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All You Need to Know about External Commercial Borrowing - BizAdvisors

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All You Need to Know about External Commercial Borrowing

All You Need to Know about External Commercial Borrowing

India is known for being a developing country. This was possible by promoting the inward flow of foreign capital. This was done through Foreign Direct Investment, Foreign Portfolio Investment, and External Commercial Borrowing. It is an instrument that provides loans to Indian businessmen. This loan is provided by a non-resident foreign currency lender to an Indian borrower. This is used by many Indian companies that have taken Private Limited Company Registration or Public Limited Company Registration.  This helps them to access foreign currencies easily. The loan is provided in the form of commercial credit, i.e. bank loans, buyer credits, supplier credits, securitized products, etc.  The maturity period of the loans starts at an average of 3 years. Its guidelines and policies are monitored and regulated by the DEA (Department of Economic Affairs) under the Ministry of Finance, Government of India along with the Reserve Bank of India (RBI). 

Benefits of External Commercial Borrowing-

The benefits of external commercial borrowings are as follows:

The abundant and diverse investor base

The international platform provides the Indian entities with a variety of choices and gives access to diverse investors as required by them. 

Lower interest rates

Due to a variety of investor vases, the entities can get credit at lower interest rates which would have been possible within the country. 

Debt-oriented funds

ECB is not equity-oriented because it cannot dilute the ownership of the members. As a result, it will not give voting powers to the lender and the lender cannot take control of the company’s existing stakeholders.

Meeting larger requirements

Entities have to meet their requirements and this is only possible only with the help of proper and adequate money. As a result, they have to rely on local banks and the government to procure sufficient amounts. With the coming of the ECB, the scope for borrowing has expanded; it helps the entities to meet their larger requirements which might not have been possible within the local limits.

Boosts economy

The government will regulate the flow of funds towards a particular sector of the economy that requires help and this will boost the economy as a whole.

Types of External Commercial Borrowings- 

ECBs are broadly classified into the following types:

Foreign Currency denominated External Commercial Borrowing (FCY denominated ECB) – 

This type of ECB is raised in any freely convertible foreign currency. It includes 

  • Foreign Currency Convertible Bonds (FCCBs), 
  • Foreign Currency Exchangeable Bond (FCEB), 
  • Loans including bank loans, 
  • Trade credits beyond three years, 
  • Financial lease.

Rupee denominated External Commercial Borrowing (INR denominated) – 

This type of ECB is raised in Indian Rupee. It includes 

  • Trade credits beyond three years, 
  • Loans including bank loans
  • Rupee denominated bonds issued overseas.

Available Routes for Raising External Commercial Borrowings-

ECB aids Indian entities or companies to raise funds in foreign currencies from outside India. For the purposes of raising External Commercial Borrowing, there are two routes to avail of this and they are as follows:

Automatic route: 

The cases under this route are examined by the Authorised Dealer from Category-I. Authorized Dealers are those selected banks that are authorized to carry out all current and capital account transactions permitted or directed from time to time.

  • Eligible borrowers under Automatic route- 
  1. Corporates (registered under the Companies Act)
  2. Units in Special Economic Zones (SEZ)

  • Borrowers can raise ECB from the following lenders under the Automatic route- 
  1. international banks, 
  2. international capital markets, 
  3. multilateral financial institutions 
  4. export credit agencies, 
  5. suppliers of equipment,
  6. foreign collaborators and 
  7. foreign equity holders 

  • Procedure-

The borrower may enter into a loan agreement with a lender authorized by the ECB to be included in the automated route in accordance with the ECB guidelines. This would not require the prior approval of the RBI[1]. The borrower must obtain a loan registration number (LRN) from the Reserve Bank of India before using the ECB. 

Approval Route: 

Under the approval route, the borrowers are required to send their requests to the RBI through their Authorised Dealers for the purposes of examination.

  • Eligible borrowers under the Approval Route
  1. Financial institutions (infrastructure or export finance)
  2. Banks and financial institutions which is involved in the textile or steel sector
  3. Foreign Currency Convertible Bonds (FCCBs) by housing finance companies
  4. Special Purpose Vehicles or any other entity (finances infrastructure companies/projects)
  5. Multi-State Co-operate Societies ( manufacturing activity)
  6. Corporates engaged in the industrial sector and infrastructure sector.
  7. Non-Government Organisations (NGOs) ( micro finance activities)
  8. Corporate in the services sector
  9. Cases that don’t come under automatic route limits and maturity period 

  • Recognised Lenders under the Approval Route 

(a)   Internationally recognized sources such as 

                         i.          international banks, 

                       ii.          international capital markets, 

                     iii.          multilateral financial institutions 

                      iv.          export credit agencies, 

                       v.          suppliers’ of equipment, 

                      vi.          foreign collaborators and 

                    vii.          foreign equity holders 

(b)   Foreign equity holder 

(c)    Overseas organizations and individuals engaged in microfinance activities.

  • Procedure- 

Applicants must submit an ECB form application to the Chief General Manager-in-charge of the Foreign Exchange Department which is under the Reserve Bank of India. The applicant has to send this application along with the necessary documents to the ECB division in Mumbai.

Conclusion-

External Commercial Borrowing is one of the primary means through which investments are bought in India. India’s GDP increased with the help of ECBs. ECBs are one of the new sources of funding to bring foreign capital to India. New RBI directions have resulted in the standards being significantly relaxed. This makes it easier to do business in India. This helps in providing automatic routes with more qualified borrowers and lenders, easier classification of the ECB, normalization of delays from filing, etc. for better economic stability. This will result in the development of resident entities to support the economy as a whole.

Read our article:A Complete Guide on Foreign Direct Investment Compliance under FEMA

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