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INTERNATIONAL CORPORATE FINANCE

Impact of External Commercial Borrowing on


Indian Economy
1. Financing options for companies 3
2. Introduction to ECB 4
3. Policies & Procedures 7
4. Advantages of ECB 11
5. Trends in ECB 12
6. Impact of Recession 15
7. Impact Analysis: Policy changes by RBI 24
8. Conclusion 27
9. References 28
FINANCING OPTIONS FOR COMPANIES

Financing options for companies can be broadly divided in the following 2 categories:
• Equity Capital
• Debt Capital

Equity capital provides investors ownership in the company while debt capital is a loan taken
by the company from the investors. The equity capital can be raised from the domestic
market as well as the foreign markets. Firms raise equity capital from the domestic market
through IPOs/FPOs, which are public offers for retail as well as institutional investors to
invest in the company. If the company does not want to go through this route, it can go for
private placements of equity wherein it can directly deal with the institutional investors. With
the liberalization of policies and the expansion of Indian companies in the global market,
more and more companies are now finding it necessary to raise capital from outside
sources. American Depository Reciepts(ADRs) and Global Depository Reciepts(GDRs)
allow companies to raise equity capital through foreign stock exchanges, i.e., investors of
other countries are offered equity in the company.

FDI: Foreign Direct Investment is a term used to specify investments by foreign investors in
real assets in India. FDI can be brought by a foreign firm in India by opening up a subsidiary,
financial collaboration, JVs. Even ADRs and GDRs fall in the category of FDI.

Debt Capital
Another way for companies to raise capital is to borrow money. Unlike the equity capital,
debts are just loans and hence the investors do not get any share of ownership in the firm.
Also, the loans generally have a fixed term and the interest payments are fixed as opposed
to the equity.
The corporate debt market in India is less developed than equity markets. Only government
securities and highly rated corporate papers can be said to be liquid. The market players in
the corporate debt market in India include the following:
• Public financial institution
• Scheduled commercial banks
• Mutual funds
• Multilateral and bilateral development financial institutions

Debts raised by companies can be for capital expenditure as well as for their working capital
needs. Working capital is required by firms to carry on their day to day operations and is
generally a short term loan.
As with the equity market, the opening up of the economy has also had its effect on the
ways debts are raised. Today companies are increasingly looking for borrowing from the
global market. Hence to differentiate the foreign borrowings of companies from their
domestic borrowings and to regulate them, the term External Commercial Borrowings was
coined.
INTRODUCTION TO ECB

What is ECB

External Commercial borrowing (ECB) refers to commercial loans availed by companies


from non-resident lenders in the form of bank loans, buyers credit, suppliers credit,
securitized instruments (e.g. floating rate notes and fixed rate bonds). A company is allowed
to raise ECB from internationally recognized source such as banks, export credit agencies,
suppliers of equipment, foreign collaborators, foreign equity-holders, international capital
markets etc. However, offers from unrecognized sources are not entertained.

External Commercial Borrowings (ECBs) include bank loans, suppliers and buyers credits,
fixed and floating rate bonds (without convertibility) and borrowings from private sector
windows of multilateral Financial Institutions such as International Finance Corporation.
In India, External Commercial Borrowings are being permitted by the Government for
providing an additional source of funds to Indian corporate and PSUs for financing
expansion of existing capacity and as well as for fresh investment, to augment the resources
available domestically. ECBs can be used for any purpose (rupee-related expenditure as
well as imports) except for investment in stock market and speculation in real estate.

What it includes

Commercial bank loans, buyer’s credit, supplier’s credit, securitized instruments such as
floating rate notes, fixed rate bonds etc., credit from official export credit
agencies, commercial borrowings from the private sector window of multilateral financial
institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional
Investors (FIIs) in dedicated debt funds.

The government has been streamlining and liberalising the ECB procedures in order to
enable the Indian corporate to have greater access in the financial markets. The RBI has
been empowered to regulate the ECBs. ECB provide additional sources of funds for the
corporate and allows them to supplement the domestic available resources and take
advantage of the lower interest rates prevailing in the international financial markets.

