Company

LOGO External Commercial

Borrowings

S.CLEMENT

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Contents
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3 Introduction and Background

2 Accessing ECB – Major Routes

3 Why Thumbs-up from the market

4 Borrowing Trends – Indian Corporates

5 Foreign Currency Convertible Bonds

6 Have ECBs lost their sheen?

Second Stimulus Package – Recent

7
Changes in ECB

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 CAPITAL STRUCTURE
DEBBT
CAPITAL

DOMESTIC EXTERNAL

INEREST CURRENCY
MATURITY

MEDIUM FIXED
LONG TERM SHORT TERM FLOATING MARKET
 SOURCES OF FINANCE

LONG TERM SHORT TERM

PUBLIC DEPOSITS
CAPITAL
TRADE CREDIT
RETAINED EARNINGS
FACTORING
DEBENTURES
BANK LOANS
TERM LOANS
CP

FIXED ASSETS W.C. FINANCE

MARGIN FOR W.C.
 Driving forces
Growing imbalance between savings and
investment with in the countries.
 Massive surpluses of OPEC countries had
to be cycled in to oil importing countries.
Trade deficit funded by other countries. US
trade deficit funded by surpluses of Japan/
China.
Need for diversification for investors - risk
management and returns
 FOREIGN CURRENCY LOANS

LENDERS IN LENDERS IN
INDIA OVERSEAS MARKET

CORPORATES
FINANCIAL INTERMEDIARIES
 FUNDING OPTIONS
for INDIAN CORPORATES
 DEBT EQUITY

 COMMERCIAL BANK LOANS ADRs

 BUYERS’ CREDIT GDRs
 SUPPLIERS’ CREDIT
 FLOATING RATE NOTES (FRNs)
 FIXED RATE BONDS
 EXPORT CREDIT AGENCIES
 COMMERCIAL BORROWINGS FROM
 MULTILATERAL FINANCIAL
 INSTITUTIONS (IFC/ADB/CDC etc.)
 What are ECBs
ECBs or External Commercial Borrowings refer
to funds (debt) raised by Indian companies
abroad in foreign currency.

What does the gamut of ECB encompass?

Securitised
Commercial
instruments such Credit from
bank loans,
as floating rate official export
buyers’ credit,
notes and fixed credit agencies
suppliers’ credit
rate bonds

Commercial borrowings from the private

Foreign
sector lending arms of multilateral
currency
financial institutions—for instance, the
convertible
International Finance Corporation and
bonds
the Asian Development Bank.
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 Supplier’s credit
 Supplier credit is a credit facility arranged
at the instance of the supplier to enable the
buyer to procure the goods on credit terms.
 Supplier’s credit represents credit sales by
supplier on the basis of accepted bills or
promissory notes.
 Exporters ( overseas sellers) supply goods
to Indian buyers on deferred payment terms
on long term or short term basis.
 Short term – E.g. LC with a usance of 6
months.
 Long term – deferred terms spread over
number of years. E.g. Airbus Industry sells
air craft to Air India on defered terms basis.
 Supplier’s credit
Extent of credit – 100%
Interest – LIBOR related
Security – LC/BG
Trade credit – less than3 years to be
approved Ads for amount UP to
US $ 20 M per import transaction.
* For non capital goods , it is one year.
 Buyers credit
 ECA (Export Credit Agency) in overseas
market offer credit to Indian importers .
 On supply of goods to importer, ECA
disburses, supplier gets the proceeds.
 Encourages exports for the country.
 EXIM bank extends such loans to
importers from African and south American
countries to encourage exports from India.
 Buyers credit – US EXIM bank
 Eligibility – international buyers purchasing
US capital equipment and services.
Normally, military or defense items are not
eligible.
 Country limitation- not available for some
countries
 Goods eligible to meet foreign
contentment requirement( US content @
50%) and to be shipped from US.
 Buyers credit – US EXIM bank
 Size – no minimum or maximum amount.
Desirable size $10 mn.
 Coverage – 85% of value or 100% of US
content.
 Cash payment – buyer to make cash payment of
15% of value to exporter.
 Repayment terms –determined by numerous
terms. Generally in excess of 7 years.
 Buyers credit – US EXIM bank
 Application –
 Final commitment – if contract has been
awarded, buyer to submit final commit
application.
 Letter of interest – if contract not awarded,
exporter and buyer can ask for LI containing
bank’s terms for specific transaction.
 Preliminary commitment – PC is non binding
expression of interest .Bank will accept
application from buyer.
 Buyers credit – US EXIM bank
Loan Guarantee
 Guanteeeing term financing to credit worthy
international buyers, both private and public sector
when terms from Bank are not attractive.
 For purchase of US goods and services.
 Enables international buyers to obtain loans from
lenders and covers 100% of commercial and political
risk
 No limit on transaction size.
 Available for medium and long term financing.
 Cash payment – 15%
External commercial
BorrwoingsBrief
 India Inc has widened its reach well beyond
the country’s borders.
 The government has permitted domestic
companies to raise funds from foreign
financial institutions

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 Why are ECBs closely monitored?
Any borrowing by a company from outside the country results in the
flow of foreign currency into India. If this inflow is left unchecked, these
external funds bring in inflationary pressures on the economy.

