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Learning Circle - Inflow of Foreign Capital
External Commercial Borrowings

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.

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, counter-guarantee or confirmation of the guarantee by a Foreign Bank/Foreign Institution will not be permitted.

Interest payable by an industrial undertaking in India, related to external commercial borrowings as approved by GOI/RBI would be eligible for tax exemptions as per Section 10(15)(iv)(b), (d) to (g) of the Income Tax Act, 1961. Exemptions under Section 10(15)(iv)(b), (d) to (g) are granted by Department of Economic Affairs while exemption under Section 10(15)(iv) (c) is granted by Department of Revenue, Ministry of Finance.

@ as defined in the Income Tax Act, 1961 amended from time to time.

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 Management Act, 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 US $ 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 US $ 10 million under all the ECB schemes except structured obligation which is at present being administered by DEA. Accordingly, applications for approval upto US $ 10 million will be considered by the Exchange Control Department of RBI, Mumbai. Accordingly, corporates seeking ECBs utpo US $ 10 million may approach RBI.

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.
[Refer Revised RBI guidelines of January 2004 in the next article]

Approvals are valid for a period of six month. 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. Extension will not be granted beyond the validity period. However, borrowers are free to submit fresh application, after a gap of six month, which will be evaluated in the light of the ECB guidelines applicable at that time.

In case of infrastructure projects, however, because financial closure may get delayed for reasons beyond the investor's control, extension of validity may be considered on merits.

Prepayment of the outstanding liability under the ECBs may be permitted by the Government on a case-to-case basis.

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 required foreign currency funds will not be permitted.

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 for concluding or winding up of the following transactions:-

1. Interest rate swaps

2. Currency swaps

3. Coupon swaps

Purchase of interest rate caps/collars

4. Forward rate agreements

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 subject to following conditions :-

1. In the event of default, foreign banks giving guarantee will make payment of defaulted amount of principal and interest after bringing in the equivalent amount of foreign exchange into the country.

2. FEMA clearance should be obtained from RBI in advance of issuance.

3. Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be obtained.

4. In the event of default, the default should be foreign exchange equivalent amount equal to the principal and interest outstanding calculated in rupee terms.

5. The liability of Indian company will always be rupee denominated and the debt servicing may be done in equivalent foreign exchange funds.

6. The guarantee fee/commission/charges and other incidental expenses to the Indian company should be in rupee terms only. All-in-cost on this account should not exceed 3% p.a. in rupee terms.

7. In case of the proposals relating to sectors where conditions apply clearances e.g. relating to the assignability licenses etc., these should be obtained in advance.

8. In case of default, the interest rate could be coupon on the Bond/or 250 bps over prevailing secondary market yield of 5-year GOI security, whichever is higher.