CHAPTER 1INTRODUCTION TO EXTERNAL COMMERCIAL BORROWING

External Commercial Borrowings (ECBs) play a significant role in any developing economy since its domestic funds areusually unable to meet growing demand, more so when the cost of domesticborrowing is higher than that of internationalfunding. Raising ECBs by Indian residents directly adds to Indias external debt and foreign exchange exposure and therefore, the same is highly regulated by the RBI. Mismatch of tenure and usage of ECBs can be disastrous for the economy as was evident from the South East Currency Crisis. Therefore, many restrictions are placed by RBI to ensure that short-term borrowings are not used for long-term use and vice versa. Policy guidelines pertaining to ECBshave been revised from time to time External Commercial Borrowings (ECBs) are a key component of Indias overall external debt which includes , external assistance, buyers credit, suppliers credit, NRI deposits, short-term credit and Rupee debt. ECB guidelines need to be assessed in the backdrop of various external debt sustainability indicators relevant to emerging economic needs.

1.1 MEANING OF EXTERNAL COMMERCIAL BORROWING

Anexternal commercial borrowing(ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sectorundertakings). ECBs include commercial bankloans, buyers' credit, suppliers' credit, securitized instruments such asfloating ratenotes and fixed rate bonds etc., credit from officialexport credit agenciesand commercial borrowings from the private sector multilateralfinancial Institutionssuch asInternational Finance Corporation(Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment instock marketor speculation inreal estate. The DEA (Department of Economic Affairs), Ministry of Finance,Government of Indiaalong withReserve Bank of India, monitors and regulates ECB guidelines and policies. For infrastructure and Greenfield projects, funding up to 50% (through ECB) is allowed. In telecom sector too, up to 50% funding through ECBs is allowed. Recently Government of India has increased limits on RBI to up to $4[1]0 billions and allowed borrowings in Chinese currency yuan.

Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should be used for new projects. A borrower can not refinance its existing rupee loan through ECB. The money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that.

1.2 HISTORY OF EXTERNAL COMMERCIAL BORROWING

A historical account of Indias approach to external commercial borrowings (ECBs) reveals that during the period 1950s to the early 1980s, the domestic firms reliance on international capital markets was restricted mainly to bilateral and multilateral assistance. In the 1980s, in the context of the widening current account deficit, the traditional external sources of financing were found to be inadequate and were supplemented with commercial borrowings from international markets including short-term borrowings. In the 1990s, the Indian corporate access to international capital markets increased with the liberalization of the external borrowings policy, the gradual withdrawal of capital account restrictions and improved credit ratings. During the current decade (2000s), the sustained growth of overseas borrowings and the overall private capital flows to India reflects the momentum in domestic economic activity, resilient corporate performance, a positive investment climate, a long-term view of India as an investment destination and the improved sovereign risk. Besides these factors, the prevailing higher domestic interest rate coupled with a higher growth rate has moderated the risk perception and created arbitrage opportunities.

1.3 TYPES OF EXTERNAL COMMERCIAL BORROWINGAt present, Indian companies are allowed to access funds from abroad in the following methods:

a) External Commercial Borrowings (ECB)refer to commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.

b) Foreign Currency Convertible Bonds (FCCBs)mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency

c) Preference shares(i.e. non-convertible, optionally convertible or partially convertible) for issue of which, funds have been received on or after May 1, 2007 would be considered as debt and should conform to the ECB policy. Since these instruments would be denominated in Rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread as permissible for ECBs of corresponding maturity.

d) Foreign Currency Exchangeable Bond(FCEB) means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency. The FCEB must comply with the Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008, notified by the Government of India, Ministry of Finance, Department of Economic Affairs vide Notification G.S.R.89(E) dated February 15, 2008. The guidelines, rules, etc. governing ECBs are also applicable to FCEBs.

