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7/29/2019 E C B presntation

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External Commercial Borrowings

andTrade Credits

Abhijit [email protected]

Vinod Kothari & Company

Practicing Company Secretaries

Kolkata Office Mumbai Office

1012, Krishna 222, Ashoka Shopping Centre

224, AJC Bose Road 2nd, Floor, LT Road

Kolkata 700 017 Near GT Hospital

Ph: 2281 7715 Mumbai 400 001
mailto:[email protected]:[email protected]


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External CommercialBorrowings (ECB)

Foreign CurrencyConvertible Bonds (FCCBs)

Preference shares (i.e. non-convertible, optionallyconvertible or partially

convertible)

Foreign CurrencyExchangeable Bond (FCEB)

At present, Indiancompanies can accessfunds from abroad in

these ways-


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External Commercial Borrowings (ECB) refer to commercial loans in the form of:

.bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes andfixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares)

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

Includes:

optionally convertible debentures,non convertible bonds, FCCBs,FCEBs, securitized instruments,

financial leases

Excludes:

trade credit supplier and buyerscredit, as per discussion in further slides

compulsorily convertible debentures,compulsorily convertible preferenceshares, equity investments

ECBswitha minimummaturity of

3 years


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ECBs can beaccessed under

two routes

AutomaticRoute

ApprovalRoute


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Eligibility criteria for accessing international financial markets- Eligible borrower

Eligible lender

Total quantum limit of funds that can be raised through ECBs. Maturity period and the cost involved. All-in-cost ceilings End uses of the funds raised. Guarantees Securities Parking of ECB proceeds

Prepayment options Refinancing of an existing ECB Debt Servicing Procedure


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Automatic route

Indian Companies including those in hotel,hospital, software sectors and infrastructureFinance companies except financialintermediaries (such as Banks, FinancialInstitutions (FIs), Housing Finance companies

and NBFCs); NGOs and Micro Finance Institutions (MFIs)engaged in micro finance activities are eligible toavail ECB;

Units in Special Economic Zones (SEZ) areallowed to borrow funds through ECBs for theirown requirements. they cannot transfer or on-lend ECB funds to sister concerns or any unit inthe Domestic Tariff Area.

(Individuals, Trusts and Non-Profit makingorganisations are not eligible to raise ECBs)

Approval route

Banks and Financial Institutions whichparticipated in the textile or steel sectorrestructuring package

ECBs with minimum average maturity of 5 yearsby NBFCs to finance import of infrastructure

equipment for leasing to infrastructure projects. NBFCs, categorized as Infrastructure Finance

Companies (IFCs) , by the RBI, including theoutstanding ECBs, beyond 50 per cent of theirowned funds, for on-lending to the infrastructuresector, satisfying the prescribed criteria;

FCCBs by housing finance companies satisfyingthe prescribed criteria

SPVs or any other entity notified by RBI, set up to

finance infrastructure companies / projects. Multi-State Co-operative Societies engaged in

manufacturing activities. SEZ developers for providing infrastructure

facilities within SEZ. Corporates in the service sector Corporates engaged in industrial & infrastructure

sector


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Internationally recognized sources(international banks, capitalmarkets, multilateral financialInstitutions, export credit agencies,equipment suppliers, foreigncollaborators) foreign equity holders(other than erstwhile OCBs) if:

- ECB up to USD 5 M minimum equity of25% directly held by lenders;

- ECB above USD 5 M minimum equityof 25% and debt-equity ratio not exceeding4:1

Automaticroute

Internationally recognized sources(international banks, capitalmarkets, multilateral financialInstitutions, export credit agencies,equipment suppliers, foreigncollaborators), foreign equity holders (other than erstwhile OCBs)if:

- such 'foreign equity holder' directly holdsminimum 25 % of the paid up equitycapital of the borrowing company.

- In such cases the debt-equity ratio mayexceed 4:1, if the RBI permits.

Approvalroute


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Eligible Borrowers Amount Permitted

Corporates other than those in the hotel, hospitaland software sectors

ECB upto MUSD 750 or equivalent during a FY

Corporates in the services sector viz. hotels,hospitals and software sector

ECB up to MUSD 200 or equivalent in a FY.*The proceeds of ECBs should not be used for landacquisition.

NGOs engaged in micro finance activities and MFIs ECB up to MUSD 10 or equivalent during a FY.

Amount Maturity

ECB up to MUSD 20 or equivalent 3 years

ECB above MUSD 20 and up to MUSD 750 orequivalent

5 years

Max amount of ECB by eligible borrower MUSD 750 during a FY

ECB up to MUSD 20 can have call/ put option If the minimum maturity of 3 years is compliedbefore exercising call/ put option

Eligible borrower Amount

Eligible borrowers under the automatic route otherthan corporates in the services sector viz. hotel,hospital and software

ECB beyond MUSD 750 or equivalent per FY.

Corporates in the services sector viz. hotels,

hospitals and software sector

ECB beyond MUSD 200 or equivalent in a FY.

