FEMA

External Commercial borrowing: All You Need to Know

External Commercial borrowing: All You Need to Know

ECB are the instruments where the Indian borrowers obtain loans from foreign sources. ECB’s include Bank Loans, Buyer’s Credit, Supplier’s credit, securitized instruments, such as floating-rate notes, fixed-rate bonds etc. In this article, we are explaining External Commercial borrowing.

External Commercial Borrowing means those borrowings which the eligible Indian Lenders have been borrowing from the non-resident entities, in the foreign currency. This is a kind of debt which is shouldered by the eligible entity in India solely for the commercial purposes, which has been extended from the commercial entities that are from any recognized entity outside India.

Legislation

They governed under the umbrella legislations of RBI Regulations, as provided under the Master Circular- External Commercial Borrowings Trade Credits and structured obligations and Foreign Exchange Management Act, 2000.

Significance

  • The availability of External Commercial Borrowing is more extensively available.
  • The ECB has proven to be the instruments that help greatly aid the Indian Firms, and organizations, to raise funds beyond India’s borders.
  • This external commercial borrowing is mainly concerning the bringing borrowings for the Foreign Direct Investment (FDI) concerning the new investment.
  • The ECB are in various types such as Foreign Currency Convertible Bonds- FCCB’S and Foreign Currency Exchangeable Bonds- FCEB.

Exceptions for the External Commercial Borrowing

The ECB funding raised cannot be used for the following places:

  1. For the Activities of Real Estate
  2. Investment in the Capital Market
  3. Investment in the Equity
  4. Working capital purposes except for equity holder
  5. General Corporate purposes except for foreign equity holder
  6. On-lending to the entities, for the above activities.
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How can the ECB be availed?

To raise funds through the External Commercial Borrowing, one can avail by two routes such as:

  1. Approval route

Perspective Borrower should send the proposal for ECB to RBI through AD-Category-I Bank for the examination

The companies who are going through the approval route must follow the necessary compliance. It is also for those companies in the concerned sectors, for which the government approval is needed, or RBI’s permission, before the raising of funds through the External Commercial Borrowing. Under this route, the RBI has mandated some guidelines, which needs to be adopted.

  1. Automatic Route

Through Authorized Dealers, Category-I Banks

Under the Automatic routes, there are eligibility regulations created by the government to avail the finance under the automatic routes. These regulations are for the industries, concerning amount, end-use of funds, or type of industry. It means the purpose of this route is that the government or the approval body that is RBI should be aware of the transactions or about the borrowings, about their mode, they are being taken.

Reporting Guidelines for the External Commercial Borrowing

S.No.Form NoDetails
1.Form 83This form is for the allotment of Loan Registration Number The borrower can enter into an agreement after following the ECB guidelines, with recognized lender for raising the ECB under the Automatic Route. The borrower must have the LRN from the RBI before obtaining the ECB
2.Form ECB-2Submitting monthly returns regarding the use of ECB
3.Form ECBApplication for ECB under the Approval Route
4.FC-GPRIt is a form for the conversion of the ECB into full equity
5.Form 83This form is used for all the stated purposes:
1. Changes in the modification in the drawdown/ repayment schedule
2. Changes in the currency of borrowing
3. Changes in the Authorized Dealer Bank
4. Changes in the name of the  Borrower company
5. Changes in the recognized lender
6. Cancellation of Loan Registration Number
7. Changes in the end-use of the  proceeds of ECB use
8. Reduction in the amount of ECB
9.Reduction in the cost of ECB  

Benefits of ECB

Benefits of ECB
  1. Cost of Borrowing
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The value of the External Commercial Borrowing fund is lower as compared to the external sources of borrowing.

  1. Bigger Markets for borrowing

As compared to the other borrowing sources, the ECB source of lending has a more prominent international market. Domestic companies’ requirements can be easily met by the International players.

  1. Easy Process

The process of obtaining the loan is simple, and it is in the fundamental forms.

  1. No Equity Loans

The loans can be obtained in the raw form; there is no need to get the loans in the equity form. This means the borrower’s stakes shall not be diluted.

  1. No loss of Control

The borrower can quickly raise funds without losing/relinquishing their Control, as debtors will not have not any voting rights in the company.

  1. Diversification of Investor Base

This means that the borrower can have access to worldwide/ global opportunities. It diversified the investor’s base and vista for the international markets.

  1. Growth of the Government of India

These inflows can be directed into the government sectors in the form of Foreign Direct Investment and increasing the potential growth of the economy.

Example: recently we have seen the growth of FDI in almost all the sectors and relieving few only government sectors. This has overall boosted the economy and development of the SME’s and infrastructure of the country.

Disadvantages of the ECB

Disadvantages of the ECB

Like every source of borrowing has some advantages, so is the case of the ECB, that it has some drawbacks too;

  1. Too much availability of funds

It can be noted that too much easy foreign borrowings, will make the company under debt.

  1. Funds at cheaper rates
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The funds like external commercial borrowing are available at relatively cheaper rates. This will show high debt in their balance sheet.

  1. Fall in the value of shares

Eventually, with too much debt, there would be considerable fall in the value of shares of the company.

  1. Risk of exchange rates

It can easily affect the company, as they are too much under the risk of foreign exchange rates. This means that since every borrowing in foreign currency and payment in the foreign currency. The currency rates will influence the borrowing for them. It increases the cost of hedging for the firms.

Conclusion

The legislation which governs the external commercial borrowing is the Foreign Exchange Management (Borrowing &Lending) Regulations 2016 and Foreign Exchange Management (Guarantee) Regulations 2000[1].

External borrowings can only be applied, when it conforms to the standard parameters, such as the minimum maturity, permitted or non-permitted end-use, and maximum all in all ceilings. The external commercial borrowing is under the supervision of these acts.
The aim is clear of the legislating bodies that it will be restricted to the maximum as it has listed ECB eligible Borrowers, recognized lenders, and minimum average period is defined and exceptions where the funds cannot be utilized.

Read our article:What are External Commercial Borrowing and its regulations?

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