External Commercial Borrowings:
The Master Blaster Of
Corporate World
Introduction:
Well this
topic is not new, but this three letter word ECB contains livelihood till
some extent of persons in corporate world. Indian corporate is one of the
largest and strongest finance market in world is limited to a three letter
world
ECB (external commercial borrowing). External Commercial Borrowings (ECB ) which cover under
its umbrella commercial bank loans, buyers’ credit, suppliers’ credit,
securitized 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. ECB can be provided by eligible lenders which can be
defined as those persons who have share in the equity of company or firm
to which they have right to lend money.
Use Of ECB:
ECBs are
being permitted by the Government as a source of finance for Indian
Corporate for expansion of existing capacity as well as for fresh
investment. 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
ECBs are to be utilized for foreign exchange costs of capital goods and
services (on FOB and CIF basis). Proceeds should be utilized at the
earliest and corporate should comply with RBI's guidelines on parking ECBs
outside till actual imports.
Who can raise ECB till what limit
All
infrastructure and Greenfield projects can raise up to 50% of the total
project cost while Telecom Projects up to 50% of the project cost
(including license fees) In the case of power projects, greater
flexibility will be allowed based on merits.
FERA Approval:
Applicant
is required to obtain approval from RBI under the FERA, 1973 after
receiving the approval from ECB DIVISION, Department of Economic Affairs,
and Ministry of Finance. RBI is endorsed to approve all the ECBs under US
$ 3 million scheme (enhanced to US 5 Million) and all other ECB proposals
are processed in DEA. Government as step towards further simplification
and rationalization has decided to delegate the ECB sanctioning power to
RBI up to US $ 100 million under all the ECB schemes except structured
obligation
Recent Trend In ECB:
The cost of
funds in the Indian Market has been relatively higher than International
Market and there is a growing tendency for Indian Business Houses to raise
funds from International Markets. Such financing is arranged for reputed
corporate houses on prevalent rates of interest. The interest rates are
fixed in terms of Basic rate of LIBOR plus other charges.
The
Registered Foreign Financial Institutions interested in lending funds to
Indian Business Houses can earn handsome interest from Indian Markets.
Demand for E.C.B is rising rapidly in this market and the Govt. Rules have
also been relaxed to certain extent. Now, Loans upto US$ 5 Millions can be
approved by Reserve Bank of India and higher amounts are approved by
Ministry of Finance.
Conclusion:
External
Commercial Borrowings (ECBs) occupy a very important position as a source
of funds for Corporate. Thus, it is to be maintained within prudent limits
for total external borrowings and to provide flexibility to Corporate in
external borrowings and that is reflected in its guidelines. However, the
main purpose of ECB is to encourage borrowings which provides basis for
strongest economy. Thus according to some Maven:
ECB is not
only three letter world but lifeline of corporate world
Article by Aditi
Sambhar, renowed
lawyer
