External Commercial Borrowings - The Master Blaster of Corporate World

Well this topic is not new, but this three letter word ECB contains livelihood till some extent of persons in corporate world. Indian corporate is one of the largest and strongest finance market in world is limited to a three letter world ECB (external commercial borrowing). External Commercial Borrowings (ECB ) which cover under its umbrella 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. ECB can be provided by eligible lenders which can be defined as those persons who have share in the equity of company or firm to which they have right to lend money.

Use Of ECB:

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.

Who can raise ECB till what limit

All infrastructure and Greenfield projects can raise up to 50% of the total project cost while Telecom Projects up to 50% of the project cost (including license fees) In the case of power projects, greater flexibility will be allowed based on merits.

FERA Approval:

Applicant is required to obtain approval from RBI under the FERA, 1973 after receiving the approval from ECB DIVISION, Department of Economic Affairs, and Ministry of Finance. RBI is endorsed to approve all the ECBs under US $ 3 million scheme (enhanced to US 5 Million) and all other ECB proposals are processed in DEA. Government as step towards further simplification and rationalization has decided to delegate the ECB sanctioning power to RBI up to US $ 100 million under all the ECB schemes except structured obligation.

Recent Trend In ECB:

The cost of funds in the Indian Market has been relatively higher than International Market and there is a growing tendency for Indian Business Houses to raise funds from International Markets. Such financing is arranged for reputed corporate houses on prevalent rates of interest. The interest rates are fixed in terms of Basic rate of LIBOR plus other charges.

The Registered Foreign Financial Institutions interested in lending funds to Indian Business Houses can earn handsome interest from Indian Markets. Demand for E.C.B is rising rapidly in this market and the Govt. Rules have also been relaxed to certain extent. Now, Loans upto US$ 5 Millions can be approved by Reserve Bank of India and higher amounts are approved by Ministry of Finance.

Conclusion:
External Commercial Borrowings (ECBs) occupy a very important position as a source of funds for Corporate. Thus, it is to be maintained within prudent limits for total external borrowings and to provide flexibility to Corporate in external borrowings and that is reflected in its guidelines. However, the main purpose of ECB is to encourage borrowings which provides basis for strongest economy. Thus according to some Maven:
ECB is not only three letter world but lifeline of corporate world.

Bibliography:
1) India's External Commercial Borrowings by V L Rao

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