External Commercial Borrowing

External Commercial Borrowings (ECBs) play a significant role in any developing

economy since its domestic funds are usually unable to meet growing demand, more
so when the cost of domestic borrowing is higher than that of international funding.
Raising ECBs by Indian residents directly adds to Indias external debt and foreign
exchange exposure and therefore, the same is highly regulated by the RBI. Mismatch
of tenure and usage of ECBs can be disastrous for the economy as was evident from
the South East Currency Crisis. Therefore, many restrictions are placed by RBI to
ensure that short-term borrowings are not used for long-term use and vice versa.
Policy guidelines pertaining to ECBs have been revised from time to time. Recently,
on August 1, 2005 new guidelines for ECBs have been announced. In this part, we
shall discuss the provisions related to raising of External Commercial Borrowings
under the automatic route of Reserve Bank of India.
External Commercial Borrowings (ECBs) are a key component of Indias overall
external debt which includes, inter alia, external assistance, buyers credit, suppliers
credit, NRI deposits, short-term credit and Rupee debt. ECB guidelines, need to be
assessed in the backdrop of various external debt sustainability indicators relevant to
emerging economic needs.
2. Meaning
External Commercial Borrowings (ECBs) are defined to include commercial bank
loans, buyers credit, suppliers credit, securitised instruments such as floating rate
notes and fixed rate bonds etc., credit from official export, credit agencies and
commercial borrowing from the private sector window of Multilateral Financial
Institutions such as International Finance Corporation (Washington), ADB, IFC, CDC
etc.
Even loans from Foreign Equity Holders are considered as ECBs.
Thus ECBs mean foreign currency loan raised by residents from recognised lenders.
Financial leases and Foreign Currency Convertible Bonds are also covered by ECB
guidelines.
3. ECB Guidelines Historical prospective
ECBs, were governed by the Ministry of Finance. Government had issued
consolidated guidelines on policies and procedures for ECBs in July, 1999. The said
guidelines were amended from time to time. The Central Government had last
revised these guidelines on 19th January, 2004. However, subsequently RBI had
issued comprehensive Circular No. 60 dated 31st January, 2004, contents of which
later on were incorporated by way of amendments to the original Notification No.
3/2002-RB vide Notification No. 126/2004-RB, dated 13th December, 2004.
From 1st February, 2004 major restrictions were imposed on raising ECBs, by Indian
borrowers, such as ban on end use of ECB for working capital, general corporate

purpose, cap of US$ 500 million per financial year under the Automatic Route etc.
Submission of ECB-2 return to RBI on a monthly basis duly certified by the
designated Authorised Dealer as well as a Chartered Accountant was made
mandatory with effect from 1st February, 2004. On April, 2005, RBI permitted NGOs
engaged in micro-finance activities to raise ECB under automatic route vide its
Circular No. 40. The revised guidelines issued by the Government of India on 19th
January, 2004 and the original comprehensive guidelines of 1999-2000 have
practically become redundant in the light of these developments.
RBI has further amended its earlier ECB guidelines vide Circular No. 5, dated August
1, 2005. Notification making amendments based on these guidelines is still awaited.
ECB guidelines can be divided in three broad periods. Prior to 1st February, 2004,
when there were less restrictions on raising ECB and the same was allowed for
general corporate purpose including working capital requirements of companies.
From 1st February, 2004 to 31st July, 2005, ECBs were governed by RBI guidelines
covered by the A.P. (DIR Series) Circular No. 60, dated 31st January, 2004, which
prohibited raising of ECB for general corporate purposes/working capital and imposed
several other restrictions and reporting requirements. New ECB guidelines are
announced by RBI effective from August 1, 2005 which imposes further restrictions
in terms of percentage of shareholding by the leaders, permissible debt equity ratio
and so on.
Provisions of ECB discussed in this Article are based on the latest RBI guidelines on
ECB covered by Circular No. 5, dated 1st August, 2005.
4. Different schemes of ECB
There are three broad schemes or more appropriately, following facilities under
ECB schemes:
i.
ii.
iii.

