External Commercial Borrowing

Funding Options in India

Indian Companies can be funded via alternative options, which primarily consist of:

• Equity Share Capital
• Preference Share Capital
• Debenture and borrowing
• External Commercial Borrowings (ECBs)
• Global depository receipts (GDRs)
• American depository receipts (ADRs)
• Foreign Currency Convertible Bonds (FCCBs)
• Foreign Currency Exchangeable Bonds (FCEBs)

Introduction - ECBs

Debt raised in foreign currency in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments from non-resident lenders with a minimum average maturity of 3 years fall within the purview of External Commercial Borrowings (ECBs). ECBs in India are regulated by the Ministry of Finance (MOF) and Reserve Bank of India (RBI). ECB can be accessed under two routes -

• The automatic route (without approval) and
• The approval route

In this context, redeemable preference shares /optionally convertible shares, partially convertible preference shares and debentures are considered as ECBs, and hence also need to conform with the ECB guidelines.

Benefits of ECBs

ECBs are being increasingly used as a major finance raising tool for meeting capital requirements at competitive rates. The benefits of ECBs over other source of funds are as follows:

• Cost of raising ECBs is much lower than that of domestic borrowings;
• Global financial market is a much bigger source of credit; and
• Foreign lenders are more flexible in terms of providing security and other terms / conditions for ECBs.

Quantum restrictions on ECB

ECB can be availed for incurring rupee or foreign currency expenditure up to the following:
US$ 750 million for borrowers in the infrastructure and industrial sectors under the automatic route.US$ 200 million for borrowers in the service sector (IT, hotels and hospitals) under the automatic route.US$ 10 million for lending to self-help groups or for micro-credit or for bonafide micro-finance activity including capacity building by NGOs engaged in micro-finance activities.

End-Use restrictions on ECBs

ECB proceeds are subject to end-use restriction and can be availed only for the following:

• The import of capital goods, new projects, modernization and expansion. This window can be availed only for projects in the real estate-industrial sector and the infrastructure sector:
  • Power
  • Telecommunications
  • Railways
  • Roads including bridges
  • Sea ports and airports
  • Industrial parksUrban infrastructure (water supply, sanitation and sewage projects)
  • Mining, exploration and refining
  • Cold storage or cold room facility, including for farm-level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.
• Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject to the existing guidelines.
• First stage acquisition of shares in the disinvestment process and in the public offer stage under the Government’s disinvestment programme.
• Companies engaged in Infrastructure sector have been permitted to raise ECB for the payment of Interest during construction (being capitalized) and are permitted to import capital goods by availing bridge finance by way of the supplier’s or buyer’s credit, subject to certain conditions.
• Payment for Spectrum AllocationMaintenance and operations of toll systems for roads and highways for capital expenditure provided they form part of the original project.
• NBFCs exclusively involved in financing infrastructure projects can avail ECB subject to complying with the prudential standards prescribed by the RBI and the borrowing entities fully hedging their currency risk.
• On-lending by infrastructure finance companies (IFCs) to the infrastructure sector is allowed under the approval route, provided the IFCs comply with prescribed conditions.
• Hotels, hospitals and software are permitted to avail ECBs under the automatic route.
• Other service sector units can approach the RBI for permission to raise ECB from foreign equity holders.
• ECB for working capital as a permissible end-use has been allowed for the civil aviation sector under the approval route, subject to the fulfillment of conditions.
• Borrowing companies in the power sector have also been allowed to use 40% of fresh ECB proceeds towards refinancing domestic rupee loans subject to approval from the RBI, provided 60% of the proceeds are utilised towards capex for Infrastructure projects.
• Indian companies which are in the infrastructure sector ( except companies in the power sector are permitted to utilise 25 per cent of the fresh ECB raised by them towards refinancing of the Rupee loan/s availed by them from the domestic banking system subject to the fulfillment of prescribed conditions.
• ECB for low cost affordable housing projects under the approval route, subject to fulfillment of conditions.
• Eligible borrowers under the automatic route other than corporates in the services sector viz. hotel, hospital and software can avail of ECB beyond USD 750 million or equivalent per financial year. Corporates in the services sector viz. hotels, hospitals and software sector can avail of ECB beyond USD 200 million or equivalent per financial year.

ECBs – Not Permitted

Apart from the specific end uses mentioned above, ECBs are not permitted for working capital, on-lending or investment in capital market or real estate.

Minimum Average Maturity and All in Cost Ceiling - Requirement

• Three years and up to five years: 350 basis points
• More than five years: 500 basis points Recognized Lender

ECBs must be availed from internationally recognized sources such as:

• International Bank,
• International Capital Market,
• Multilateral Financial Institutions,
• Export credit agencies,
• Suppliers of equipment,
• Foreign collaborators and Foreign equity holders

ECBs can be raised from foreign equity holders holding the prescribed minimum level of equity in the Indian borrower company

• ECB up to US$ 5 million: Minimum equity of 25% held directly by the lenderECB more than US$ 5 million: Minimum equity of 25% held directly by the lender and a debt-equity ratio not exceeding 4:1 (i.e. the total ECB (existing and proposed) should not exceed four times the direct foreign equity holding). Besides the paid-up capital, free reserves (including share premium) will also be considered for determining the total equity held by the foreign equity holder.
• ECB from an indirect foreign equity holder (holding a minimum of 51% equity) or from a group company under a common parent has also been recently permitted under the approval route, provided the total ECB liability does not exceed seven times the foreign equity held directly or indirectly by the lender.

Parking of ECB proceeds

Proceeds from ECBs are allowed to be retained outside India in the prescribed liquid assets or brought into rupee accounts in India pending their utilization. ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization. The rupee funds, however, will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.

Prepayment

Prepayment of an ECB of up to US$500m is likely to be allowed by AD bankers without prior approval of RBI subject to compliance with the stipulated minimum average maturity period applicable to the loan.

Conversion of ECB into Equity

Conversion of ECB into equity is permitted subject to the following conditions:

• The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable.
• The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
• Pricing of shares as per the pricing guidelines.

Conclusion

The External Commercial Borrowing (ECB) route was introduced in India little over a decade ago and over the years it has been an effective mode of raising funds for expansion initiatives and for undertaking large size projects especially in the infrastructure development sector.

Even in the recent times, when liquidity crunch and investor caution has been witnessed, the ECB has been a successful mode of financing for Indian companies.

Furthermore, the Reserve Bank of India (RBI) has recently introduced certain revised norms & conditions and liberalized the ECB route, thereby making ECB a suitable financing option in the current business context.

We at ILO Consulting are well positioned to assist Indian companies in accessing the ECB route. We have deep relationships in over 30 countries globally with corporate finance advisory firms, law firms, foreign investment banks and large financial institutions.