External Commercial Borrowings Policy

Extract from Economic Survey 2012, Chapter 5 "Financial Intermediation and Markets", pg.125.

The borrowings raised by an Indian corporate from confirmed banking sources outside India are called External Commercial Borrowings(ECBs).ECBs are permitted by the Government of India as a source of finance for Indian corporates for expansion of existing capacity as well as for fresh investment. 2

ECBs are defined to include:

• Commercial bank loans
• Syndicated loans [A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers. The syndicated loan market is the dominant way for corporations in the U.S. and Europe to tap banks and other institutional financial capital providers for loans. At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. 3]
• Buyers' credit and suppliers' credit
• Securitised instruments such as Floating Rate Notes and 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.

Benefits of ECBs: 

• It provides 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.
• ECBs help in diversification of the investor base.
• 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.
• Corporates 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.2

A prospective borrower can access ECBs under two routes, namely the automatic route and approval route. ECBs not covered under the automatic route are considered on case-by-case basis by the RBI under the approval route. The High Level Committee on ECB took a number of steps in September 2011 to expand the scope of ECBs. These include:

1. High networth individuals (HNIs) who fulfill the criteria prescribed by SEBI can invest in IDFs (Infrastructure Debt Funds)
2. IFCs have been included as eligible issuers for FII investment in the corporate bonds long-term infra category.
3. ECB would be permitted for refinancing of rupee loans of infrastructure projects on the condition that at least 25 per cent of such ECBs shall be used for repayment of the said rupee loan and 75 per cent invested in new projects in the infrastructure sector. This would be permitted only under the approval route.
4. Refinancing of buyer’s/supplier’s credit through ECBs for the purchase of capital goods by companies in the infrastructure sector was approved. This would also be permitted only under the approval route.
5. ECBs for interest during construction (IDC) that accumulates on a loan during the project execution phase for companies in the infrastructure sector would be permitted. This would be subject to the condition that the IDC is capitalized and is part of the project cost.
6. Renminbi (RMB) was approved as an acceptable currency for raising ECBs subject to a limit of US$ 1 billion within the existing ECB ceiling. Such borrowings shall be allowed only through the approval route.
7. The existing ECB limits under the automatic route were enhanced from US$ 500 million to US$ 750 million for eligible corporates as per the extant ECB guidelines. For borrowers in the services sector, the limit has been enhanced from US$ 100 million to US$ 200 million and for NGOs engaged in micro-finance activities from the existing US$ 5 million to US$ 10 million. All other conditions will apply as per the extant ECB guidelines. 
8. INR denominated ECBs would be permitted from foreign equity holders to ‘all eligible borrowers’ except in the case of ECBs availed of by NGOs as per extant ECB guidelines under the automatic route.

In November 2011, ECB policy was modified keeping in view the developments in global financial markets and macro-economic conditions. The all-in-cost ceiling was enhanced and the proceeds of ECBs raised abroad for Rupee expenditure in India should be brought immediately. The change in the all-in-cost ceiling came into force in November 2011 and is applicable up to 31 March 2012, subject to review thereafter.
[All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.2]

An important reason India emerged largely unscathed from the global crisis of 2008 is the strict ECB policy that places all-in-cost, end-use, and maturity restrictions on foreign borrowings by corporates. As a result, India’s external debt to GDP ratio declined from 38.7 per cent in 1991-92 to 17.8 per cent in 2010-11, while the debt service ratio declined from 30.2 per cent to 4.2 per cent. Corporates were therefore not exposed to balance sheet recession that could have happened due to excessive foreign borrowings. The liberalization of ECB policy, as a result, has to keep in view the need to maintain sustainable levels of external debt ratios. This is more important because of the fact that high levels of external debt ratios contributed to the BOP crisis of the early 1990s.

Sources:
1. Economic Survey 2012
2. http://www.icicibankbahrain.com/bh_syndicatedloans_ecbs.htm
3. http://en.wikipedia.org/wiki/Syndicated_loan