Indian companies which are in the infrastructure ECBs in Renminbi, subject to an annual cap of USD

Automatic route

Approval route


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AUTOMATIC ROUTE APPROVAL ROUTE

All-in-cost includes rate of interest, other feesand expenses in foreign currency exceptcommitment fee, pre-payment fee, and feespayable in Indian Rupees.

The payment of withholding tax in IndianRupees is excluded for calculating the all-in-cost.

In the case of fixed rate loans, the swap costplus the margin should be the equivalent ofthe floating rate plus the applicable margin.

ECB beyond the permissible all-incost ceilingcan be availed of under the Approval Route.(to be reviewed after March 31, 2012)

AverageMaturity Period

All-in-costCeilings over 6month LIBOR*

3 years and upto 5years

350 basis points

More than 5 years 500 basis points

*for the respective currency of borrowing or

applicable benchmark

*The above ceilings are applicable upto March 31,2012 and are subject to review thereafter.


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AutomaticR

oute

Import of capital goods for new projects,modernization/expansion of existing productionunits in real sector - industrial sector includingSME, infrastructure sector and specified servicesectors.

Overseas Direct Investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS)

First stage acquisition of shares in the disinvestmentprocess and also in the mandatory second stage offerto the public under the Governments disinvestmentprogramme of PSU shares.

Investment in infrastructure sector Payment for Spectrum Allocation. For lending to self-help groups or for micro-credit or

for bonafide micro finance activity includingcapacity building by NGOs engaged in micro finance

activities. NBFCs categorized as IFCs by the RBI, arepermitted to avail of ECBs, including theoutstanding ECBs, up to 50 per cent of their ownedfunds, for on-lending to the infrastructure sector.

Approvalroute

In addition, the ECBproceeds can also be utilisedfor the following purposes

with the prior approval ofRBI

Implementation of new projectsand modernization/ expansion ofexisting production units by thecompanies engaged in theindustrial sector including SME.

Import of capital goods by servicesector companies

First stage acquisition of shares

of PSUs in the disinvestmentprocess by Government and alsoin the mandatory second stageoffer to the public.

Refinancing of an existing ECBsubject to certain conditions.


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For on-lending or investmentin capital market or acquiringa company (or a part thereof)in India by a corporate;

Real estate sector; Working capital, general

corporate purpose andrepayment of existing Rupeeloans.

Automaticroute

Same However, the eligible Financial

Institutions and Banks canutilise the ECB proceeds foracquisition of companies inIndia, subject to the approvalof RBI.

Approvalroute


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Issuance of guarantees, standby letter of credit, letter ofundertaking or letter of comfort by banks, Financial Institutions

and NBFCs from India relating to ECB is not permitted.

Applications in the case of SME will be considered on meritsubject to prudential norms.

Issuance of guarantees, standby letters of credit, letters of undertakingand letters of comfort by banks in respect of ECB by textile companies

for modernization or expansion of textile units will be consideredunder the Approval Route subject to prudential norms.


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S

ecurity

-- Security to be provided to the lender/supplier is left to theborrower.

-- Creation of charge over immoveable assets and financialsecurities, such as shares, in favour of the overseas lender issubject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of NotificationNo. FEMA 20/RB-2000 dated May 3, 2000, as amendedfrom time to time.

-- Powers to convey no objection under the ForeignExchange Management Act (FEMA), 1999 for creation ofcharge on immovable assets, financial securities and issue ofcorporate or personal guarantees in favour of overseas

lender / security trustee, to secure the ECB to be raised bythe borrower has been delegated to AD Category - I banks .

-- On compliance with the specified conditions, AD CategoryI banks may convey their no objection.


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Borrowers are permitted to either keep ECB proceeds abroad or to remit thesefunds to India, pending utilization for permissible end-uses

ECB proceeds meant only for foreign currency expenditure can be retainedabroad pending utilization

The rupee funds, will not be permitted to be used for investment in capitalmarkets, real estate or for inter-corporate lending

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 thanAA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys

(b) Treasury bills and other monetary instruments of one year maturity having minimumrating as indicated above, and

(c) deposits with overseas branches /subsidiaries of Indian banks abroad. The fundsshould be invested in such a way that the investments can be liquidated as and when fundsare required by the borrower in India.


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The existing ECBmay be refinancedby raising a freshECB subject to thecondition that thefresh ECB is raisedat a lower all-in-costand the outstandingmaturity of theoriginal ECB ismaintained.

Automatic

routePre-payment of ECBfor amountsexceeding USD 500million would beconsidered by theReserve Bank underthe Approval Route.

Approval

route


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Existing ECB may be refinanced

by raising a fresh ECB subject tothe condition that the fresh ECBis raised at a lower all-in-cost

and the outstanding maturity ofthe original ECB is maintained


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Automatic Route Approval Route

1. Borrowerenters into a

loanagreement

withRecognised

lender

2. LRNobtained by

Borrowerfrom the

RBI

3. Borrowercan then

draw ECB

Applicant

submit anapplication to the

Chief GeneralManager-in-

Charge, ForeignExchange

Department,RBI, along with

necessary

documents forapproval


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Foreign Currency Exchangeable Bond (FCEB) means :

a bond expressed in foreign currency

the principal and interest in respect of which is

payable in foreign currency,issued by an Issuing Company and subscribed to by

a person resident outside India,

in foreign currency and exchangeable into equity shareof the Offered Company,

either wholly, or partly or on the basis of any equity relatedwarrants attached to debt instruments.