1.4 MAJOR ADVANTAGES OF ECB

a. Lower interest rate First, the foreign currency loan is offered in the international markets frequently against the guarantee from a bank. Therefore the borrower should add against the guarantee fee payable by him to his bank to the cost of raising the foreign currency loan. The interest rate the guarantee commission and other incidental costs should aggregate to less than the cost of funds in the domestic market.

b. The availability of the funds The availability of funds from the International market is huge as compared to domestic market and corporate can raise large amount of funds depending on the risk perception of the International market.

c. Non-encumbrance on assets The third advantage is that since specific assets are usually not charged for funds raised abroad, the borrowing capacity in the domestic company is not affected.

d. Freedom from exchange risk The exchange loss on conversion can be avoided provided the purpose for which the loan is raised can be paid for in the currency of the loan and the source of repayment is also in the same currency. For instance, the loan is raised to pay in dollars for raw materials imported and export proceeds are also received in US dollars. If the sources of repayment are in a currency other than the currency of loan, the borrower will be facing exchange risk. 1.5 DISADVANTAGES OF ECB

1. Interest Rate RiskAs ECBs are issued for a longer period of time and in this meanwhile if the interest rate in domestic country goes down, it can convert ECB in an expensive source of financing.2. Exchange Rate Risk If the domestic currency gets depreciated at the time of payment of ECB, then borrower will have to pay extra rupee because of the domestic currency depreciation.3. LeverageECB is a debt instrument, and if it is raised beyond a limit, it can increase the countrys dependence on the Lenders country. As they will be in a condition to impose their decision on borrowing county.

1.6 WHY EXTERNAL COMMERCIAL BORROWING IS ATTRACTIVE?

INVESTOR ECB is for specific period, which can be as short as three years Fixed Return, usually the rates of interest are fixed The interest and the borrowed amount are repairable No owners risk as in case of Equity Investment

BORROWER No dilution in ownership Considerably large funds can be raised as per requirements of borrower Usually only a fixed rate of interest is to be paid Easy Availability of funds because ECB is more appealing to Investors is

1.7 IMPACT OF EXTERNAL COMMERCIAL BORROWINGS(1) IMPACT OF ECBS ON STOCK PERFORMANCE OF COMPANIESI compared the stock price of companies with highest ECB/Total Liabilities ratio with their respective indices.I did this comparison for 2 periods, calendar year 2007 which was a bull market and calendar year 2011 which was a bear market. Bull MarketDuring bull markets, companies have high profits and face less difficulty in meeting their interest obligations. Also, the rupee is stronger relative to dollar which reduces the obligations of ECBs. This fact can be seen in the stock price performance of companies with high ECB exposure as they outperformed their respective indices by 50%. The outperformance was seen across majority of the companies as 14 out of the 20 companies outperformed their respective industry indices.

Bear marketDuring the bear market of 2011, the rupee depreciated heavily, the impact of which was clearly seen in the stock price performance of companies with high ECB exposure. These companies unperformed their respective industry indices by 18%. 15 out of the 20 companies underperformed their respective industry index.

(2) IMPACT OF ECBS ON FINANCIAL PERFORMANCE OF COMPANIESTo measure the impact of ECB on financial performance of companies I compared the financial parameters of companies with ECB exposure (55 companies) to those which had only domestic debt (159 companies). I excluded debt free companies from our analysis as we specifically wanted to understand the impact of ECB debt as compared to domestic debt.

We use the following financial parameters for measuring the impact:

.Interest Cover Directly identifies a companys ability to meet its interest obligations.PAT Margin Interest obligations have a direct impact on the PAT margin of a company.Return on Equity To analyze the impact on Shareholder equity.Since we based our analysis on a large number of companies across all the different sectors, we believe the unsystematic risks of individual companies wont affect the conclusions of our research.

The financial performance indicators reveal a trend that reinforces the conclusion of stock price performance. During bull markets, there is no stress on the financial performance of companies with ECB debt. However, during bear markets, as profits begin to fall and rupee depreciates, the Interest Cover, Return on Equity and PAT margin of companies with high ECB exposure reduces greatly indicative of the deteriorating financial condition of such companies.

(3) IMPACT OF ECB ON INDIAS EXTERNAL DEBTExternal debt of a country indicates contractual liability of residents to non-residents. At the end of Mar 2012, as per RBI estimates, the total external debt for India (including both long and short term debt) stands at $345 billion. The debt was up 13% from $305 billion at the end of March 2011. The rise in External Commercial Borrowing was one of the major contributors of the rise in external debt accounting for 39.7 per cent of the increase in total debt.As we can see from the below graph, the composition of Indias external debt is undergoing a major change wherein the contribution of multilateral and bilateral debt is falling while that of ECBs and NRI deposits is increasing sharply. Between 2006 and 2012, ECBs in India has grown at a 25.7% while total external debt has grown at 16% CAGR during the same period.

