Do you run a business that requires import & exports and in need of any funds or financial assistance?
How about considering ECB?
ECB stands for External Commercial Borrowings (ECB). ECB helps Indian corporations to raise funds in foreign currencies from overseas lenders. ECB include commercial bank loans, buyers’ credit, and suppliers’ credit, credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions. These funds can be raised either through approval route or automatic route. Reserve Bank of India (RBI) has created certain eligibility regulations for availing such finances under the automatic route. These regulations are mainly related to the amounts, industry type, end-use of the funds, etc. Firms that wish to raise funds through ECB have to meet these eligibility criteria outlined by RBI, and then funds can be raised without any approvals. For External Commercial Borrowing, RBI has issued circulars and formal guidelines for the specification of norms for such borrowings
Benefits of ECB:
Indian businesses can take full advantage of lower interest rates prevailing in the Euro zone and US and Japan, by raising ECB from these economies.
For large projects with revenues in foreign currency, ECB provides a good route to borrow large amount in foreign currency and improve the strength of the balance sheet and improve the profitability of the project
By availing ECB, the company’s stakes aren’t diluted. Borrowers can raise funds without giving up control, as debtors will not have any voting rights in the company.
Through ECB, domestic borrowers get access to global markets and exposure to global opportunities.
Disadvantages of ECB:
Funds raised through ECB are subject to risks associated with foreign exchange rates, since the borrowing and paying back has to be done in foreign currencies.
Though ECB can be availed at lower rates, there are a set of guidelines and restrictions that must be followed by both lenders and borrowers, which are governed by RBI. This increases documentation and compliance can be a burden for a business.
Even if a borrower has surplus liquidity, ECB cannot be prepaid before completion of the minimum average period.
A borrower cannot refinance its entire existing rupee loan through ECB.
Who could be the Lenders of ECB?
There are a set of eligible lenders for trade credits, mainly non-resident lenders from whom importers can raise funds from overseas in freely convertible foreign currency or Indian Rupee. They are mostly banks and financial institutions, overseas suppliers, foreign equity holders, joint venture partner, and financial institutions in International Financial Services Centers (IFSCs) in India. In India, not all banks are active in ECB. Only large Public Sector Banks (PSBs), large private sector banks, and select MNC Banks are actively involved in ECB. As per RBI’s new framework, there has been an expansion of the list of recognized lenders to include entities having long term interest in India. Foreign regulated financial entities, insurance funds, pension funds, sovereign wealth funds, and similar other long-term investors are included in the list of recognized lenders for long term funding into India.
As per current trend of type of lenders, we find that 70% of ECB are from the parent company or from the JV partner. Getting ECB from a bank is subject to same amount of due diligence as getting any Rupee loan. May be that is the reason that share of banks in total ECB is relatively smaller.
The interest rate on ECB:
If ECB is taken from an equity holder, the interest rate could be bilaterally decided. In our experience, the lender keeps interest rate very competitive as the idea is to support the borrower. If the lender is a bank, the interest rate is a function of credit assessment and period of ECB. In general, banks charge a rate ranging between Libor + 2% to LIBOR + 4.5%.
The procedure of getting ECB:
Under automatic route –
The initial documentation includes filling form ECB, making loan agreement, making average maturity, repayment and interest payment schedule and request letter.
These documents need to be vetted by the CA/CS of the borrowing company and submitted to the AD bank.
Various departments scrutinize the documents in the bank, and once they find all facts okay, the documents are processed to RBI
Usually, under the automatic route, the RBI gives its approval within few days and issues the LRN
Once LRN is issued, the draw-down can take place
Under Approval route –
The initial documentation includes filling form ECB, making loan agreement, making average maturity, repayment and interest payment schedule, request letter, and covering letter (which some case needs to explain the case).
These documents need to be vetted by the CA/CS of the borrowing company and submitted to the AD bank.
Various departments scrutinize the documents in the bank, and once they find all facts okay, the documents are processed to RBI
Usually under approval route the RBI, it takes few weeks to few months for approval as RBI double checks it
Once LRN is issued, the draw-down can take place
Prepayments:
For both ECB route i.e., automatic and approval, prepayment of ECB up to USD 500 million may be allowed by AD banks without any prior approval of RBI (Refer circular) subject to compliance with the specified minimum average maturity period (MAMP) as applicable to the loan. However, for approval route prepayment for amounts exceeding USD 500 million would be considered by the RBI under the Approval Route.
Reporting Requirements for ECB:
To improve ease of doing business in India, RBI came up with a new ECB Framework on 16th January 2019, which is a more simplified version of the old one that would influence capital flows. As an amendment, RBI has expanded the list of eligible borrowers, broadened the list of recognized lenders, and reduced the minimum average maturity period (MAMP).
Borrowers should ensure that all terms and conditions are reported correctly in Form ECB (Refer ECB FAQ’s) and none of the columns are left blank. Changes in ECB parameters, be it under automatic route or under the approval route, should also be reported to the Department of Statistics and Information Management (DSIM) through revised form immediately, in any case not later than seven days from the changes effected. While submitting the revised form, the changes should be mentioned explicitly in the communication. Failing to comply with the reporting guidelines in respect of Form ECB may invite penal action under FEMA.
How is FCTL different from ECB?
As mentioned above, ECBs carry certain restrictions of documentation and prepayment and end use. There is an alternative to ECB for borrowing in foreign currency. Such a product is called Foreign Currency Term Loan (FCTL). For availing FCTL, there is no need for RBI approval, and the decision of lending lies with the lending bank. The clauses related to prepayment and end-user could be bilaterally negotiated between borrowers and lenders.
Given the flexibility in FCTL, the interest rate of FCTL is generally higher than that of ECB.
How could Edugains help?
Edugains has, in the past, helped businesses raise ECB. Edugains offers the following support to businesses in the area of ECB:
Loan Application Management of ECB
Assistance in loan availing from bank
Provide better FX rates for conversion of payments of principals/ interests. ECB Structuring and Pricing
Assistance in structuring the whole loan process that is just according to the RBI Guidelines
FEMA compliance and approval: Monthly return fillings that are according to the RBI mandate (ECB-2 Return)
Edugains is a niche advisory and outsourcing company in the domain of banking and foreign exchange risk management. We started operations in 2011, and since then, we have been helping SME corporate across India to reduce their overall finance cost; raise low cost borrowings in Rupees and foreign currency; manage the currency risk on import-export transactions and advise on FEMA and RBI compliance. Our expertise is to reduce overall finance cost without change or existing bank.
Edugains, as a part of its advisory services, helps businesses with the following:
Export-import rate improvement
Reduce overall expense of interest and other financial costs
Interest reduction by using better product, minimizing hidden charges etc (preferably without change of bank)