External Commercial Borrowings (ECBs)

Introduction

External Commercial Borrowings (ECBs) are an essential financial tool for Indian companies seeking to raise capital from foreign sources. This blog provides an in-depth overview of ECBs, including their types, regulations, benefits, risks, and the latest RBI guidelines.

What are External Commercial Borrowings (ECBs)?

• External Commercial Borrowings (ECBs) refer to loans obtained by Indian companies from foreign lenders for commercial purposes.
• These borrowings are generally in the form of loans, bonds, or credit arrangements and are governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA), 1999.

Why ECBs?

• To access cheaper funds
• Diversify funding sources
• Finance large-scale projects
• Support business expansion or refinance debt

ECB Framework in India

The RBI has laid down a clear framework for ECBs, classifying them into three key tracks:

• Track I:
  • Medium-term foreign currency-denominated ECBs (3 to 5 years).
• Track II:
  • Long-term foreign currency-denominated ECBs (10 years or more).
• Track III:
  • Indian rupee-denominated ECBs (including Masala Bonds).

Classification of ECBs by Tenor

• Short-Term ECBs:
  • Maturity of up to 3 years.
• Long-Term ECBs:
  • Maturity exceeding 3 years.

ECB Instruments

• Foreign Currency Loans:
  • Loans from foreign financial institutions or banks.
• Foreign Currency Convertible Bonds (FCCBs):
  • Bonds that can be converted into equity shares.
• Foreign Currency Exchangeable Bonds (FCEBs):
  • Bonds exchangeable into equity shares of a group company.
• Buyers’ Credit:
  • Financing arrangement for imports.
• Suppliers’ Credit:
  • Extended by suppliers for imported goods/services.
• Masala Bonds:
  • Rupee-denominated bonds issued in the international market.

Eligibility for ECBs

• Eligible Borrowers
  • The RBI permits various entities to raise ECBs, such as:
    • Corporates (excluding real estate and stockbroking firms)
    • Non-Banking Financial Companies (NBFCs)
    • Startups and MSMEs (subject to conditions)
    • Infrastructure companies
    • Microfinance institutions (MFIs)

• Eligible Lenders
  • Foreign lenders who can provide ECBs include:
    • International commercial banks
    • Multilateral financial institutions (e.g., World Bank)
    • Export credit agencies
    • Foreign equity holders

ECB End-Use Restrictions

While ECBs provide flexibility, certain end-uses are prohibited:

• Prohibited Uses:
  • Real estate activities
  • On-lending for equity investments
  • Working capital (unless specified under a track)
  • Repayment of domestic loans (under certain conditions)
• Permitted Uses:
  • Infrastructure projects
  • Greenfield or brownfield expansions
  • Import of capital goods and services
  • Refinancing of existing ECBs

Approval Routes

ECB proposals are reviewed under two primary routes:

• Automatic Route
  • No prior RBI approval is required if all conditions are met. The borrower must adhere to regulations such as borrowing limits and end-use restrictions.
• Approval Route
  • If the ECB does not meet conditions under the automatic route, it must be approved by the RBI. Approval is generally sought for cases with complex structures or higher borrowing limits.

Key Limits and Conditions for ECBs

Borrowing Limits

• General Limit:
  • USD 750 million per financial year for eligible borrowers.
• Startup Limit:
  • USD 3 million per year for startups.

All-In-Cost Ceilings

ECB interest rates and costs are capped to prevent excessive borrowing costs. The ceiling is linked to the benchmark rate, such as SOFR (Secured Overnight Financing Rate). All costs (interest, management fees, guarantees) are included in the ceiling.

Hedging Requirements

To mitigate foreign exchange risks, the RBI may impose hedging requirements:

• Hedging ensures borrowers are protected from adverse currency movements.
• Infrastructure firms are often required to hedge a portion of their ECB exposure.

Reporting Requirements

Companies must comply with strict ECB reporting norms:

• ECB-2 Return:
  • A monthly filing with the RBI, detailing ECB utilization and repayment status.
• Drawdown Schedule:
  • Details of ECB disbursement and repayment dates.

Non-compliance may result in penalties or restrictions on future borrowing.

Advantages of ECBs

• Lower Interest Rates
  • Foreign loans may offer lower interest rates compared to domestic borrowings.

• Access to Large Capital
  • ECBs enable companies to raise significant funds for large-scale projects or expansions.

• Flexible Terms
  • Longer repayment periods provide financial stability and breathing room.

• Diversified Funding Sources
  • Companies can reduce dependency on domestic lenders and banks.

• Currency Diversification
  • Borrowing in foreign currency provides companies with currency diversification, which may be beneficial in international operations.

Risks of ECBs

• Exchange Rate Fluctuations
  • Depreciation of the Indian rupee can increase repayment costs.

• Regulatory Compliance
  • Non-compliance with ECB rules can lead to penalties and restrictions.

• Macroeconomic Risks
  • Global economic downturns or geopolitical issues may affect repayment terms or lender conditions.

• Interest Rate Risk
  • Fluctuations in global interest rates can impact borrowing costs.

Recent ECB Policy Updates

• Startup ECBs:
  • Startups can raise up to USD 3 million with simplified regulations.
• Masala Bonds:
  • Promotion of rupee-denominated bonds to reduce exchange rate risk.
• Infrastructure ECBs:
  • Higher borrowing limits and longer tenors for infrastructure companies.

Steps to Raise ECBs in India

• Identify Borrowing Needs:
  • Assess the company’s funding requirements.
• Choose an Appropriate Track:
  • Based on purpose, tenor, and currency needs.
• Select Lenders:
  • Engage with eligible foreign lenders.
• Compliance Check:
  • Ensure adherence to RBI regulations.
• Filing:
  • File necessary forms with the RBI.
• Monitoring:
  • Regularly report ECB utilization and repayments.

Conclusion

• External Commercial Borrowings (ECBs) offer Indian companies a powerful financial tool to access international capital markets. However, companies must carefully evaluate risks, adhere to regulatory norms, and implement proper risk management strategies to maximize the benefits of ECBs.
• By leveraging ECBs effectively, Indian businesses can achieve greater financial flexibility and competitiveness in the global marketplace.