As a result, the contribution of ECB in the total external debt has increased from 19% in 2006 to 30% in 2012 while that of multilateral and bilateral debt has fallen from 23% to 14% and 11% to 8% respectively. This changing structure indicates the Indian economy is becoming more market oriented and is becoming integrated with the world economy.

Looking at the composition of debt payments, we observe that debt payments towards ECBs continue to contribute the most significant portion of total debt payments. Also, the contribution of payments towards ECBs has increased significantly in 2011-12 to 80% from 71.3% in 2010-11. It may be noted that the repayments towards short-term debt are not included in the total debt payments (as per the international practice).

CHAPTER 2LEGAL FORMALITIES2.1 POLICY & PROCEDURE FOR EXTERNAL COMMERCIAL BORROWINGS (ECB)A) POLICY1) External Commercial Borrowings (ECBs) are defined to include commercial bank loans, buyers' credit, suppliers' credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.2) ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment.3) The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management.4) The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Development Financial Institutions, through their sub-lending against the ECB approvals are also expected to give priority to the needs of medium and small scale units.5) Applicants will be free to raise ECB from any internationally recognised source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. offers from unrecognised sources will not be entertained.

B) PROCEDURE FOR SEEKING ECB APPROVAL 1) Applications for approval up to USD 10 million will be considered by the Exchange Control Department of RBI, Mumbai, w.e.f. 01/ 01/ 19992) Applications for amount more than USD 10 million and under structured obligation may be submitted by the borrowers in the prescribed format (Annex. II) to the Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance, North Block, New Delhi-110 001.

The application should contain the following information:a) An offer letter from the lender giving the detailed terms and conditions;b) Copy of Project Appraisal Report from a recognised Financial Institution/Bank, if applicable;c) Copies of relevant documents and approvals from Central/State Governments, wherever applicable, such as FIPB, CCEA and SIA clearances, environmental clearance, techno-economic clearance from Central Electricity Authority, valid licenses from Competent Authorities, no objection certificate from Ministry of Surface Transport, evidence of exports/foreign exchange earnings from the statutory auditor based on the bankers realisation certificate, registration with RBI in case of NBFCs, approval for overseas investment from RBI etc.

2.2 RULES AND REGULATIONS REGARDING ECBS

The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

The ECB policy basically deals with the following aspects:-1) Eligibility criteria for accessing international financial markets2) Total quantum / limit of funds that can be raised through ECBs3) Maturity period and the cost involved4) End use of the funds raised

2.3 THE GOVERNMENT THROUGH THE ECB POLICIES IS TRYING TO NOURISH 2 SECTORS

1) Infrastructure2) SME

ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Development Financial Institutions, through their sub-lending against the ECB approvals are also expected to give priority to the needs of medium and small scale units ECBs are to be utilized for foreign exchange costs of capital goods and services (on FOB and CIF basis). Proceeds should be utilized at the earliest and corporate should comply with RBI's guidelines on parking ECBs outside till actual imports.The policies do not require any approval for investment under a limit in these 2 sectors. Thus it is easy to acquire foreign loans for such enterprises. Apart from that, the low cost of funds in the global market provides the small and medium enterprises funds at low costs thus bringing in more money in these sectors.

2.4 EXTERNAL COMMERCIAL BORROWINGS (ECB) POLICY STRUCTURED OBLIGATIONS

As per the extant guidelines, credit enhancement is permitted to be provided by multilateral / regional financial institutions, Government owned development financial institutions, direct/indirect foreign equity holder(s) under the automatic route for domestic debt raised through issue of capital market instruments, such as, Rupee denominated bonds and debentures, by Indian companies engaged exclusively in the development of infrastructure (as defined under the extant ECB policy) and by Infrastructure Finance Companies (IFCs), which have been classified as such by the Reserve Bank.RBI. vide Ref:A.P. (DIR Series) Circular No.120 dated 26 June 2013decided that credit enhancement can be provided by eligible non-resident entities to the domestic debt raised through issue of INR bonds/ debentures by all borrowers eligible to raise ECB under the automatic route. It has also been decided to reduce the minimum average maturity of the underlying debt instruments from seven years to three years.Prepayment and call/put options, however, would not be permissible for such capital market instruments up to an average maturity period of 3 years.