The FCEB may be denominated in any freely convertible foreigncurrency


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Eligible issuer

The Issuing Company

shall be part of thepromoter group of theOffered Company andshall hold the equityshare/s being offered at

the time of issuance ofFCEB

Entities not eligible toissue FCEB

An Indian company,

which is not eligible toraise funds from theIndian securities market,or a company which has

been restrained from

accessing the securitiesmarket by the SEBI shallnot be eligible to issueFCEB


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a listed company, whichis engaged in a sectoreligible to receive ForeignDirect Investment and

eligible to issue or avail ofForeign Currency Convertible Bond (FCCB)or ECB

Who shall bethe offeredCompany


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Entities complying with theForeign Direct Investmentpolicy and adhering to thesectoral caps at the time ofissue of FCEB can subscribe to

FCEB. Prior approval of the FIPB,wherever required under theForeign Direct Investmentpolicy, should be obtained

Eligible subscriber

Entities prohibited to buy, sellor deal in securities by theSEBI will not be eligible tosubscribe to FCEB

Entities noteligible tosubscribe to FCEB


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End-use permitted

Issuing Company: (i) The proceeds of FCEB may be investedby the issuing company overseas by wayof direct investment including in Joint

Ventures or Wholly Owned Subsidiariesabroad, subject to the existing guidelineson overseas investment in Joint Ventures/ Wholly Owned Subsidiaries.

(ii) The proceeds of FCEB may beinvested by the issuing company in thepromoter group companies.

Promoter Group Companies:Promoter group companies receivinginvestments out of the FCEB proceedsmay utilize the amount in accordance

with end-uses prescribed under the ECBpolicy.

End-uses not permitted:

The promoter group company receivingsuch investments will not be permitted toutilise the proceeds for investments inthe capital market or in real estate inIndia.


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All-in-costceiling The rate of interest

payable on FCEB and the

issue expenses incurredin foreign currency shallbe within the all-in-cost

ceiling as specified byReserve Bank under theECB policy


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At the time of issuance of FCEB the exchangeprice of the offered listed equity shares shall not

be less than the higher of the following two:

(i) The average of the weekly high and low of the closingprices of the shares of the offered company quoted on thestock exchange during the 6 months preceding therelevant date; and

(ii) The average of the weekly high and low of the closingprices of the shares of the offered company quoted on astock exchange during the 2 week preceding the relevantdate.


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-Minimum maturity of FCEB 5 years

-The exchange option can be exercised at any timebefore redemption;

-While exercising the exchange option, the holder ofthe FCEB shall take delivery of the offered shares;

-Cash (Net) settlement of FCEB is not permissible


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Parking of FCEB proceeds abroad

The proceeds of FCEB may be retained and / or deployedoverseas by the issuing / promoter group companies or

repatriated to India for credit to the borrowers Rupeeaccounts in India pending utilization for permissible end-uses;

The issuing company shall ensure that the proceeds of FCEBare used by the promoter group company only for thepermitted end-uses prescribed under the ECB policy;

The issuing company should submit audit trail of the end-useof the proceeds by the issuing company / promoter groupcompanies to the RBI duly certified by the designated ADbank.


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Trade Credits (TC) refer to:

credits extended for imports directly by the overseas supplier, bankand financial institution for maturity of less than three years.

Depending on the source of finance, such trade creditsinclude suppliers credit orbuyers credit:

Suppliers credit relates to credit for imports into India extendedby the overseas supplier,

Buyers credit refers to loans for payment of imports into Indiaarranged by the importer from a bank or financial institutionoutside India for maturity of less than three years.

Buyers credit and Suppliers credit for 3 years and above comeunder the category of External Commercial Borrowings which aregoverned by ECB guidelines.


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No roll-over/extension is permitted beyond the permissible period. AD banks shall not approve trade credit exceeding MUSD 20 per import

transaction.

AMOUNT MATURITY

Trade Credits for importsinto India up to MUSD 20

per import transaction

up to 1 year

Trade Credits for import ofcapital goods upto MUSD20

More than 1 year and lessthan 3 years


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All-in-cost Ceilings:Maturity period All-in-cost ceilings over

6 months LIBOR*

Up to one year 350 basis points

More than one year but lessthan three years

The all-in-cost ceilings include arranger fee, upfront fee,

management fee, handling/ processing charges, out of pocket andlegal expenses, if any.The existing all-in-cost ceiling is applicable upto March 31, 2012 andis subject to review thereafter.


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Guaranteefor

Tra

deCredits

-- AD banks can issue Letters of Credit/guarantees/Letterof Undertaking (LoU) /Letter of Comfort (LoC) in favour ofoverseas supplier, bank and financial institution, up toMUSD 20 per transaction

Eligibility criteria Maturity

For import of all non-capitalgoods permissible underForeign Trade Policy

Upto 1 year

For import of capital goods,subject to prudential guidelinesissued by RBI from time totime

Upto 3 years

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