About External Commercial Borrowings (ECBs):
- ECBs refer to the borrowing of funds by Indian companies from foreign sourcesin the form of loans, bonds, or other financial instruments.
- Purpose: It can be used to finance a variety of purposes, including the expansion of business, the acquisition of assets, and the repayment of existing debt.
- Source of ECBs: ECBs can be obtained from a variety of sources, including foreign banks, international financial institutions, and foreign subsidiaries of Indian companies.
- ECB can be in the form of rupee-denominated loans, which are repaid in Indian rupees, or foreign currency-denominated loans, which are repaid in a foreign currency.
- Regulation: ECB is subject to regulatory oversight by the RBI, which sets limits on the amount of ECB that Indian companies can obtain and the purposes for which it can be used.
- The ECBs fall under the umbrella of RBI regulations as postulated under the Master Direction - External Commercial Borrowings, Trade Credits, and Structured Obligations (Master Direction), and the Foreign Exchange Management Act, 1999 (FEMA).
- ECBs should adhere to criteria like minimum maturity period, maximum all-in-cost ceiling, permitted and non-permitted end-uses, etc.
- As of today, there are two paths to raise funds by employing ECBs: the approval route and the automatic route.
- There are a variety of eligibility regulations created by the government for availing of finance under the automatic route.
- These regulations are about amounts, industry, the end-use of the funds, Companies that desire to raise finance via ECB must meet these eligibility criteria; thereafter, funds can be raised without needing approval.
- The approval route, on the other hand, mandates that companies which fall under certain pre-specified sectors must obtain the RBI's or the government's explicit permission, prior to raising funds through ECB.
- As per RBI guidelines, all entities except a Limited Liability Partnership are allowed to raise ECBs.
- Benefits:
- ECBs provide an opportunity to borrow large volumes of funds.
- The funds are available for a relatively long term.
- Interest rates are also lowercompared 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.
- Risks:
- Exchange rate risk:Fluctuations in the value of the Indian rupee against foreign currencies can affect the cost of repaying the loan.
- Sovereign risk: The ability of a foreign government to repay its debt can affect the creditworthiness of foreign lenders.
- Credit risk:Foreign lenders may not have the same level of protection as domestic lenders in the event of default.
- Regulatory risk: Changes to government regulations or policies related to the ECB can affect the availability and cost of borrowing.
