ECB

Chapter 4: Enclosure 4.1 (updated)

EXTERNAL COMMERCIAL BORROWING

Brief excerpts from ECB (External Commercial Borrowing) Guidelines dated 13.06.97 & amendments dated 09.02.2000 by Department of Economic Affairs (DEA), Ministry of Finance (MoF).

Definitions & Policy

ECB includes 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 borrowings from the private sector window of multilateral financial institutions such as IFC, ADB (Asian Development Bank), AFIC, CDC (Commercial Development Corporation), etc.

ECB is permitted by the government as a source of finance for Indian corporates for expansion of their existing capacity as well as for fresh investment. The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as power, oil exploration, telecom, railways, roads and bridges, ports, industrial parks and urban infrastructure etc., and the export sector. Development Financial Institutions (DFI) through their sub-lending against the ECB approvals, are also expected to give priority to the needs of medium and small scale units.

Applicants will be free to raise ECB from any internationally recognised source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets, etc. Offers from unrecognised sources will not be entertained.

ECB Guidelines as applicable to the Telecom Sector

ECB entitlement for Telecom Projects:

Telecom infrastructure projects are permitted to avail ECB to an extent of 50% of the total project cost (including the licence fee) as appraised by a recognised financial institution/bank, subject to the fulfillment of other ECB guidelines.

External commercial loans are to be utilised for import of capital goods (CG) and services (on FOB or CIF basis). However, in the case of infrastructure projects, ECB can be utilised for rupee expenditure, including for telecommunications (licence fee payments would be an aproved use of ECB.

Average Minimum Maturities (without ‘Put’/‘Call’ options):

3 Years for < US$ 20 Million or equivalent

5 Years for > US$ 20 Million or equivalent

However, larger tenor borrowing has to precede short term borrowing.

Refinancing is allowed as long as the original/higher maturity period is retained.

ECB entitlement does not include foreign currency borrowings sourced from DFIs.

Interest Rate for project financing:

At present, interest rate limits on ECB non-recourse financing allow interest spreads upto 350 basic points above LIBOR/US Treasury. However, some flexibility is permitted in determining the spread on merits. In order to give borrowers greater flexibility in designing a debt strategy, up to 50% of the permissible debt may be allowed in the form of subordinated debt at a higher interest rate, provided the composite spread for senior and subordinated debt taken together comes within the overall project financing limit.

Short Term Loans:

While ECB for a minimum maturity period of three years and above will be sanctioned by DEA, approvals of short term foreign currency loans with a maturity of less than three years will be sanctioned by Reserve Bank of India (RBI), according to RBI guidelines.

ECB approval procedures

At present a borrower has to approach government twice, once for obtaining in-principle approval and second for submission of loan agreement(s) for 'taking on record' (ToR). After ToR, the borrower approaches RBI for FERA approval and permission for drawdown. Thus, there are 3 stages. As a measure of simplification it has been decided that the regional offices of RBI would take loan agreement/documents on record of all ECB approvals-once they have been approved by the Government/RBI as the case may be. RBI will send a copy of loan documents/ToR records to DEA. RBI will issue appropriate instructions in this regard.

Default Interest:

Default interest not exceeding 2% over the applicable rate will be incorporated in the approval letter/taken on record letter itself. No further approval would be required from the Government/RBI.