Tuesday, August 23, 2011


This research article has been published in the 36th Regional Conference of The Institute of Company Secretaries of India  held on 19-20 August 2011 at Chennai

As the current lending rates of Indian banks are hovering around 15%, by resorting to external commercial borrowings, CFOs of large Indian companies are trying to minimise the finance charges in their P&L account. Thus, CFOs are resorting to ECB as one of the financial engineering strategies to maximise the profitability of the company. However, heavy reliance on ECB can be a landmine to a company if there is a high volatile exchange rate fluctuation. Thus, by resorting to new financial instruments like hedging the forex exposures, CFOs of large companies are trying to pool in the international funds in Indian markets at a lower cost so that they could remain as profit making and as a competitive company.  This research essay gives you a vista and comprehensive picture of current ECB regulations in India and how the companies are benefiting out of it.
ECB as A Strategy of Long-term Funding for the Large Indian Companies
Eligible Indian borrowers are now permitted to avail commercial loans which are known as External Commercial Borrowings (ECB) with a minimum average maturity period of 3 years from eligible recognised non-resident lenders. ECB can take the following forms; loan from banks, supplier’s credit, buyer’s credit, securitised instruments and debt instruments.
There are two routes for raising ECB; one is automatic route where no prior approval is needed from RBI subject to adherence with the reporting needs immediately after availing the ECB and another one is under approval route.
Restrictions on Use of ECB’s
v  For investment in real estate sector; however, companies engaged in construction of “integrated township” is now allowed to avail ECB under approval route.
v  As per RBI Master Circular 2011, for repayment of existing Rupee loans, working capital, and general corporate purpose. However, under approval rate, RBI allows this as a special case. For instance, under approval route, RBI has permitted M/s Tata Teleservices Ltd and IDEA Cellular Ltd to refinance their INR Loan 3-G Spectrum-fee.  In May 2011 alone, RBI has permitted about 70 Indian companies to avail ECB under automatic route. RBI also allows by way of take-out finance for infrastructure companies to switch their rupee loan into ECB under approval route.
v  For 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.
v  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).
v  Individuals, Trusts and Non-Profit making organizations are not eligible to raise ECB.
v  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.
Conditions as regards to Securities to Foreign Lenders under ECB guidelines
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. AD Category - I banks have been delegated powers to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. It is to be noted that there is a restriction for a foreign lender to acquire immovable property, the issue of personal or corporate guarantees and, creation of charge over financial securities. In case of default by the Indian borrowers, the foreign lenders are not eligible to acquire automatically the immovable property charged to them in India. The international lender should sell such properties to an Indian resident and then repatriate the sale proceeds out of India.

As per the extant norms, refinancing of domestic Rupee loans with ECB is not permitted. However, keeping in view the special funding needs of the infrastructure sector, a scheme of take-out finance has been put in place. Accordingly, take-out financing arrangement through ECB, under the approval route, has been permitted for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects.
All-in-cost ceilings

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 all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are valid until reviewed: Average Maturity Period
All-in-cost Ceilings over 6 month LIBOR*

Three years and up to five years
300 basis points

More than five years
500 basis points

Non-Banking Financial Companies (NBFCs) are eligible to raise ECB under approval route from eligible lenders. Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy. Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

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 is allowed under current ECB guidelines.

ECB by Telecom Companies

The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources by the successful bidders, to be refinanced with a long-term ECB, under the approval route, subject to the following conditions:
(i) The ECB should be raised within 12 months from the date of payment of the final instalment to the Government;
(ii) The designated AD - Category I bank should monitor the end-use of funds;
(iii) Banks in India will not be permitted to provide any form of guarantees; and
(iv) All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, etc, should be complied with.

RBI through its circular dated 4 July 2011 has briefed that Fresh ECBs/ FCCBs can be raised with the stipulated average maturity period and applicable all-in-cost being as per the extant ECB guidelines; The amount of fresh ECB/FCCB shall not exceed the outstanding redemption value at maturity of the outstanding FCCBs; The fresh ECB/FCCB shall not be raised six months prior to the maturity date of the outstanding FCCBs;
The purpose of ECB/FCCB shall be clearly mentioned as ‘Redemption of outstanding FCCBs’ in Form 83 at the time of obtaining Loan Registration Number from the Reserve Bank; The designated AD - Category I bank would monitor the end-use of funds; All other aspects of ECB policy under the automatic route, such as, eligible borrower, recognised lender, end-use, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged;
ECB / FCCB beyond USD 500 million for the purpose of redemption of the existing FCCB will be considered under the approval route; and ECB / FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 500 million available under the automatic route as per the extant norms.
Parking of ECB proceeds

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses.
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 Moody’s (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) 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.
ECB funds may also be repatriated to India for credit to the borrowers’ Rupee accounts with AD Category I banks in India, pending utilization for permissible end-uses.
An ECB borrower is required to keep ECB funds parked abroad till the actual requirement in India. Further, as per RBI norms, a borrower cannot utilize the funds for any other purpose as there are end use restrictions for ECB. However, Reliance Infrastructure now Reliance Energy has parked its foreign loan proceeds worth $300 million with its mutual fund in India for 315 days, and then repatriated the money abroad to a joint venture company. These actions, according to an RBI, violated various provisions of the Foreign Exchange Management Act (FEMA). In doing so, Reliance had not applied for prior approval of RBI as it contravened the end use restrictions and also it repatriated the ECB funds for investments in its overseas joint venture without prior approval of RBI.
For the justification of its levy of fine of Rs 125 Crores, RBI viewed that as the Reliance has made additional income of Rs 124 crores by parking its ECB in its mutual funds in contravention of ECB end use restrictions. Hence, borrowing companies in India should be very careful about the parking of funds abroad or end use of the same in India.
Statistics on ECB in India

Reserve Bank of India (RBI) has allowed ECB during the month of May 2011 (latest month statistics) as per details given below:
Under Automatic Route
Under RBI Approval Route
Total ECB collected
USD 1,497,371,540
USD 11,55,449.288
USD 2,652,820,828

RBI has allowed the maturity period for the ECB from minimum of 3 years to the maximum of 14 years 3 months. The purpose for which ECB has been allowed has been given as under:

ü  Rupee Expenditure Loc.CG                                 
ü  New Project
ü  Import of Capital Goods
ü  Onward/Sub-lending
ü  Import of Capital Goods
ü  Modernisation
ü  Power
ü  Road
ü  Overseas Acquisition
ü  Port
ü  Micro Finance
ü  Refinance of INR Loan 3-G Spectrum Fee

RBI has permitted during the month of May 2011 alone about 70 Indian companies to avail ECB under automatic route and about 10 Indian companies are allowed to access ECB under approval route.


As I said, ECB is an excellent financial engineering tool where CFO can use the same to bring down their finance costs and to enhance the bottom line of the company but it has to be carried with abundance prudence and caution as there involves foreign exchange fluctuation risks where in certain scenarios it may exceed the costs of local borrowing but such risks can be averted by resorting to forex hedging tools against future fluctuations in forex rates.

For any clarification or assistance , please feel free to contact me through rvsekar2007@gmail .com or 919848915177.


  1. ECB is a light load to the big bulls under present regulations. But it is dear and distant dream to the many a needy.What is the logic behind this
    paradox? Pl reply, sir.

    B M Bhustalimath, Bangalore..bmbmath@yahoo.com

  2. Very nice and helpful information has been given in this article. I like the way you explain the things. Keep posting. Thanks..

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  4. whether an nri director of ndian company can give loan from his nro account