Purpose

ECBs are being permitted by the government as an additional source of financing for
expanding the existing capacity as well as for fresh investments. The policy of the
government also seeks to emphasize the priority of investing in the infrastructure and core
sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc. Another priority
being addressed is the need of capital for Small and Medium scale enterprises.
Modes of raising ECBs

ECB constitutes the foreign currency loans raised by residents from recognised lender. The
ambit of ECB is wide. It recognizes simple form of credit as suppliers’ credit as well as
sophisticated financial products as securitization instruments. Basically ECB suggests any
kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit
notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature,
satisfying the norms of the ECB regulations. The different borrowings and loans that come
under the ECB roof are:

• Commercial Bank Loans: These loans constitute the term loans taken by
companies from banks outside India
• Buyer's Credit: Buyer's credit is the credit availed by the importers of
goods/services from overseas lenders such as Banks and Financial Institutions for
payment of their Imports on the due date. This lending is usually based on the letter of
Credit (a Bank Guarantee) issued by the importer’s bank, i.e., the importer’s bank acts
as a broker between the Importer and the Overseas lender for arranging buyers credit
by issuing its Letter of Comfort for a fee.
• Supplier's Credit
• Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate
Bonds
FRBs) , Syndicated Loans etc.
• 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

What is not included under ECBs

• Investment made towards core capital of an organization viz.


• investment in equity shares
• convertible preference shares
• convertible debentures
• Instruments which are fully and mandatorily convertible into equity within a
specified time are to be reckoned as part of equity under the FDI Policy
• Equity capital
• Retained earnings of FDI companies
• Other direct capital (inter-corporate debt transactions between related
entities)
POLICIES & PROCEDURES

Access to ECB

ECB can be accessed using two routes, (i) Automatic Route (ii) Approval Route

(A) AUTOMATIC ROUTE

External Commercial Borrowing for investment in industrial sector, infrastructure sector


are allowed under Automatic Route. They do not require the approval of the Reserve Bank
or the Government of India.

i. Eligible Borrowers
a) Corporates in the hotel, hospital, software sectors are eligible to raise ECB under
this route. Financial intermediaries, Trusts and Non-Profit making organizations
b) Units existing in the Special Economic Zones (SEZ) are allowed to raise ECB for
their own requirement with the exception that they cannot transfer the funds to
their sister concerns or any other unit outside the SEZ.
c) Non-Government Organizations (NGOs) engaged in micro finance activities are
also allowed to raise ECB under this route.

ii. Recognized Lenders


Eligible borrowers can raise ECB from various sources like
• International banks
• Multilateral financial institutions (such as IFC, ADB, CDC, etc)
• International capital markets
• Export credit agencies
• Suppliers of equipment
• Foreign collaborators
• Foreign equity holders
Overseas Organizations and Individual Lender who propose to lend ECB are
required to furnish a certificate of due diligence from an overseas bank to the AD
bank of the borrower, the overseas bank in turn is subject to the supervision of the
host-country regulator.

iii. Amount

(a) The maximum amount of fund that can be raised under ECB by a corporate other
than those in the hotel, hospital and software sectors is USD 500 million during a
financial year.
(b) For corporates in the services sector the limit is USD 100 million or its equivalent in a
financial year
(c) For NGOs engaged in micro finance the maximum permissible amount is only USD 5
million

iv. Maturity

The maturity limit for the funds under ECB is as given below:
• For ECB up to USD 20 million or its equivalent in a financial year the average
minimum maturity is of three years.
• For ECB above USD 20 million and up to USD 500 million the minimum average
maturity is five years.
Provided the minimum average maturity limit is subscribed to, ECB up to USD 20
million can have call/put option.