External Commercial Borrowings (ECB) Policy Structured Obligations for infrastructure sectorOn a review, it has been decided, to further liberalise the ECB policy in respect of the infrastructure sector.Direct foreign equity holder (holding minimum 25 per cent of the paid-up capital) and indirect foreign equity holder holding atleast 51% of the paid-up capital, will be permitted to provide credit enhancement for the domestic debt raised by Indian companies engaged exclusively in the development of infrastructure and by Infrastructure Finance Companies (IFCs) through issue of capital market instruments. No prior approval will be required from the Reserve Bank for providing such credit enhancements.2.5 ECB NORMS FOR INFRASTRUCTURE SECTOR LIBERALISEDThe Reserve Bank of India has relaxed norms for infrastructure companies with direct foreign equity up to 25per centto raise fund overseas without government permission subject to the following conditions1. At least 75per centof the fresh ECB proposed to be raised should be utilised for capital expenditure towards a new infrastructure project(s), where infrastructure is as defined in terms of the extant guidelines on ECB.2. In respect of remaining 25per cent, the refinance shall only be utilized for repayment of the Rupee loan availed of for capital expenditure of earlier completed infrastructure project(s); and3. The refinance shall be utilized only for the Rupee loans which are outstanding in the books of thefinancing bank concerned. Such company may submit their applications in Form ECB through their designated authorised dealer bank with the required documents. The AD Category I bank shall monitor the end use of funds and bank in India will not be permitted to provide any form of guarantee.

2.6 NEW GUIDELINES ON EXTERNAL COMMERCIAL BORROWING

A high level committee chaired by Economic affairs secretary R.Gopalan announced a series of changes in the External Commercial Borrowing (ECB) guidelines. The committee comprised of officials form both Ministry of Finance as well as the RBI. The key changes that were announced as under : The ECB limit for more than 5yr maturities through the automatic route, wherein the RBI approval is not required has been hiked from $500 mn to $750 mn for individual companies. The overall ECB issuance however for the current fiscal has been kept unchanged at $30 bn with an assurance that it may be increased at a later stage incase required. The end-use of ECB funds has been widened by allowing 25% of the ECB proceeds to be utilized towards repayment of existing rupee debt. And the ECB proceeds can now be utilized towards refinancing of buyers & suppliers credit also. ECB denominated in rupee can now be availed. ECB denominated in Chinese Yuan (CNY) is now permitted with an overall limit of $1 bn. High Net worth Individuals (HNIs) are now allowed to invest in infrastructure debt funds. Infrastructure finance companies issuances will be eligible for inclusion under FII in debt limit. The committee has also agreed to propose to the Revenue department to allow tax exemption on withholding tax on interest payable on ECB issuances of maturity 5 yrs & beyond.

2.7 THE RECENT CHANGES MADE UNDER EXTERNAL COMMERCIAL BORROWING

1. The term debt in the debt-equity ratio has been replaced with ECB liability to make the term signify true position as other borrowings/ debt are not considered in working out this ratio.2. The paid- up capital contributed by the foreign equity holder is considered under the guidelines for the purpose ofcalculationof equity for ECBs of or beyond USD 5 million from direct foreign equity holders. Now, besides paid up capital, free reserves including the share premium receivedin foreign currencyas per the latest audited balance sheet shall be reckoned for the purpose of calculating the equity of the foreign equity holder. To benefit eligible borrowers, ECB proposals from foreign equity holders (direct/indirect) andgroup companiesunder the approval route will be considered by the RBI. Service sector units, in addition to those in hotels, hospitals and software, could also be considered as eligible borrowers ifthe loanis obtained from foreign equity holders. This would facilitate borrowing by training institutions, R&D, and miscellaneous service companies. ECB fromindirectequity holders may be considered provided theindirectequity holding by the lender in theIndian companyis at least 51per cent. ECB from a group company may also be permitted provided both the borrower and the foreign lender are subsidiaries of the same parent. While submitting their proposals, eligible companies have to ensure that total outstanding stock of ECBs (including the proposed ECBs) from a foreign equity lender does not exceed seven times the equity holding, either directly or indirectly of the lender.

To further liberalise the ECB policy in respect of the infrastructure sector RBI has made following changes

1. Direct foreign equity holder (holding minimum 25per centof the paid-up capital) andindirectforeign equity holder holding at least 51% of the paid-up capital, will be permitted to provide credit enhancement for the domestic debt raised by Indian companies engaged exclusively in the development of infrastructure and by Infrastructure Finance Companies (IFCs) through issue of capital market instruments.2. No prior approval will be required from the Reserve Bank for providing such credit enhancements.

