What are ECBs?

External Commercial Borrowings (ECB) 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. These ECBs can therefore be raised within the Policy guidelines of Govt. of India/ Reserve Bank of India applicable from time to time.

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. Development Financial Institutions, through their sub- lending against the ECB approvals are also expected to give priority to the needs of medium and small scale units. 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.

The Reserve Bank of India has been empowered to give ECB approvals under the US $ 5 million scheme and to approve ECBs upto US $ 10 million under all other ECB windows. Corporates are now eligible for ECBs even for project related rupee expenditure up to 35% of the total project cost and are permitted to obtain credit enhancements from international banks / international financial institutions / joint venture partners for their domestic rupee denominated structural obligations.

The ECBs route is beneficial to the Indian corporates on account of following :-

1. It provides the foreign currency funds which may not be available in India.

2. The cost of funds at times works out to be cheaper as compared to the cost of rupee funds.

3. The availability of the funds from the International market is huge as compared to domestic market and corporates can raise large amount of funds depending on the risk perception of the International market.

Applications may be submitted by the borrowers in the prescribed format (Annex. II) to the Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance, North Block, New Delhi-110 001.The application should contain the following information:-

• An Offer letter from the lender giving the detailed terms and conditions;

• Copy of Project Appraisal Report from a recognised Financial Institution/Bank, if applicable;

• Copies of relevant documents and approvals from Central/State Governments, wherever applicable, such as FIPB, CCEA, and SIA clearances, environmental clearance, techno-economic clearance from Central Electricity Authority, valid licences from Competent Authorities, no objection certificate from Ministry of Surface Transport, evidence of export/foreign exchange earnings from the statutory auditor based on the bankers realisation certificate, registration with RBI in case of NBFCs, approval for overseas investment from RBI etc.

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 15 million equivalent;

2. Minimum average maturity of seven years for external commercial borrowings greater than USD 15 million equivalent;

3. 100% Export Oriented Units(EOUs) are permitted ECB at a minimum average maturity of three years even for amounts exceeding USD 15 million equivalent; and

4. Indian Development Financial Institutions (DFIs) and corporates engaged in infrastructure projects in Telecommunications and Oil Exploration and Development (excluding refining) will be permitted to raise ECB at a minimum average maturity of five years even for borrowings exceeding USD 15 million equivalent.

5. Bonds and FRNs can be raised in trenches of different maturities as long as the average maturity of the different trenches within the same overall approval taken together satisfies the maturity criteria prescribed in the ECB guidelines. In such cases, it is expected that longer term borrowings would necessarily precede that of the shorter tenors. The longer the initial tenor the shorter the subsequent trenches can be within the average maturity.

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 restrictions excluding investments in stock-markets or in real estate. The loan amount may be raised in one or more trenches subject to the caveat that the total outstanding loan under this scheme at any point of time should not exceed USD 5 million. Each trench should have a minimum simple maturity of 3 years.

As a measure of simplification and de-regulation for the benefit of corporates and institutions, Government have delegated the sanctioning powers to Reserve bank of India(RBI) under this scheme with effect from 15th December, 1996.

Corporates and institution are advised to submit their applications under this scheme to the Exchange Control Department of RBI, Mumbai.

Corporates who have foreign exchange earnings are permitted to raise ECB upto twice the average amount of annual exports during the previous three years subject to a maximum of USD 100 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 15 million equivalent and seven years for ECBs exceeding USD15 million. The maximum level of entitlement in any one year is a cumulative limit and debt outstanding under the existing USD 15 million exporters scheme will be netted out to determine annual.

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.

a) ECB of ten years average maturity and above will outside the ECB ceiling, though MOF's prior approval for such borrowings would continue to be applicable. The extent of debt under this window will be reviewed by the Government periodically.

b) Corporate borrowers able to raise long-term resources with an average maturity of 10 years and 20 years will be allowed to use ECB proceeds without the normal end-use restrictions upto USD 100 million for issue of 10 years and above upto 20 years and USD 200 million for issue of 20 years and above. These amounts will be available for general corporate objectives excluding investments in stock markets or in real estate.

c) To be eligible for this purpose, the debt instrument should not include any "put" or "call" options potentially reducing the stated maturities

While DFIs are required to adhere to the average maturity criteria prescribed, namely, minimum of five years for loans more than USD 15 million equivalent and minimum three years for loans less than or equal to USD 15 million equivalent for their borrowing, they are permitted to on-lend at deferent 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 programmes.

All financial intermediaries, including DFIs, are required to on-lend their external commercial borrowings within 12 months of drawdown.

1. External commercial loans are to be utilised for import of capital goods and services (on FOB or CIF basis). However, in the case of projects in the following infrastructure areas, ECB can be utilised for rupee expenditure:-

   1. Power

   2. Telecommunications(Licence fee payments would be an approved use of ECB).

   3. Railways

   4. Roads (including bridges)

   5. Ports

   6. Industrial Parks; and

   7. Urban infrastructure(water supply, sanitation and sewerage projects as defined in Section 80 IA of Income Tax Act, 1961).

2. Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards.

3. ECB proceeds may also be utilised for project- related rupee expenditure as outlined in paras 7 to 11 above. However, under no circumstances, ECB proceeds will be utilised for-

   1. Investment in stock market; and

   2. Speculation in real estate.