The process of managing working capital is one that never ends for finance/accounting workers i...
India always promotes capital inflows as an element of the growth plan. The need for domestic capital and shortage in the current account forced the government in the past to go for foreign capital. Hence, foreign capital is money obtained from foreign countries to invest locally. Foreign capital is not of the same kind as there are different types of foreign capital. The primary category is foreign investment including FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment). Likewise, there are other types of foreign capital which include trade credit, NRI Deposits and the most important one for India – the External Commercial Borrowing (ECB).
External commercial borrowing (ECB) is loans in India made by non-resident lenders in foreign currency to Indian borrowers. They are used generally in India to ease access to foreign money by Indian corporation and PSUs (public sector undertakings).
Most of the loans are provided by foreign commercial banks and other financial institutions.
They are as follows:
A borrower can raise ECB in Indian Rupees (INR) or in any other convertible currency. Any unit building Indian rupee denominated ECB is not allowable to convert the accountability which arises out of the ECB into foreign currency liability in any way.
|Track 1||Track 2||Track 3|
|International banks||All entities mentioned under Track I (but excluding overseas offices/subsidiaries of the Indian banks)||All entities listed under Track I excluding overseas branches/subsidiaries of the Indian banks|
|International capital markets||In the case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organizations and individuals|
|Multilateral financial institutions (like IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions.|
|Export credit agencies|
|Suppliers of equipment|
|Overseas long term investors|
|Foreign equity holders|
|Overseas branches/subsidiaries of Indian banks|
|Track 1||Track 2||Track 3|
|Companies in Manufacturing and Software Development||All entities listed under Track 1||All entities listed under Track 2|
|Shipping and Airline Companies||Companies in the Infrastructure Sector||NBFCs registered under RBI|
|SIDBI (Automatic Route) EXIM Bank (Approval Route)||REITs and INVITs||NBFC-MFI, NPOs engaged in MFI activity|
|Units in SEZ||Companies engaged in R&D, Training (other than an educational institution)|
|NBFC-IFC, NBFC-AFC||Companies supporting infra and logistic services|
|Holding Companies and CIC||Developers of SEZ/NMIZs|
|HFC, regulated by the NHB||Companies engage in the trade of maintenance, repair, and overhaul, and freight forwarding|
|Track 1||Track 2||Track 3|
|The all-in-cost ceiling is given through a uniform ceiling of 450 basis points per annum over the benchmark over six month LIBOR or applicable benchmark for the respective currency||The limit spread over the milestone will be 450 basis points per annum.||The limit spread over the benchmark will be 450 basis points per annum.|
|Any penal interest for default or breach of the covenant should not be more than 2 percent over and above the contracted rate of interest.|
|Sector||Maximum amount per FY|
|Companies in the manufacturing and infrastructure sectors, NFC-IFCs, NBFCAFCs, Holding Companies, CICs||USD 750 million|
|Companies in the Software Development Sector||USD 200 Million or equivalent|
|Companies in micro-finance activities||USD 100 Million or equivalent|
|All remaining entities||USD 500 Million or equivalent|
The minimum average maturity for the three tracks is as follows:
Medium-term foreign currency denominated ECB with a minimum average maturity of 3/5 years.
Long term foreign currency denominated ECB with a minimum average maturity of 10 years.
Indian Rupee (INR) denominated ECB with a minimum average maturity of 3/5 years.
Moreover, for Tracks I and III, the subsequent negative end users will also apply excluding when raised from Direct and Indirect equity holders or a Group company. Please note that the loan is for a minimum average maturity of five years:
Lastly, for all Tracks, the following negative end use will also be relevant:
Conversion of ECB, including those which have been matured but still unpaid, into equity is allowable subject to the following circumstances:
The procedure for raising ECB under approval route requires the borrowers to come up to the RBI with a request in prescribed format Form ECB for examination through their AD Category I bank. Such cases are considered keeping in view the by and large plan, macroeconomic circumstances, and virtues of the specific proposals. ECB proposals acknowledged in the Reserve Bank above the defined threshold limit (refixed from time to time) are placed before the Empowered Committee set up by the Reserve Bank.
The Reserve Bank takes a final decision taking into account the suggestion of the Empowered Committee. Entities desirous of raising ECB under the automatic route may approach an AD Category I bank with their proposal along with the duly filled in Form 83.
Though external commercial borrowings come at fewer costs, it comes with various restriction and procedure that need to be followed. There exist a limit on the amount and maturity of the External Commercial Borrowing (ECB). There are limitations concerning the end use of the funds also. The companies may use it for growth, but they cannot use it for onward lending, repayment of existing loans, real estate investments, and many such restrictions. ECB is one of the commonly availed sources of cheaper funds by eligible companies. However, the companies need to be careful about the exchange rate risk and brunt on balance sheet debt to use it effectively.