/Joint Venture Partners.

OTHER TERMS AND CONDITIONS Apart from the maturity and end-use requirements as per paras above, the financial terms and conditions of each ECB proposal are required to be reasonable and market-related. The choice of the sourcing of ECB currency of the loan, and the interest rate basis (i.e. floating or fixed), will be left to the borrowers.

SECURITY The choice of security to be provided to the lenders/suppliers will also be left to the borrowers. However, where the security is in the form of a guarantee from an Indian Financial Institution or from an Indian Scheduled Commercial Bank, Counterguarantee or confirmation of the guarantee by a Foreign Bank/Foreign Institution will not be permitted. EXEMPTION FROM WITHHOLDING TAX. Interest @ payable by an industrial undertaking @ in India, related to external commercial borrowings as approved by GOI/RBI would be eligible for tax.

APPROVAL UNDER FERA After receiving the approval from ECB Division, Department of Economic Affairs, Ministry of Finance, the applicant is required to obtain approval from the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973, and to submit an executed copy of the Loan Agreement to this Department for taking the same on record, before obtaining the clearance from RBI for drawing the loan. Monitoring of end-use of ECB will continue to be done by RBI. At present, ECB approvals under USD 3 million scheme (enhanced to US 5 million) is given by RBI and all other ECB proposals are processed in DEA. As a measure of further simplification and rationalisation, Government has decided to delegate the ECB sanctioning power to RBI up to USD 10 million under all the ECB schemes except structured obligation which is at present being administered by DEA. Accordingly, applications for approval upto USD 10 million will be considered by the Exchange Control Department of RBI, Mumbai.

SHORT-TERM LOAN FROM Reserve Bank of India While ECB for minimum maturity of three years and above will be sanctioned by Department of Economic Affairs, Ministry of Finance, approvals of short term

foreign currency loans with a maturity of less than three years will be sanctioned by RBI, according to RBI guidelines.

VALIDITY OF APPROVAL Approvals are valid for a period of six months, i.e. the executed copy of the loan agreement is required to be submitted within this period. In the case of FRNs, Bonds etc., the same are required to be launched within this period. In case of power projects, the validity of the approval will be for a period of one year and 9 months in the case of telecom sector project . Bonds, Debentures, FRNs and other such instruments will have additional validity period of three months for all the ECB approvals across the board. Extension will not be granted beyond the validity period.

PRE-PAYMENT OF ECB a) Prepayment facility would be permitted if they are met out of inflow of foreign equity. b) In addition to ECB being prepaid out of foreign equity, corporates can avail either of following two options for prepayment of their ECBs: On permission by the Government, prepayment may be undertaken, within the permitted period, of all

ECBs with residual maturity up to one year. OR Prepayment upto 10% of outstanding ECB to be permitted once during the life of the loan, subject to the company complying with the ECB approval terms. Those companies who had already availed prepayment facility of 20% earlier would not be eligible. c) Validity of permission under the above two options will be as under : 1.Prepayment approval for ECBs other than Bonds/Debentures/FRNs will be 15 days or period up to next interest payment date, whichever is later. 2.In case of Bonds/FRNs, validity of permission will not be more than 15 days.

REFINANCING THE EXISTING FOREIGN CURRENCY LOAN Refinancing of outstanding amounts under existing loans by raising fresh loans at lower costs may also be permitted on a case-to-case basis, subject to the condition that the outstanding maturity of the original loan is maintained. Rolling over of ECB will not be permitted. A corporate borrowing overseas for financing its Rupee-related expenditure and swapping its external

commercial borrowings with another corporate, which requires foreign currency funds, will not be permitted.

LIABILITY MANAGEMENT Corporates can undertake liability management for hedging the interest and/or exchange rate risk on their underlying foreign currency exposure. Prior approval of this Department or RBI has been dispensed with.