The following article will guide about how to avail external commercial borrowings (ECBs) from a bank.
In a broader sense, it would include commercial bank loans, buyer’s credit, supplier’s credit, bonds, loans from ODAs, multilateral agencies. However, taking a limited view, ECBs would include medium and long-term loans as permitted by Reserve Bank of India and the Government of India.
ECBs have been permitted by the Government of India as a source of finance for fresh investments and for expansion of existing facilities. Since these constitute international debt for the country, the government keeps some ceiling or a cap on ECBs in line with its debt management policies.
Buyers credit or suppliers credit (trade credit) for three years and above also come under the category of ECBs.
ECBs availed by residents are governed by provisions of section 6, FEMA 1999, as amended from time to time. The updated guidelines have been covered under RBI Master circular dated 1.7.2009 on the subject.
ECBs can be availed under Automatic Route or Approval Route:
(i) Automatic Route:
ECB for investment in real estate sector, industrial sector, infrastructure sector will not require any approval from RBI or Government of India, can be accessed by companies, registered under Companies Act. This route is not available for individuals, trusts and non-profit making organisations, and financial intermediaries such as banks, housing finance companies, etc.
For raising funds under this route, funds have to be raised from internationally recognised sources, such as banks, capital markets, export credit agencies, suppliers of equipment, etc.
The maximum amount that can be raised under this route can be:
(a) USD 20 million, with a minimum average maturity of three years.
(b) Above USD 20 million and up to USD 500 million with average maturity of five years.
The all in cost, which includes interest and other expenses, except commitment fees, pre-payment fees or other fees payable in Indian Rupees should be 300 basis point above six months Libor for average maturity period of three to five years, and 500 bps above six months Libor for average maturity of over five years.
The borrower may enter into an agreement with the recognized lender for raising ECB, within the prescribed guidelines, without prior approval of RBI and ensure to comply with the reporting requirements. It will be the borrowers’ responsibility to ensure compliance of all prescribed guidelines related to end-use, cost, ceilings, etc.
(ii) Approval Route:
Under this route financial institutions dealing with infrastructure financing or export credit, and banks or institutions participating in textile or steel sector restructuring, as approved by Government of India, as also others not falling under automatic route are eligible to borrow funds from overseas market.
The funds are to be raised from recognised lenders, with similar caps for all in costs, as in the case of automatic route.
There are restrictions on end use of the funds so raised under this route.
Issuance of guarantees or standby LCs or letter of undertaking or letter of comfort by banks or financial institutions for raising ECBs is not allowed, except permitted by Reserve Bank of India.