EXTERNAL COMMERCIAL
BORROWINGS: AN ANALYSIS
~ AKSHAY GOEL [HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR]
External Commercial Borrowings (ECB) is a
permitted source of finance for Indian Corporates for
expansion of existing capacity as well as fresh
investments for the same. They have been defined by
the Reserve bank of India as commercial loans
availed from non-resident lenders with a minimum
average maturity of three years. The phrase
“commercial loans” in this definition includes bank
loans, buyer’s credit, supplier’s credit, scrutinised
instruments like floating rate notes and fixed rate
bonds, credit from official export agencies and
commercial borrowings for private sector window of
multilateral financial institutions.
Basically, ECB includes any funding other than
equity or any kind of direct capital. Such direct
capital falls under FDI (Foreign Direct Investments).
ECB in India is governed by Foreign Exchange
Management Act along with the Foreign Exchange
Management (Borrowing and Lending of Foreign
Exchange) Regulations.
NEED
2. The funds availed in the form of ECBs are highly
under the control of the government and the RBI.
This leads to limit in the use of the same. E.g.: in
most cases, this money is not allowed to be used
for general corporate purposes or working
capital.
ROUTES
ECB can be accessed through two routes in India,
based on the requirement of Government approval
for the same:
1. Automatic Route: under this route, the corporates
do not need a government or RBI approval for
accessing ECB from external markets.
2. Approval Route: under this route, the corporates
do require a government approval for accessing
ECB.
AUTOMATIC ROUTE:
Features:
1. ECB allows companies access to funds in foreign
currencies which may not be that easy to avail
from the domestic market.
1. Access of funds under automatic route doesn’t
require a government of India or Reserve Bank of
India approval.
2. It allows an access to a diversified investor’s
base to the companies. This could also help the
companies access funds on a cheaper rate from
external sources.
2. Corporates including hotel, hospital, software
sectors (registered under the Companies Act 1956)
and Infrastructure Finance Companies are
eligible to raise ECB. Units in SEZs are allowed
to raise ECB for their captive requirements.
NGOs engaged in micro finance activities are
eligible to avail of ECB (subject to certain
conditions).
3. The availability of funds in the international
market is larger as compared to the domestic
market. Hence, ECB helps companies to fulfil
comparatively larger requirements.
4. Foreign investors provide a larger flexibility to
the companies in terms of providing security for
the ECBs.
DEMERITS
1. Since ECB involves exchange of money in foreign
currency, the companies have to deal with the
expenditure of hedging their foreign exchange
exposure.
3. Specific organisations who are not allowed to
raise ECB through this route include financial
intermediaries such as banks, FIs, HFCs, and
NBFCs as well as trusts and non-profit making
organisations.
4. ECB can be raised by borrowers
internationally recognized sources such as:
(i) international banks,
(ii) international capital markets,
from