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Indian companies have attracted over $30 billion of External Commercial Borrowings in FY 2022-23, tapping global capital markets for ambitious projects. ECBs provide cost-effective funding when Indian borrowing rates soar above international averages.
This article unpacks everything you need to know about External Commercial Borrowings: eligibility, regulation, benefits, and the hurdles involved in helping your business access this financial lifeline.
ECBs refer to commercial borrowings that Indian enterprises raise from overseas lenders through bank loans, buyers' credit, suppliers' credit, or other types of securitized instruments such as floating rate notes and bonds. ECBs are regulated by the RBI as per the FEMA guidelines. They are essential to expansion, undertaking large projects, or refinancing existing debts with an average maturity of more than three years.
ECBs offer businesses access to global capital markets, often at a lower interest rate than their domestic borrowing options. This funding avenue allows Indian companies to engage in large-scale projects without relying too heavily on domestic banks. Industries like infrastructure, manufacturing, and services frequently use ECBs for growth.
The Reserve Bank of India (RBI) has a vital role to play in regulating the inflow of foreign capital so that the interests of India's economy are protected. Through ECBs, it regulates foreign funds and their inflow so that funds are utilized productively while not causing any hindrance to the domestic financial sector in India.
To simplify the process and accommodate the diverse business requirements, RBI has introduced two separate routes for accessing ECBs:
Automatic Route
In this route, eligible entities are allowed to raise ECBs without having to seek prior approval from the RBI. This reduces the complexity of borrowing and, in particular, suits sectors like manufacturing, infrastructure, hotels, hospitals, and software.
Approval Route
High-value external commercial borrowings are always required to be approved by the RBI. These include amounts that surpass prescribed limits, borrowing for restricted purposes, and raising funds through innovative instruments like Foreign Currency Convertible Bonds (FCCBs) or Foreign Currency Exchangeable Bonds (FCEBs). The approval route involves scrutiny, especially in sensitive and non-standard uses.
The RBI determines the eligibility criteria so that only those businesses with a reasonable purpose and capacity can gain access to foreign funds. Some of the eligible borrowing entities are:
However, some entities like trusts, non-profits, and financial intermediaries such as NBFCs, and housing finance companies are not allowed to raise ECBs. The borrower also needs to raise funds from internationally recognized lenders such as international banks, capital markets, export credit agencies, or multilateral financial institutions like ADB or IFC.
ECBs are a flexible source of finance, but their usage is stringently monitored to avoid misuse. According to RBI guidelines, the ECB proceeds can be used for:
The borrower has to register the loan with the RBI by acquiring a Loan Registration Number (LRN) before availing of the funds. They are also allowed to park ECB proceeds abroad in liquid assets until utilization or remit the funds to India for approved rupee expenditures. Strict compliance ensures that ECBs align with India's broader economic strategy while mitigating risks such as foreign exchange exposure.
In enforcing these regulations, the RBI achieves the fine line of encouraging foreign investment while ensuring that India's economic interests are secured, thus making the ECB a sound means of scaling for Indian business.
ECBs can be raised from internationally recognized sources such as:
While ECBs can fund capital goods imports, infrastructure projects, and overseas investments, they cannot be used for:
ECBs provide businesses with access to several financial instruments, each tailored to meet different funding needs and strategic goals. Here are the main ECB instruments available:
1. Foreign Currency Convertible Bonds (FCCBs)
Foreign Currency Convertible Bonds, or FCCBs, are hybrid debt instruments that combine features of bonds and equity. These bonds are issued in foreign currency, and their principal and interest are payable in the same foreign currency. The interesting feature of FCCBs is that they can be converted into equity shares of the issuing company at a pre-determined conversion price and time.
2. Foreign Currency Exchangeable Bonds (FCEBs)
Foreign Currency Exchangeable Bonds (FCEBs) are similar to FCCBs except for one difference: FCEBs are bonds are exchangeable into equity shares of another company other than the issuer. This instrument allows a company to raise capital while giving the bondholder the chance to exchange the bond for equity in another company, usually a part of the issuer's promoter group.
