ECB - An indepth analysis Contd.,

Part I: Meaning – Approval / Automatic Route – Three aspects of ECB

Meaning:

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)] availed from non-resident lenders with minimum average maturity of 3 years.

Approval and Automatic Route:

ECB can be accessed under two routes namely ‘Automatic Route’ and ‘Approval Route’. Automatic Route does not require RBI / Government approval. ECB for investment in real estate sector -industrial sector, especially infrastructure sector-in India, are under Automatic Route. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route. Reserve Bank has set up an Empowered Committee to consider proposals coming under the Approval Route.



The three letter word ECB hinges on three aspects:

1. Eligibility criteria for accessing external markets.
2. Amount of borrowings to be raised and their maturity structure.
3. End use of the funds raised.
Eligible Borrowers and Lenders:
Under the Automatic Route, Borrowers can raise ECB from internationally recognized sources such as
a. International banks,
b. International capital markets,
c. Multilateral financial institutions (such as IFC, ADB, CDC, etc.,),
d. Export credit agencies,
e. Suppliers of equipment,
f. Foreign collaborators and
g. Foreign equity holders (other than erstwhile OCBs).
A "foreign equity holder" to be eligible as “recognized lender” under the automatic route would require minimum holding of equity in the borrower company as set out below:

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

b. For ECB more than USD 5 million - minimum equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding).

If the proposed ECB exceeds four times the direct foreign equity holding, then approval route must be sought.

Overseas organizations and individuals complying with following safeguards may provide ECB to Non-Government Organizations (NGOs) engaged in micro finance activities.

Overseas Organizations proposing to lend ECB would have to furnish a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to Financial Action Task Force (FATF) guidelines to the AD bank of the borrower. The certificate of due diligence should comprise the following:

a. that the lender maintains an account with the bank for at least a period of two years,
b. that the lending entity is organized as per the local law and held in good esteem by the business/local community and
c. that there is no criminal action pending against it.

Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are
not required to adhere to Know Your Customer (KYC) guidelines are not eligible to extend ECB.

Besides corporate registered under the Companies Act units in Special Economic Zones are allowed to raise ECB for their requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area.

Individuals, Trusts and Non- Profit making Organizations are not eligible to raise ECB.

The following types of proposals are covered under 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.

d. Foreign Currency Convertible Bonds (FCCBs) by housing finance companies satisfying the following minimum criteria: (i) the minimum net worth of the financial intermediary during the previous three years shall not be less than Rs. 500 crore, (ii) a listing on the BSE or NSE, (iii) minimum size of FCCB is USD 100 million, (iv) the applicant should submit the purpose / plan of utilization of funds.

e. Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route.

f. Multi-State Co-operative Societies engaged in manufacturing activity satisfying the following criteria i) the Co-operative Society is financially solvent and ii) the Co-operative Society submits its up-to-date audited balance sheet.

g. Corporates engaged in industrial sector and infrastructure sector in India can avail ECB for Rupee expenditure for permissible end-uses.

Amount of borrowings to be raised and their maturity structure:

Corporates can raise ECB upto the maximum amount of USD 500 Million or its equivalent during a financial year without the approval of RBI.

a. ECB up to USD 20 million or equivalent in a financial year with minimum average maturity of three years.

b. ECB above USD 20 million and up to USD 500 million or equivalent with a minimum average maturity of five years.

Corporates 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.

Corporates in infrastructure sector *can avail ECB up to USD 100 million and corporates in industrial sector can avail ECB up to USD 50 million for Rupee capital expenditure for permissible end-uses within the overall limit of USD 500 million per borrower, per financial year, under Automatic Route.

NGOs engaged in micro finance activities can raise ECB up to USD 5 million during a financial year. Designated AD bank has to ensure that at the time of drawdown the forex exposure of the borrower is hedged.

Corporates in the services sector viz. hotels, hospitals and software companies can avail ECB up to USD 100 million, per borrower, per financial year, for import of capital goods.

* 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)

End use of the funds raised:

Under the automatic route, ECB can be utilized for import of capital goods(as classified by DGFT in the foreign trade policy) , by new or existing production units, in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.

Also it can be utilized for overseas direct investment in Joint Ventures (JV) or Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

The following end uses require approval from RBI:

a. Borrowers in the services sector are not eligible to avail ECB under the Automatic Route. Government has decided on 2nd June 2008 to allow entities in the service sector viz. hotels, hospitals and software companies to avail ECB up to USD 100 million, per financial year, for the purpose of import of capital goods under the Approval Route and

b. The first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.

Utilization of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India, Also it is not permitted in real estate, for working capital, general corporate purpose and repayment of existing Rupee loans.

Part II: Other aspects of ECB

Besides the above criteria, certain other factors like a. all-in cost ceiling, b. guarantee, c. security, d. parking of ECB proceeds overseas, e. prepayment, f. refinancing of existing ECB and g. debt servicing needs to be considered before proceeding to ECB proposal.

a. all-in cost ceiling:

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. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are reviewed from time to time.

The following ceilings are valid till reviewed:

Average Maturity Period
All-in-cost Ceilings over 6
month LIBOR*
Three years and up to five years 200 basis points

More than five years 350 basis points

* for the respective currency of borrowing or applicable benchmark

b. 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.

With a view to facilitating capacity expansion and technological upgradation in Indian Textile industry, issue of guarantees, standby letters of credit, letters of undertaking and letters of comfort by banks in respect of ECB by textile companies for modernization or expansion of textile units will be considered under the Approval Route subject to prudential norms.


Part III : PROCEDURAL ASPECTS

Borrowers are required to submit ECB-2 Return certified by the designated AD bank on monthly basis so as to reach DSIM, RBI within seven working days from the close of month to which it relates.