India has always encouraged capital inflows as a part of the development policy. Deficient domestic capital and reduction in the current account compelled the government historically to go after foreign capital. Foreign capital is money obtained from foreign countries to make investment domestically. The major category is foreign investment including FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment). Likewise, there are other types of foreign capital like trade credit, NRI Deposits and the most important one for India – the External Commercial Borrowings (ECB).
ECB is a loan which is being availed by an Indian entity from a non- resident lender with a minimum average maturity of 3 years. Mostly, these loans are provided by foreign commercial banks and other institutions.
Advantages of ECB
Below are some advantages of ECB:
- ECBs provide opportunity to borrow large volume of funds
- The funds are available for relatively long term
- Interest rate are also lower compared to domestic funds
- ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.
- Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, international capital markets etc.
The RBI (Reserve Bank of India) had indicated in its December 2018 monetary policy meeting that it could consider easing overseas borrowing rules. Below are the latest ECB norms lifting sector- wise limits:
Ease of doing business
In order to improve ease of doing business, central bank lifted sectoral curbs and eased foreign borrowing norms allowing a wider set of end-users to tap overseas markets for loans focusing the below points:
- RBI widened the eligibility for ECBs to include all entities that can receive foreign direct investment.
- The Export-Import Bank and the Small Industries Development Bank of India has been allowed to borrow overseas from recognized lenders.
- The previous four-tier structure has been replaced by two specific channels: dollar- and rupees. The list of eligible borrowers has been expanded. Every entity eligible to receive foreign direct investment can borrow under the ECB framework. Indian rupee-denominated overseas borrowings with similar sets of maturities have been combined into a single rupee- denominated ECBs.
The above new framework will come into effect immediately.
According to RBI, the, minimum average maturity period diminished from 5 years to 3 years for all ECBs, irrespective of the borrowing amount except the borrowers specifically permitting to borrow for a shorter span of time. The ceiling limit for borrowing is still at $750 million or equivalent per financial year under the automatic route replacing the existing sector-wise limits. This resulted in increased lending options and entering more lenders in ECB space while strengthening the framework. RBI had concluded funds raised via ECBs at 6.5% of GDP, at current market prices. Based on GDP, the soft limit goes to $160 billion.
The common negative list of end – use remains unchanged for which ECBs cannot be raised or utilized. An eligible borrower cannot raise ECBs for real-estate activities, capital market investments, equity investments, on-lending to entities, and even working capital or general corporate activities unless the funds are raised specifically by the foreign equity holders of the resident borrower. Unlike many other emerging market economies, India has a vibrant corporate sector at home. Many of them have overseas operations as well.
The above are the recent evolutions in external commercial borrowings. If you would like to know more about requirements of external commercial borrowings and its impact assessment on your company, our team of experts can assist you.
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