Trade Credit
Automatic Route
Approval Route

In this part, we will cover the first two schemes; i.e., Trade Credit and Automatic
route only.
4.1 Trade credit for imports into India
Trade Credits (TC) refer to credits extended for imports directly by the overseas
supplier, bank and financial institution for original maturity of less than three years.
Depending on the source of finance, such trade credits include suppliers credit or
buyers credit. Suppliers credit relates to credit for imports in to India extended by
the overseas supplier, while buyers credit refers to loans for payment of imports in
to India arranged by the importer from a bank or financial institution outside India
for maturity of less than three years. It may be noted that buyers credit and
suppliers credit for three years and above come under the category of External
Commercial Borrowings (ECB) which are governed by ECB guidelines.
4.1.1 Amount and maturity

ADs are permitted to approve trade credits for imports into India up to US$ 20
million per import transaction for import of all items (permissible under the Exim
Policy) with a maturity period (from the date of shipment) up to one year. For import
of capital goods, ADs may approve trade credits up to US$ 20 million per import
transaction with a maturity period of more than one year and less than three years.
No roll-over/extension will be permitted by the AD beyond the permissible period.
As hitherto, ADs shall not approve trade credit exceeding US$ 20 million per import
transaction.
4.2.9 Parking of ECB proceeds overseas
ECB proceeds should be parked overseas until actual requirement in India. It is
clarified that 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 than AA(-) by Standard and Poor/Fitch IBCA or AA3 by Moodys;
(b) deposits with overseas branch of an authorised dealer in India; and (c) Treasury
bills and other monetary instruments of one year maturity having minimum rating as
indicated above. The funds should be invested in such a way that the investments
can be liquidated as and when funds are required by the borrower in India.
4.2.10 Prepayment
Prepayment of ECB up to US$ 200 million may be allowed by ADs without prior
approval of RBI subject to compliance with the stipulated minimum average maturity
period as applicable to the loan.
4.2.11 Refinance of existing ECB
Refinancing of existing ECB by raising fresh ECB at lower cost is permitted subject to
the condition that the outstanding maturity of the original loan is maintained.
4.2.12 Debt servicing
The designated Authorised Dealer (AD) has the general permission to make
remittances of instalments of principal, interest and other charges in conformity with
ECB guidelines issued by Government/RBI from time to time.
4.2.13 Procedure
Borrower may enter into loan agreement complying with ECB guidelines with
recognised lender for raising ECB under Automatic Route without prior approval of
RBI. The primary responsibility to ensure that ECB raised/utilised are in conformity
with the ECB guidelines and the Reserve Bank regulations/directions/circulars is that
of the concerned borrower and any contravention of the ECB guidelines will be
viewed seriously and may invite penal action. The designated AD is also required to
ensure that raising/utilisation of ECB is in compliance with ECB guidelines at the time
of certification.
4.2.14 Hedging

In cases where ECBs have been raised for meeting rupee expenditure under
Automatic Route, the Authorised Dealer has to ensure at the time of draw down that
the forex exposure of the borrower is hedged unless there is a natural hedge in the
form of uncovered foreign exchange receivables. [A.P.(DIR Series) Circular No. 23
dated 17th September, 2002]
4.2.15 Drawal of loan
The borrower can draw-down the loan only after obtaining loan registration number
from DESACS, RBI.
4.2.16 Reporting requirements
a. In order to simplify the procedure, submission of copy of loan
agreement is dispensed with.
b. Borrowers are required to submit Form 83, in duplicate, certified by
the Company Secretary (CS) or Chartered Accountant (CA) to the
designated AD. One copy is to be forwarded by the designated AD to
the Director, Balance of Payments Statistics Division, Department of
Statistical Analysis and Computer Services (DESACS), Reserve Bank of
India, Bandra-Kurla Complex, Mumbai 400 051 for allotment of loan
registration number.
c. Borrowers are required to submit ECB-2 Return on monthly basis
certified by the designated AD so as to reach DESACS, RBI within
seven working days from the close of month to which it relates.
d. The loan agreement entered into by the borrower with the overseas
lender shall strictly conform to these Regulations.
In the subsequent part we shall discuss provisions relating to raising ECBs under the
Approval Route of RBI.