(B) APPROVAL ROUTE


For specific sectors the borrower has to take the explicit permission of the government
before taking the loan

i. Eligible Borrowers
The following types of proposals for ECB are covered under the Approval Route.
a) Financial institutions which deal exclusively with infrastructure or export finance
such as IL&FS, IDFC, PFC, Power Trading Corporation, IRCON and EXIM Bank
b) Banks and financial institutions which had participated in the textile or steel sector
restructuring package as approved by the Government.
c) ECB with minimum average maturity of 5 years borrowed by NBFCs from multilateral
financial institutions, and international banks meant for financing import of
infrastructure equipment for infrastructure projects for leasing purpose.

e) FCCBs by listed housing finance companies having a minimum net worth of Rs. 500
crore during the previous three years
g) Multi-State Co-operative Societies engaged in manufacturing activity
h) SEZ developers for providing facilities such as
• Telecommunication
• Power
• Roads
• Railways
• Sea port
• Industrial parks
• Urban infrastructure
• Airport
• Mining, refining and exploration.

ii. Recognised Lenders


Eligible borrowers can raise ECB from various sources like
• International banks
• Multilateral financial institutions (such as IFC, ADB, CDC, etc)
• International capital markets
• Export credit agencies
• Suppliers of equipment
• Foreign collaborators
• Foreign equity holders

iii. Amount and Maturity


Corporates can also avail an additional amount of ECB under the approval route. This
amount is up to a maximum of USD 250 million with average maturity of more than 10
years and is over and above the existing limit of USD 500 million granted under the
automatic route. Other ECB criteria, such as end-use, recognized lender, etc. are also
needed to be complied with as usual. However, Prepayment and call/put options, would
not be permissible for such ECB up to a period of 10 years.
ADVANTAGES OF ECB

Benefits to the borrower

• Foreign currency funds: Companies need funds in foreign currencies for many
purposes such as, paying to suppliers in other countries etc that may not be available
in India.
• Cheaper Funds: The cost of funds borrowed from external sources at times works
out to be cheaper as compared to the cost of Rupee funds.
• Diversification of investor’s base: Another advantage is the addition of more investors
thus diversifying the investor base
• Satisfying Large requirements: The international market is a better option in case of
large requirements, as the availability of the funds is huge when compared to
domestic market.
• Corporate can raise ECBs from internationally recognised sources such as banks,
export credit agencies, suppliers of equipment, foreign collaborators, foreign equity
holders, international capital markets etc.

Benefits to the economy


As can be seen from the policies formed to regulate the ECB, these borrowings have some
apparent benefits for the economy. The government through these policies is trying to
nourish 2 sectors:
• Infrastructure
• SME
The policies do not require any approval for investment under a limit in these 2 sectors. Thus
it is easy to acquire foreign loans for such enterprises. Apart from that, the low cost of funds
in the global market provides the small and medium enterprises funds at low costs thus
bringing in more money in these sectors.

Benefits to the 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 repatriable
• No owners risk as in case of Equity Investment

Also, we can see that India’s debt management policy has significantly improved over the
years.Thisis reflected in various external debt indicators. The debt service ratio, which is the
ratio of external debt to the GDP of the country and is an indicator of an economy’s debt
servicing capability, has improved, 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.
Trends in ECB

Over the years we have seen that Indian companies are becoming increasingly dependent
on ECB. As the interest rates are down in the international market we see that Indian
companies want to get loans through ECB at lower cost and lower their cost of borrowing.
This can be a cause of concern due to two issues that come with inflow of External
Commercial Borrowings in India.

INCREASING DEPENDENCE ON FOREIGN DEBT AS A SOURCE OF LONG TERM


FINANCE

As the External commercial borrowings increases the external debt to India increases and
this has to be matched with growth of foreign exchange reserves in the country so as to
maintain solvency. Also increase in ECB is accompanied with increase in currency risk as
there will be depreciation in rupee, which will lead to increased burden on the borrower as
the value of the rupee depreciates. Hence we can see that increase in ECB is less
favourable for India’s point of view. As we can see from the above graph the repayment of
external growth liabilities peaks in 2013 and if strict measures are not taken, India can go
under huge debt causing problems in near future.

