Tuesday, September 20, 2011

What foreign financial assistance will come under ECB and what not ?

Modes of raising ECBs

ECB constitutes the foreign currency loans raised by residents from recognised lender. The ambit of ECB is wide. It recognizes simple form of credit as suppliers’ credit as well as sophisticated financial products as securitization instruments.

Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature, satisfying the norms of the ECB regulations.

The different borrowings and loans that come under the ECB roof are:

  1. Commercial Bank Loans: These loans constitute the term loans taken by companies from banks outside India.

2.Buyer’s Credit: Buyer’s credit is the credit availed by the importers of goods/services from overseas lenders such as Banks and Financial Institutions for payment of their Imports on the due date. This lending is usually based on the letter of Credit (a Bank Guarantee) issued by the importer’s bank, i.e., the importer’s bank acts as a broker between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee.
  1. Supplier’s Credit
Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs) , Syndicated Loans etc.

4.Credit from official export credit agencies
Commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC,

5.Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognized credit rating agency.
6.Lines of Credit from foreign banks and financial institutions
7.Financial Leases
8.Import Loans

9.Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

10.External assistance, NRI deposits, short-term credit and Rupee debt

11.Foreign Currency Convertible Bonds

12.Non convertible or optionally convertible or partially convertible debentures

What is not included under ECBs
1.Investment made towards core capital of an organization viz.

a)Investment in equity shares

b)Convertible preference shares

c)Convertible debentures

d)Instruments which are fully and mandatorily convertible into equity within a specified time are to be reckoned as part of equity under the FDI Policy
e)Equity capital
f)Retained earnings of FDI companies
g)Other direct capital (inter-corporate debt transactions between related entities)

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