CHAPTER 3ROUTES OF EXTERNAL COMMERCIAL BORROWING

ECB can be accessed under two routes: Automatic Route Approval Route

ECB for investment in real sector-industrial sector, infrastructure sector and specified service sectors in India as indicated under Automatic Route, i.e. do not require Reserve Bank / Government of India approval. In case of doubt as regards eligibility to access the Automatic Route, applicants may take recourse to the Approval Route.

(A) AUTOMATIC ROUTE

(1) Eligible Borrowers (a) Corporate, including those in the hotel, hospital, software sectors (registered under the Companies Act, 1956) and Infrastructure Finance Companies (IFCs) except financial intermediaries, such as banks, financial institutions (FIs), and Non-Banking Financial Companies (NBFCs),other than those specifically allowed by Reserve Bank, are eligible to raise ECB.

(b) Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail of ECB.

(c) Micro Finance Institutions (MFIs) engaged in micro finance activities are eligible to avail of ECBs.

(2) Recognised Lenders"Foreign equity holder" to be eligible as recognized lender under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below:

a) For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender

b) For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and ECB liability-equity ratio not exceeding 4:1 Besides the paid-up capital, free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet shall be reckoned for the purpose of calculating the equity of the foreign equity holder in the term ECB liability-equity ratio. (3) Amount and Maturity a) The maximum amount of ECB which can be raised by a corporate other than those in the hotel, hospital and software sectors is USD 750 million or its equivalent during a financial year. b) Corporate in the services sector viz. hotels, hospitals and software sector are allowed to avail of ECB up to USD 200 million or its equivalent in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. c) NGOs engaged in micro finance activities and Micro Finance Institutions (MFIs) can raise ECB up to USD 10 million or its equivalent during a financial year.

(4) All-in-cost ceilings

a) All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in- cost. The existing all-in-cost ceilings for ECB are as under:

b) In the case of fixed rate loans, the swap cost plus margin should be the equivalent of the floating rate plus the applicable margin.

(5) End-use

a) industrial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors, namely, hotel, hospital and software in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure .

(6) Payment for Spectrum Allocation

(a) Relaxation for the successful Bidders of 2G spectrum Re-auction

(i) To make the upfront payment initially out of Rupee loans availed of from the domestic lenders and refinance such Rupee loans with a long-term ECB provided such ECB is raised within a period of 18 months from the date of sanction of such Rupee loans for the stated purpose from the domestic lenders. (ii) Availing of short term foreign currency loan in the nature of bridge finance for the purpose of making upfront payment and replace the same with a long term ECB subject to condition that the long term ECB is raised within a period of 18 months from the date of draw down Of the bridge finance.

(7) End-uses not permitted (a) For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs),etc., are also considered as investment in capital markets].

(b) for real estate sector,

( c) for working capital, general corporate purpose and repayment of existing rupee loans.

(8) Guarantees

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

(9) Security

The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, respectively, as amended from time to time.

(10) Parking of ECB proceeds

a) The proceeds of the ECB raised abroad meant for Rupee expenditure in India, such as, local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment for spectrum allocation, etc. should be repatriated immediately for credit to the borrowers Rupee accounts with AD Category I banks in India.b) ECB proceeds parked overseas can be invested in the following liquid assets (1) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys (2) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (3) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.

(11) Prepayment

Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan

(12) Refinancing of an existing ECB

The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained. An existing ECB may, however, be refinanced by raising a fresh ECB at a higher all- in-cost under the approval route.

(13) Debt Servicing

The designated AD bank has the general permission to make remittances of installments of principal, interest and other charges in conformity with the ECB guidelines issued by Government / Reserve Bank of India from time to time.

(14) Corporates Under Investigation

All entities against which investigations / adjudications / appeals by the law enforcing agencies are pending may avail of ECBs as per the current norms, if they are otherwise eligible, notwithstanding the pending investigations / adjudications / appeals, without prejudice to the outcome of such investigations / adjudications / appeals. Accordingly, in case of all applications where the borrowing entity has indicated about the pending investigations / adjudications / appeals, Authorised Dealers while approving the proposal shall intimate the concerned agencies by endorsing the copy of the approval letter.