The last three years has seen increasing dependency on external debt and with the world
economy going into recession and interest rates falling world over ECB has become a
exciting option for the Indian companies. ECB’s have significant advantages over other debt
options due to following reasons. At present, the one-year Libor is just above 1 per cent.
Assuming that based on country risk rating, a triple-A rated company can manage to procure
a loan at, say, around 5-7 per cent. After considering the currency risk, it would still work out
to be cheaper than a domestic loan where the PLR is 11.5 per cent. Therefore, it makes
sense to borrow from these markets.
Also as the rupee is getting stronger over the time so we need to pay less rupee to repay the
loan. Due to the following reasons ECB as a proportion of total external debt has been
increasing from around 20% in 2005 and now has reached levels of 27% in 2009. Due to
increasing reserves we have been able to bring down ECB to forex reserve ratio from
around 50% in 2000 to 25% as of now.

A reason for concern is that external account debt-equity ratio has averaged 1.08 for the last
5 years while ideally it should be less than 1. Too much dependence on foreign debt could
place the country in a vulnerable spot. Further, with inflation rates varying between India and
the developed world, real interest rate becomes critical in interest rate formulation.

The table shows the currency components of India’s external debt. More than half of India’s
external debt is in USD followed by Indian Rupee and Yen.
IMPACT OF RECESSION

We trace the impact of recession on ECB in the following fashion:

• Trend in USD equivalent borrowing

• Trend in Automatic/Approval schemes of borrowing

• Pattern in financing needs

• Average Lending Period during the tenure

Trend in USD Equivalent Borrowing


Recession was accompanied by tight liquidity across nations. Banks and Financing
Institutions have been reluctant to lend despite Central Bank’s monetary measures, forcing
the Govt. to step in through fiscal schemes and packages. The following graph and table
traces the trend in ECB during recession period.

Month Approval Automatic Grand Total


Jul-08 2085640842 386173175 2471814017
Aug-08 709278599.2 894092856.6 1603371456
Sep-08 2464713988 370234850.2 2834948838
Oct-08 803382602.4 321846533.5 1125229136
Nov-08 181634093.5 1520849290 1702483384
Dec-08 87036385.59 1582140099 1669176485
Jan-09 572997400.7 764077624.7 1337075025
Feb-09 131705126.2 320895301.6 452600427.8
Mar-09 257142176.9 856746861.7 1113889039
Apr-09 23075000 275556202.8 298631202.8
May-09 167574222.8 326721764 494295986.8
Jun-09 1345889544 573150910.6 1919040455
Jul-09 74246487 1940971625 2015218112
Aug-09 154721491.4 934844205.2 1089565697
Sep-09 1177618374 331956434 1509574808
Oct-09 245576374.3 2340142192 2585718566
Nov-09 1632171848 721493738.2 2353665587
Dec-09 - 1256495675 1256495675
Jan-10 430601486.3 889207012.4 1319808499
Feb-10 228940000 1963190991 2192130991
Mar-10 1960812830 2361426399 4322239229
Apr-10 2119788955 697942864.3 2817731819
May-10 236918917.4 459370105.7 696289023.1
Jun-10 12904468.28 1778388710 1791293179

The following inferences can be drawn with respect to ECB from the table and graphs:

• External borrowings fell for a period of 6 months from January to May before picking
up again. This gain could be largely attributed to the RBI’s easing of regulatory
framework with respect to the ECB.

• There is a marked increase in ECB through approval route which can be attributed to
easing of regulatory framework.

Furthermore, there seems to be a seasonal trend in ECB as well. We examine whether the
increase/Decrease in the ECB has been due to seasonal variation or a marked downtrend
followed by an uptrend or both.