3. Preference Shares
Preference shares are another form of debt under the ECB framework. These are non-convertible or partially convertible shares issued to investors, with a fixed rate of return. Although they represent equity ownership, preference shares are considered debt instruments for the purpose of ECB, as they usually carry a fixed interest rate (dividend) and are considered less risky than common equity.
These ECB instruments are flexible and offer a variety of advantages depending on the company's growth stage, capital needs, and willingness to dilute ownership. With the right instrument, businesses can tailor their external borrowing strategy to support both short-term financing and long-term growth.
In ECBs, businesses need to consider the loan amount, maturity, and the all-in cost cap. All these help it to assess the viability and cost efficiency of borrowing funds from international markets.
The RBI specifies permissible annual limits for the amount the entity can raise through ECB. These are subject to their sector:
This way, the borrowing is balanced with the country's other economic policies and does not allow a particular sector to indulge too much in foreign debt.
The maturity period for ECBs is also restricted so that the business pays back their loans within a reasonable period without putting too much burden on the economy with long-term liabilities.
This structure maintains stability in the finances and gives scope for firms to obtain credit on a need-to-have basis.
The all-in-cost of an ECB includes interest, and other charges or fees along with expenses incurred by a firm but not commitment fee or prepayment fee. RBI fixes these limits to avoid heavy burdening on the part of a business through excessive credit burdens.
The cost ceiling will be ascertained using LIBOR or similar benchmarks as applicable to the currency of loan.
These ceilings ensure that borrowing costs are kept competitive while at the same time protecting businesses from extremely high interest rates.
The RBI, in this way, sets parameters that allow businesses to access global capital markets on fair and sustainable terms, thereby investing in growth and expansion while managing risk effectively.
ECBs provide access to competitive interest rates and enormous fundraising opportunities. Yet, these will require regulatory landscape awareness.
In choosing ECBs, businesses first need to gauge their financial strength and growth prospects to ensure the repayment feasibility of international borrowings. Loan amounts are capped at a percentage by RBI, and end-use is also restricted in some ways. Currency and compliance risks also need to be accounted for.
To maximize the use of ECBs, it's necessary to partner with financial solutions that make the process more streamlined. Karbon Business provides seamless solutions for managing international payments tied to ECBs. Whether it's managing repayments or navigating foreign exchange risks, Karbon's reliable services help you manage and optimize your global financing strategy effectively.
In case of default in repayment by an ECB borrower, the lender may take legal action or seek remedies as per the loan agreement, which may include seizure of assets. In addition, the borrower may face penalties under FEMA regulations, which include fines and restrictions on future foreign borrowing.
Yes, ECBs can be refinanced. A borrower can borrow a new ECB to repay an existing one, but the new loan needs to have the following conditions:
Under specific conditions, refinancing requires RBI sanction for an ECB, especially where the fresh loan has a higher cost of all-in cost and does not meet other prescribed conditions.
There are the following required to raise an ECB:
MAMP is an acronym for Minimum Average Maturity Period. It is a critical parameter the RBI uses for regulating the ECB. MAMP refers to the minimum number of years in which the principal of the loan should be repaid. This would ensure that the ECB cannot be a short-term loan which would exhaust the cash flows of the company. MAMP of most ECBs is kept at 3 years or more.
The term LIBOR and bps (basis points) refers to the interest rate on a loan, where LIBOR (London Interbank Offered Rate) is the benchmark rate, and 350 basis points (bps) is the additional percentage added to LIBOR to determine the total interest rate on the loan.
To break it down:
LIBOR is a widely used reference rate that banks charge each other for short-term loans.
350 basis points (bps) equals 3.5% (since 1 basis point = 0.01%, so 350 bps = 350 × 0.01% = 3.5%).
So, if LIBOR is 2% at a given time, then the total interest rate on the loan would be 2% + 3.5% = 5.5%. This is the rate the borrower would pay on the ECB (External Commercial Borrowing) for a loan with a maturity of 3 to 5 years, based on the all-in-cost ceiling.
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