External Commercial Borrowing

  • May 25, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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External Commercial Borrowing

Subject: Economy

Section: External sector

Context:

The rise in global interest rates and the depreciation of the rupee is likely to reduce the appetite of India Inc to mobilise funds through external commercial borrowings (ECBs) in the coming months.

ECBs play an important role in India by supplementing the funding needs of corporations. ECBs account for a major share of India’s external debt and form for 36.8 per cent of India’s external debt as of end of December 2021

Concept:

External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

The framework for raising loans through ECB comprises the following two options:

ParameterFCY denominated ECBINR denominated ECB
Currency of borrowingAny freely convertible Foreign CurrencyIndian Rupee (INR)
Forms of ECBLoans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; Foreign Currency Convertible Bond (FCCBs),Foreign Currency Exchangeable Bond (FCEBs) and Financial Lease.Loans including bank loans; floating/ fixed rate notes/bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; and Financial Lease.

Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.

Eligible borrowersAll entities eligible to receive FDI.

Further, the following entities are also eligible to raise ECB:

i. Port Trusts;

ii. Units in SEZ;

iii. SIDBI; and

iv. EXIM Bank of India.

a) All entities eligible to raise FCY ECB; and

b) Registered entities engaged in microfinance activities, viz., registered Not for Profit companies, registered societies/trusts/ cooperatives and Non-Government Organisations.

Recognised lenders:

The lender should be a resident of a Financial Action Task Force (FATF) or International Organisation of Securities Commission’s (IOSCO’s)  compliant country.  Further:

  • Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;
  • Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
  • Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs).

Minimum Average Maturity Period (MAMP):

MAMP for ECB will be 3 years.

End-uses (Negative list):

The negative list, for which the ECB proceeds cannot be utilised, would include the following:

  •  Real estate activities.
  •  Investment in the capital market.
  •  Equity investment.
  • Working capital purposes, except in some cases
  • General corporate purposes, except in some cases
  • Repayment of Rupee loans, except in some cases
  • On-lending to entities for the above activities, except in some cases
economy External Commercial Borrowing