Seasonal Trend Analysis of ECB during Recession

• 3 Month Moving Average

Mon Total ECB 3 Months Moving Error (Actual-


average Predicted)
Jul-08 2471814017 #N/A #N/A
Aug-08 1603371456 #N/A #N/A
Sep-08 2834948838 2303378104 531570734.6
Oct-08 1125229136 1854516477 -729287340.8
Nov-08 1702483384 1887553786 -185070402.3
Dec-08 1669176485 1498963001 170213483.3
Jan-09 1337075025 1569578298 -232503272.5
Feb-09 452600427.8 1152950646 -700350218.2
Mar-09 1113889039 967854830.6 146034208
Apr-09 298631202.8 621706889.8 -323075686.9
May-09 494295986.8 635605409.4 -141309422.6
Jun-09 1919040455 903989214.9 1015051240
Jul-09 2015218112 1476184851 539033260.8
Aug-09 1089565697 1674608088 -585042391.3
Sep-09 1509574808 1538119539 -28544730.93
Oct-09 2585718566 1728286357 857432209.3
Nov-09 2353665587 2149652987 204012599.6
Dec-09 1256495675 2065293276 -808797601
Jan-10 1319808499 1643323253 -323514754.7
Feb-10 2192130991 1589478388 602652602.7
Mar-10 4322239229 2611392906 1710846323
Apr-10 2817731819 3110700680 -292968860.3
May-10 696289023.1 2612086690 -1915797667
Jun-10 1791293179 1768438007 22855171.62

• 6 Month Moving Average

Mon Total ECB 6 Months Moving Error Component(Actual


Average - Predicted)
Jul-08 2471814017 #N/A #N/A
Aug-08 1603371456 #N/A #N/A
Sep-08 2834948838 #N/A #N/A
Oct-08 1125229136 #N/A #N/A
Nov-08 1702483384 #N/A #N/A
Dec-08 1669176485 1901170553 -231994067.9
Jan-09 1337075025 1712047387 -374972361.9
Feb-09 452600427.8 1520252216 -1067651788
Mar-09 1113889039 1233408916 -119519877.4
Apr-09 298631202.8 1095642594 -797011391
May-09 494295986.8 894278027.7 -399982040.9
Jun-09 1919040455 935922022.7 983118432.3
Jul-09 2015218112 1048945871 966272241.6
Aug-09 1089565697 1155106749 -65541052.05
Sep-09 1509574808 1221054377 288520431.1
Oct-09 2585718566 1602235604 983482962.1
Nov-09 2353665587 1912130537 441535049.1
Dec-09 1256495675 1801706407 -545210732.5
Jan-10 1319808499 1685804805 -365996306.5
Feb-10 2192130991 1869565687 322565303.3
Mar-10 4322239229 2338343091 1983896138
Apr-10 2817731819 2377011966 440719852.8
May-10 696289023.1 2100782539 -1404493516
Jun-10 1791293179 2189915457 -398622277.9
• 12 Month Moving Average

Mon Total ECB 12 Month Moving Error (Actual -


average Predicted)
Jul-08 2471814017 #N/A #N/A
Aug-08 1603371456 #N/A #N/A
Sep-08 2834948838 #N/A #N/A
Oct-08 1125229136 #N/A #N/A
Nov-08 1702483384 #N/A #N/A
Dec-08 1669176485 #N/A #N/A
Jan-09 1337075025 #N/A #N/A
Feb-09 452600427.8 #N/A #N/A
Mar-09 1113889039 #N/A #N/A
Apr-09 298631202.8 #N/A #N/A
May-09 494295986.8 #N/A #N/A
Jun-09 1919040455 1418546288 500494167.4
Jul-09 2015218112 1380496629 634721483.2
Aug-09 1089565697 1337679482 -248113785.7
Sep-09 1509574808 1227231646 282343161.5
Oct-09 2585718566 1348939099 1236779467
Nov-09 2353665587 1403204283 950461304
Dec-09 1256495675 1368814215 -112318540.2
Jan-10 1319808499 1367375338 -47566839.16
Feb-10 2192130991 1512336218 679794772.7
Mar-10 4322239229 1779698734 2542540495
Apr-10 2817731819 1989623785 828108034
May-10 696289023.1 2006456538 -1310167515
Jun-10 1791293179 1995810932 -204517753.4