The availability of cheap credit abroad (due to interest rate differences

between domestic and foreign borrowings) encouraged many
companies big and small, to take the ECB route for funding their
projects.

Small and mid-sized companies, with not-so-impressive balance

sheets, were found taking the FCCB route to borrowings, along the top-
tier companies, leading to a sharp expansion in overseas liabilities for
Corporate India.

The ECB policy is monitored and updated by RBI on a regular

basis, according to the macroeconomic conditions and foreign exchange
liquidity situation
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Accessing ECB – Two Major routes

• Eligible Borrowers
AUTOMATIC
ROUTE • Recognized Lenders

• Amount and Maturity

• All In cost Ceilings

APPROVAL
ROUTE • End Use

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The Automatic Route – A snapshot
ELIGIBLE BORROWERS RECOGNISED LENDERS
•Corporate registered under the •Internationally recognised sources
Companies Act except financial such as, international banks,
intermediaries are eligible. multilateral financial institutions
example: IFC, ADB, CDC etc.\
•NGOs engaged in micro finance •Foreign equity holder as recognized
activities are also eligible to avail ECB lender – Requirements
subject to certain conditions. •Debt Equity Requirements : 4:1

AMOUNT AND MATURITY

•ECB up to USD 500 million per borrower per financial year would be permitted for
Rupee expenditure and / or foreign currency expenditure.
•ECB up to USD 20 million or equivalent can be availed with minimum average
maturity of three years.
•ECB above USD 20 million and up to USD 500 million or equivalent with minimum
average maturity of five years.
•ECB up to USD 20 million can have call/put option provided the minimum average
maturity of 3 years is complied before exercising call/put option .

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Permissible Investments – Automatic
Route : End Use
ECB can be raised only for permissible end use only. ECB proceeds can
also be utilized for overseas direct investment in Joint Ventures (JV)/Wholly
Owned Subsidiaries (WOS) and investment such as import of capital goods.

ECB proceeds is not permitted for on-lending or investment in capital

market or acquiring a company in India by a corporate and also in real
estate and intercorporate lending

End-uses of ECB for working capital, general corporate purpose and

repayment of existing Rupee loans are also not permitted

ECB proceeds should be parked overseas until actual requirement in

India.
USD 5 million Scheme: All Corporates and Institutions are permitted to raise
ECB up to USD 5 million equivalent at a minimum simple maturity of 3 years.
Borrowers may utilise the proceeds under this window for general corporate
objectives without any end-use use restrictions excluding investments in stock
markets or in real estate.
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The Approval Route – A snapshot
ELIGIBLE BORROWERS
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.

Cases falling outside the purview of the automatic route limits and
maturity period

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.

Multi-state Co-operative Societies engaged in manufacturing activities

subject to conditions regarding solvency and disclosures
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Concept of ‘All in Cost Ceilings’ in both the
routes
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
All in Cost in respect of both the routes
All-in-Cost ceilings over 6
Average Maturity Period
Months LIBOR
Existing Revised
 

Three years and up to

five years 200 bps 300 bps

More than five years and

up to seven years 350 bps 500 bps

More than seven years

450 bps
The requirement of minimum average maturity period of seven years for ECB more than USD 100
million for Rupee capital expenditure by the borrowers in the infrastructure sector has been
dispensed with.
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 Cost Benefit Analysis
ADVANTAGES DISADVANTAGES

Interest rate differential Hedging Foreign Exchange risk

involves expenditure
ECBs provide foreign currency
funds to the corporate sector that are Fluctuation in Foreign Exchange
rates
necessary for import of capital goods
Government policy changes
etc Global conditions

ECBs carry fewer covenants as

compared to the debt raised from
Financial Institutions / Banks in India
Regulatory arbitrage
Larger amount and longer tenor
Global visibility
Encourages ODI. E.g. TATA –
CORUS. Loan $ 8bn
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 Why Thumbs up from the market
While one reason for this is that Indian companies have realised that the market for goods and
services has become global, the other reason is that they now have the resources to spread their
wings far and wide.

The willingness to invest in India’s growth story has opened up an entirely new source of growth
for India Inc — foreign capital. Earlier, even the idea of Tata Steel acquiring Anglo-Dutch steel
maker Corus for $12 billion and raising an estimated $8 billion from foreign sources was
unthinkable.

A few years ago, the interest rate charged by a domestic bank for a loan for an infrastructure
project was more than 10%, while the Libor (London Inter Bank Offer Rate) was at 4%. Hence, a
number of projects became financially viable due to the savings in terms of interest cost.