(15) 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.(B) APPROVAL ROUTE

(1) Eligible borrowersThe following types of proposals for ECB are covered under the Approval Route.

a) Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank are considered on a case by case basis.b)Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package and assessment by Reserve Bank based on prudential norms. Any ECB availed for this purpose so far will be deducted from their entitlement.

c) ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects.

(2) Recognised Lenders (a) Borrowers can raise ECB from internationally recognised sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v) suppliers' of equipment, (vi) foreign collaborators and (vii) foreign equity holders (other than erstwhile OCBs).(b) From 'foreign equity holder' where the minimum equity held directly by the foreign equity lender is 25 per cent but debt-equity ratio exceeds 4:1(i.e. the proposed ECB exceeds four times the direct foreign equity holding).(3) Amount and MaturityCorporates can avail of ECB of an additional amount of USD 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of USD 500 million under the automatic route, during a financial year. Other ECB criteria such as end-use, all-in-cost ceiling, recognised lender, etc. need to be complied with. Prepayment and call/put options, however, would not be permissible for such ECB up to a period of 10 years

(4) All-in-cost ceilingsAll-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculatingthe all in cost.The all-in-cost ceilings for ECB are reviewed from time to time.

(5) End-use(a) ECB can be raised only for investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects);(b) ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subjectto the existing guidelines on Indian Direct Investment in JV/WOS abroad.

(6) End Uses Not PermittedUtilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate except banks and financial institutions eligible under paragraph II (B) (ii) (a) and II (B) (ii) (b), real estate, working capital, general corporate purpose and repayment of existing Rupee loans.

(7) Guarantee Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms.

(8) SecurityThe choice of security to be provided to the lender / supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of the overseas lender is subjecttoRegulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000 as amended from time to time, respectively.

(9) Parking of ECB proceeds overseasECB proceeds shall be parked overseas until actual requirement in India. ECB proceeds parked overseas can be invested in the following liquid assets (a)deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys; (b)deposits with overseas branch of an AD bank in India.(10) Prepayment(a) Prepayment of ECB up to USD 400 million may be allowed by the AD bank without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan. (b) Pre-payment of ECB for amounts exceeding USD 400 million would be considered by the Reserve Bank under the Approval Route

(11) Refinancing of an existing ECBExisting ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained(12) ProcedureThe designated AD bank has general permission to make remittances of instalments of principal, interest and other charges in conformity with ECB guidelines issued by Government / Reserve Bank from time to time.Applicants are required to submit an application in form ECB through designated AD bank to the Chief General Manager, Foreign Exchange Department, Reserve Bank of India, Central Office, External Commercial Borrowings Division, Mumbai 400 001, along with necessary documents.

(13) Empowered CommitteeReserve Bank has set up an Empowered Committee to consider proposals coming under the Approval Route.

CHAPTER 4ANALYSIS OF EXTERNAL COMMERCIAL BORROWING

4.1 SOURCES OF ECBS Almost 60% of external commercial borrowings is through Secured Loans. Foreign Currency Convertible Notes form about 18% of the total external commercial borrowings.

The interest rates for secured loans are lower than those for unsecured loans and hence they are preferred by companies to raise capital. For banks secured loans are safer and hence preferred to unsecured loans.

FCCBs have lower interest rates than loans, however, there is a threat of equity dilution if they are converted to equity which lowers their appeal to borrowers. Also, in the present scenario where company stocks have been battered, the lenders would not prefer FCCBs.

4.2 WHICH SECTORS PREFER ECBSI analyzed the ECB borrowing across sectors in 2007 and 2012. The idea was to see if there was a preference for ECB within some sectors or was it dependent on market conditions.

The analysis reveals an interesting point that sectors which are performing well generally have lower ECB. For example, Auto and Pharma which were laggards in the 2007 bull market had ECB/Total Liabilities of 14% and 15% respectively. However, as the performance of these sectors relative to the market improved in 2012, their ECB/Total Liabilities reduced to 5% and 1% respectively. Infrastructure and Power are an exception to this trend.

I believe the reason for this trend is that sectors which are not performing well have to avail domestic credit atunfavourablestringent terms and so they prefer ECBs which are available at comparatively favourable terms.