The analysis of the moving averages shows that there is a minor cyclical trend coupled with
a dominant pattern of a dip and a long term rise. The Durbin Watson coefficient showed the
following results for plotting the residuals

Moving Durbin Auto - correlation Result Overall


Average For Watson
3 Months 1.816951027
Coeff 0.091524487 Weak Weak-
Medium
6 Months 1.400567178 0.299716411 Weak-Medium
12 Months 1.263608941 0.368195529 Medium

Hence, we can safely conclude that the External Commercial Borrowing saw a dip followed
by a rise during the period of recession.

Pattern in Financing Needs


India Inc. saw a spate of financing needs due to acquisition just preceding the dawn of
recession. India has for long been a huge importer of capital goods. The following graph list
out the changes in the reasons for which loans were sought during recession.
The graph clearly shows the pre-recessionary times showed a marked chunk of borrowings
for import of capital goods (shown in brown) in the first few observations which shrinks for
the later observations.

The reasons for the shift can be attributed to the following factors:

• With recession, most of the plans of expansion were held in abeyance. As a result,
import of capital goods which is undertaken after modernization/revamping of
capacity, have dried up as industries need to first invest in modernization as a first
priority

• Refinancing of old loans have been undertaken in the later half as firms find
themselves unable to pay due to the dip in their margins during recessionary period
which saw their plans of breakeven and payback going haywire.

Trend in Average Lending Period during the tenure

We analyze the impact of recession on the average tenure of lending. During recession, tight
liquidity across the world led to a sharp curb in lending. The table and the corresponding
graph, show an initial dip in the lending tenure from 95 to 72 months in a span of three
months followed by fluctuation in a band of 10 months from 72 to 83.
Month Average Lending Total USD Equivalent Loan
Period(Months)
Jul-08 95.8 2471814017
Aug-08 82.1 1603371456
Sep-08 78.22 2834948838
Oct-08 72.46808511 1125229136
Nov-08 79.93333333 1702483384
Dec-08 80.77777778 1669176485
Jan-09 71.56410256 1337075025
Feb-09 71.25 452600427.8
Mar-09 70.07142857 1113889039
Apr-09 83.66666667 298631202.8
May-09 71.69444444 494295986.8
Jun-09 72.54 1919040455
Jul-09 83.43478261 2015218112
Aug-09 72.71698113 1089565697
Sep-09 75.81818182 1509574808
Oct-09 73.62745098 2585718566
Nov-09 73.53191489 2353665587
Dec-09 71.1 1256495675
Jan-10 79.2244898 1319808499
Feb-10 77.38297872 2192130991
Mar-10 68.71232877 4322239229
Apr-10 67.24 2817731819
May-10 74.05660377 696289023.1
Jun-10 87.90196078 1791293179

The initial dip can be attributed to an initial panic and the worsening of lending situation as
well as risk. The stabilization in a band that followed may be attributed to the following
factors:

• India was relatively low on exposure and retained its credibility as a destination of
choice due to a strong internal demand

• Short term lending was considered even more risky due to the uncertainty prevailing.
IMPACT ANALYSIS: MAJOR POLICY CHANGES BY RBI

We hereby trace the major roadmap of deregulation followed by RBI during the recessionary
period, with impacts that could be really traced from data made available by RBI. The
changes are highlighted in red, bold fonts and the analyzed impacts presented in red
bordered tables.