Out of the $15 billion raised by ET500 companies, more than $8 billion was utilised for import of
capital goods. This shows that companies which import machinery often use the ECB route to
raise money, as it is much cheaper.

In March 2008, Tata Chemicals completed the acquisition of US-based soda ash maker General
Chemicals. Of the $850 million it arranged for funding this acquisition, $500 million was via the
ECB route. This ECB funding was at Libor + 4.25%, including the charge for covering foreign
exchange risk. Hence, the entire interest cost of the acquisition turned out to be less than 7.5%,
compared to the prime lending rate of 11-12% offered by most domestic banks at that time.

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 Borrowing Trends

Borrowings Statistics

Sectoral – Company Analysis

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FCCB’s

A FCCB i.e. Foreign currency convertible bond is a quasi debt instrument

that is issued in currency other than that of an issuer’s domestic currency.
It resembles like a Zero Coupon bond which means that it has to be
redeemed at a premium. There is also a embedded option to convert the
bond in to Equity or as per the agreements made by the Issuer Company.

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 Pros and Cons
Advantages:
 Eased Norms for FCCB’s.
 Premature Redemption and Conversion.
 Zero Coupon. (results in better cash flows)

 Disadvantages:
 Currency Movements.
 Income may not be in Foreign currency for natural Hedge.
 Conversion price can be revised.
 Extra Debt burden in future.
For E.g.: Subex Ltd. Is requires around 720 Cr. to meet its FCCB
redemption commitment. But the stock price is down 90% from the
conversion price and mkt cap is around 120 Cr. Moreover the company
has posted losses for the last two quarters which means that the cash
flows are not enough to cover FCCB redm. burden.

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 Have ECBs lost their sheen ??
Bankers globally have adopted a far more cautious approach to lending.

The cost of funds has risen globally as more and more financial institutions are grappling
with losses and write-offs

Lenders have explored the possibility of invoking terms in the loan agreement - “market
disruption event” clause

A Market disruption event would allow the lender to calculate the rate of interest for a
specific loan that represents its actual cost of funds.

The challenge for India lies in the regulator—RBI—ensuring that the ECB policy remains
proactive and reflects the economic reality.

Plagued by demand slowdown in exports and domestic usage – dip in project expansion
and modernisation activities . With the rupee on a roll, external commercial borrowings
seemed like a ‘win-win

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 Contd…
Companies hold on to Cash – Fewer Mergers and acquisitions coupled with limited foreign
borrowings. Putting pressure on the ratios of the acquiring companies – TATA Steel, TATA
Motors, SUZLON – RE Power. Tata Steel, with massive borrowings against its purchase of
Corus Steel, has now ordered a slowdown in output.

The net profit of the corporate sector was under strain due to provision for MTM losses on
foreign currency loans.

Tata Motors, India's biggest auto maker by sales, said it is accepting fixed-term deposits for
the first time in 13 years, as it seeks to refinance debt it took on to buy Ford Motor Co.'s Jaguar
and Land Rover brands this year.

In 2006-07, bank credit to industry was Rs1,41,543 crore. External commercial borrowings
were Rs88,472 crore.

They may have to depend on domestic banks and their own balance sheets to fund their
growth this year.

The “homecoming” of these heavy weights could squeeze out the smaller fellows.

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 Second Stimulus package : Recent
changes in ECB Policies
All in Cost Ceilings:

Limit of all-in cost raised to 300 basis points over the six-month London interbank offered rate
or Libor, an international benchmark rate, from 200 basis points, for three- to five-year ECBs.

For more than five-year overseas loans, the limit has been raised to 500 basis points over six-
month Libor.

Infrastructure:
The government included mining, exploration and refinery sectors under the ambit of
infrastructure so that they can access overseas borrowings more liberally up to $500 million
into India for rupee capital expenditure.

RBI has also removed the seven-year minimum average maturity requirement for ECBs of
more than $100 million by infrastructure companies.
Telecom:

RBI also allowed ECBs for making payments for 3G spectrum licences, a move that will help
telecom companies.

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 Second Stimulus package : Recent
changes in ECB Policies
Service Sector
At present, hotels, hospitals and software companies are allowed to avail ECB up to $100
million per financial year for importing capital goods under the approval route. Now this
amount can be raised under automatic route for both dollar and rupee expenditure.
NBFC & Housing

Non-banking finance companies (NBFCs) exclusively involved in infrastructure financing can

avail of ECBs from multilateral or regional financial institutions and government-owned
development financial institutions for on-lending to infra sector under approval route.

To facilitate access to funds for the housing sector, the ‘development of integrated
townships’ would be permitted as an eligible end-use of the ECB, under the approval route
of RBI

A suggestion has been floated that Indian banks and RBI set up a fund to lend to
borrowers who have to prepay or repay existing ECBs.

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Company
LOGO