What is External Commercial Borrowings (ECB)
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External Commercial Borrowings is basically a loan availed by an Indian entity from a nonresident lender. Most of these loans are provided by foreign commercial banks and other institutions. It is a loan availed of from non-resident lenders with a minimum average maturity of 3 years.
Routes for External Commercial Borrowing
External Commercial Borrowings (ECB) can be availed by either automatic route or by approval route. Under automatic route, the government has permitted some eligibility norms with respect to industry, amounts, end-use etc. If a company passes all the prescribed norms, it can raise money without any prior approval.
ECBs can be accessed under two routes,
- Automatic Route
- Approval Route
The following types of proposals for ECBs are covered under the Route.
- Eligible borrowers
- Recognized Lenders
- Amount and Maturity
- All-in-cost ceilings
- End-uses not permitted
- Procedure : Borrowers may enter into loan agreement complying with the ECB guidelines with recognised lender for raising ECB under Automatic Route without the prior approval of the Reserve Bank. The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before drawing down the ECB.
Benefits of ECB
- The cost of funds is usually cheaper from external sources if borrowed from economies with a lower rate of interest. Indian companies can usually borrow at lower rates from the U.S. and the Eurozone as interest rates are lower there compared to the home country, India.
- Availability of larger market can help companies satisfy larger requirements from global players in a better manner as compared to what can be achieved domestically.
- External Commercial Borrowing is just a form of a loan and may not be of equity nature or convertible to equity. Hence, it does not dilute stake in the company and can be done without giving away control because debtors do not enjoy voting rights.
- The borrower can diversify the investor base.
- It provides access to international markets for the borrowers and gives good exposure to opportunities globally.
- The economy also enjoys benefits, as the government can direct inflows into the sector, have potential to grow. For example, the government may allow a higher percentage of ECB funding in case of infrastructure and SME sector. This helps in an overall development of the country.
- Avenues of lower cost funds can improve the profitability of the companies and can aid economic growth.
- External Commercial Borrowing is a very attractive option for companies due to the advantages mentioned above. Although there are some demerits of ECB as given below:
- Availability of funds at a cheaper rate may bring in lax attitude on the company’s side resulting in excessive borrowing. This eventually results in higher (than requirement) debt on the balance sheet which may affect many financial ratios adversely.
- Higher debt on the company’s balance sheet is usually viewed negatively by the rating agencies which may result in a possible downgrade by rating agencies which eventually might increase the cost of debt. This may also tarnish the company’s image in the market and market value of the shares too in eventual times.
- Since the borrowing is foreign currency denominated, the repayment of the principal and the interest needs to be made in foreign currency and hence exposes the company to exchange rate risk. Companies may have to incur hedging costs or assume exchange rate risk which if goes against may end up negative for the borrowers resulting into heavy losses for them.
ECB Frequently asked questions (FAQ)
Yes, extant ECB framework is different from the framework for issuance of Rupee denominated bonds overseas. To know more about the framework of issuance of Rupee denominated bonds overseas, interested party may refer to aforementioned Master Direction. Both these frameworks (ECB framework and framework for issuance of Rupee denominated bonds overseas) run separately/concurrently.
No, foreign currency loans given domestically by Authorized Dealer Category I banks out of the proceeds of FCNR (B) deposits do not come under the ECB framework.
ECB can be raised in Indian Rupees (INR) and / or any convertible currency. Any entity raising INR denominated ECB is not permitted to convert the liability arising out of this ECB into foreign currency liability in any manner or assuming foreign currency risk is any manner by either entering into a derivative contract or otherwise.