July 2008

Deregulation through FEMA. Creation of additional charge on

• Immovable assets
• Financial Security
• Issue of corporate/personal guarantee

September 2008
Existing Revised
All-in-cost ceilings 3-5 Years 200bps 200bps
Over 6 Months 5-7 Years 350bps 350bps
LIBOR for ECBs >7 Years 350bps 450bps
Tenure
Route Automatic 50m 50m
Approval 100m 500m with average
maturity upto 7
Years

October 2008
Existing Revised
All-in-cost ceilings 3-5 Years 200bps 300bps
Over 6 Months 5-7 Years 350bps 500bps
LIBOR for ECBs
>7 Years 450bps 450bps
Tenure
Route Automatic 50m 50m
Approval 500m with average 500m
maturity upto 7
Years
Sectors Opened Telecom allowed ECB for license/permit for 3G

Impact Analysis

• Two Major ECB’s of 0.5 Billion & 0.95 Billion in Telecommunications


• 37% of ECB taken through Approval Route was for maturity greater than 7 Years
from Oct 08- June 2010 – a Sum of 9.7 Billion

Jan 2009
Existing Revised
All-in-cost ceilings 3-5 Years 300bps 300bps
Over 6 Months 5-7 Years 500bps 500bps
LIBOR for ECBs
>7 Years 450bps 450bps
Tenure
Approval Route No Ceilings till June
2009
Route Automatic 50m 50m
Approval 500m 500m
Sectors Opened • ECB Open to “Integrated Township” Corporates
• Corporates in the Hotels, Hospitals and Software sectors
to avail of ECB up to USD 100 million per financial year,
under the Automatic Route, from Approval Route

Impact Analysis
• 1.1 Billion Raised by Corporates in Hotel Alone from May 09- June 2010

Jun 2009
Existing Revised
All-in-cost ceilings 3-5 Years 300bps 300bps
Over 6 Months 5-7 Years 500bps 500bps
LIBOR for ECBs
>7 Years 450bps 450bps
Tenure
Approval Route No Ceilings till Dec
2009
Route Automatic 50m 50m
Approval 500m 500m
Sectors Opened

Dec 2009
Existing Revised
All-in-cost ceilings 3-5 Years 300bps 300bps
Over 6 Months 5-7 Years 500bps 500bps
LIBOR for ECBs
>7 Years 450bps 500bps
Tenure
Approval Route No Ceilings till Dec
Route Automatic 2009
50m 50m
Approval 500m 500m
Sectors Opened

August 2010

Sectors Corporates in the Hotel, Hospital and Software sectors to avail of


Opened
ECB beyond USD 100 million under the Approval Route, for foreign
currency and/or Rupee capital expenditure for permissible end-uses

Impact Analysis

• The cumulative impact of these policies has seen a hike in ECB after an initial dip
despite the recessionary trend.
CONCLUSION

External Commercial Borrowings are increasingly becoming an important source of financing


for the Indian companies. This can be attributed to the fact that Indian companies have
increased their global footprint, thus producing the need of possessing foreign currency
funds. Also, lower interest rates outside provide an opportunity to pick up funds at lower
costs. But nothing comes without any perils. With the increase in External Commercial
Borrowings by corporate India’s external debt increases and this has to be matched with
growth of foreign exchange reserves in the country so as to maintain solvency. Also
increase in ECB brings the risk of depreciation in rupee, which will lead to increased burden
on the borrower as the value of the rupee depreciates.

As the global markets tumbled in the recession, the borrowings from them were also
impacted. The analysis shows a drop in ECBs during recession. Also, due to recession, we
saw a significant impact on the reason ECB was taken by companies. There was a
significant drop in ECBs taken for import of capital goods. The average lending period also
saw an initial dip before stabilising. Lastly, we see the impact of the changes in policies
announced by the RBI. As can be seen, for the period of Jul-08 to Jun-10, the RBI
announced many policy changes, opening up the regulations and including more and more
sectors. The markets correctly responded to these announcements and we see significant
impact on the ECB due to these policy changes.

REFERENCES
http://dbie.rbi.org.in/

http://www.rbi.org.in/

CMIE Prowess Database

www.indiastat.com

https://www.credit-suisse.com/us/en/