4.3 KEY ISSUES WITH ECB POLICYDomestic loan refinancing by ECBs is not available to companies in sectors such as retail, construction, services etc.1. Similar policy available for companies developing sea ports, airports, roads, bridges and power. These sectors require cheap source of funding to remain competitive in global markets2. Use of ECBs for on-lending is not allowed. Inability of wholly owned subsidiaries(WOSs) and Special Purpose Vehicles (SPVs) to raise cost effective debt due to lack of strong balance sheet. SPVs and WOSs prevalent in infrastructure sector which are capital intensive3. Absence of full capital account convertibility and thus a cap on rupee expenditure of ECBs.

CHAPTER 5 CASE STUDY5.1 RBI EASES EXTERNAL COMMERCIAL BORROWING NORMS

In order to encourage capital flows, the RBI on Wednesdayeased the external commercial borrowing(ECB) norms by allowing companies to use funds raised from foreign partners for general corporate purposes.

"On a review, it has been decided to permit eligible borrowers to avail of ECB under the approval route from their foreign equity holder company with minimum average maturity of 7 years for general corporate purposes," said the Reserve Bank in clarifications on its August 14 Overseas Direct Investment (ODI) guidelines.

Till now borrowings in the form of ECB were not permitted to be utilised for general corporate purpose.

However, the RBI has put certainconditions for availing the benefitsof relaxed norms.

"Minimum paid-up equity of 25 per cent should be held directly by the lender (overseas partner)," the RBI said.

Also, repayment of the principal will commence only after completion of minimum average maturity of seven years and no prepayment will be allowed before maturity, it added.

The measure is aimed at encouraging capital inflows and arresting the decline in rupee value.

Capital outflows have caused volatility in the stock market, as the benchmark S&P BSE Sensex yesterday fell 651 points. The rupee had touched an all time low of 68.80 against the US dollar last month.

India Inc raised over $3.71 billion from overseas markets in July through ECBs and foreign currency convertible bonds (FCCBs). In June, it had raised $1.95 billion through this route.

5.2 RBI PERMITS ECB FACILITY FOR NBFC-AFCSReserve Bank of India (RBI) allowed Non-banking finance companies (NBFCs) categorised as Asset Finance Companies (AFCs) to avail of external commercial borrowing (ECB).But the central bank imposed certain conditions for such NBFCs to access ECB window. One of the condition is that they would avail ECB under the automatic route with minimum average maturity of five years. Further, the funds raised through the ECB route must be used for financing import of infrastructure equipment for leasing to infrastructure projects.Further, these companies can raise ECB through foreign currency bonds (FCB) only from those countries, where regulations are complaint with Financial Action Task Force (FATF) guidelines.Such ECBs can be availed up to 75 per cent of owned funds of NBFC-AFCs, subject to a maximum of $200 million or its equivalent per financial year.Also, ECBs by AFCs above 75 per cent of their owned funds will be considered under the approval route and currency risk of such ECBs is required to be fully hedged.Meanwhile, the RBI also allowed NBFC-Infrastructure Finance Companies (IFCs) to avail of ECB for on-lending to infrastructure sector both under automatic and approval routes.

5.3 RBI SUSPENDS EXTERNAL BORROWINGS IN CHINESE YUAN

The Reserve Bank of India (RBI) on Tuesday discontinued the facility of external commercial borrowings (ECBs) in renminbi, the Chinese currency. Indian companies in the infrastructure sector were allowed to avail this fund raising route subject to a maximum of cap of USD one billion. "It has been observed that the facility of ECB in renminbi (RMB) had remained unused so far. Accordingly, the scheme of ECB in renminbi has been reviewed and it has been decided that this scheme may be discontinued from the date of issue of this circular,"

5.4 FUTURE OUTLOOKAn issue for the country is that while ECBs can be a blessing for some companies, it raises the issue of sustainability of external debt at the macro-level.With ECBs becoming attractive, they now account for 30% of the total debt; they could rise as long as our interest rate differential with those in the euro market is wide. The back-up in terms of reserves would increase primarily from hot money FII flows in the future, which may not be the perfect match. This, coupled with the forex risk, in the absence of hedging would be the two concerns going ahead.

We can expect an increase in demand for ECBs amongst the Indian Companies because of the following reasons:

1. Plans for Huge Spending on Infrastructure projects2. Domestic interest rates are moving upwards

2