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    External Commercial Borrowings (ECB) In Foreign Currency (FC) By Indian Companies Whether Boon Or Bane??

    RBI has issued ECB regulations viz., Foreign Exchange Management (Borrowing or Lending in Foreign Exchange)Regulations, 2000, Notification No. FEMA 3/ 2000-RB,dated May 3, 2000 read with Sec.6(3) of FEMA Act,1999

     

    Indian companies are allowed to access funds from abroad in the following Methods:

    ECB

    FCCBs

    Preference Shares/Debentures

    FCEB

     

    What is ECB

     

    External Commercial Borrowings (ECBs) include

    bankloans,

    suppliers' and buyers' credits,

    fixedand floating rate bonds (without convertibility)

    Financial Lease

     

    borrowings from private sector windows of multilateral Financial Institutions such as IFC, ADB, CDC etc..

     

    ØEuro-issues include Euro-convertible bonds and GDRs.

     

    RBI vide A.P. (DIR Series) Circular No.32, dated 30th November, 2015 has revised the total ECB Framework

     

    ECB – under New Regime

     

    Track – I

    Track – II

    Track – III

     

     

     

     

     

    Medium term foreign currency

    Long  term  foreign  currency

    I n d i a n  R u p e e  ( I N R )

     

    d e n o m i n a t e d  E C B  w i t h

    d e n o m i n a t e d  E C B  w i t h

    d e n o m i n a t e d  E C B  w i t h

     

    minimum average maturity of

    minimum average maturity of

    minimum average maturity of

     

    3/5 years

    10 years

    3/5 years

     

    Eligible Borrowers

     

     

     

     

     

     

    Track – I

    Track – II

    Track – III

     

     

     

     

    C o m p a n i e s  i n  M fg  a n d

    All entities listed under Track-I

    All entities listed under Track-II

    Software development

     

     

     

     

     

     

    Shipping & Airline Companies

    Companies  in  Infrastructure

    All NBFCs registered with RBI

     

     

    Sector

     

     

     

     

    SIDBI (Automatic Route)

    REITs and INVITs

    NBFC-MFI, NPOs engaged in

    EXIM Bank(Approval Route)

     

    MFI activity

     

     

     

     

    Units in SEZ

     

    Cos. engaged in R&D, Training

     

    (other than educational Inst.)

     

     

     

     

     

     

     

    NBFC-IFC, NBFC-AFC

     

    Cos.  Supporting  Infra  and

     

    logistic services

     

     

     

     

     

     

     

    Holding Companies and CIC

     

    Developers of SEZ/NMIZs

     

     

     

     

     

     

     

    Various other aspects of ECB have not been mentioned here for the sake ofbrevity and relevancy.

     

    RBI publishes the quarterly outstanding debt position with a lag of one quarter. Asper the available latest statistics of end of June, 2016, the outstanding Commercial Borrowings are USD 175.7 Billion (declined from USD 185.0 Billion as of June, 2015)

     

    In order to understand that whether the ECBs are really cost effective and whether it is boon or bane, the author has made an attempt to compare with the effective Interest on INR loans borrowed in India and ECB loans borrowed from abroad

     

    In the below table, comparable State Bank of India (SBI) Prime Lending Rate or Base Rate of MCLR based Base Rate has been listed. Also indicative 6 Months Average LIBOR rate has been mentioned for comparable effective date of interest of SBI. Similarly Forex rate of USD-INR is mentioned for each effective date.

     

    An attempt is made to compute the effective estimated Total Rate of Interest (ROI) of ECB to compare the benefit or loss in case of the Borrower does not have Natural Hedge (viz., Exports receivables) or any forex hedge by way of derivative contracts.

     

     

     

     

     

    Table

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Effective

    SBI Base

     

    USD-INR

    % of Forex

    6 Months

    Avg % of

    Estimated

    Estimated

     

    Average

    Forex

    Total ROI

    Date

    Rate (%)

    1

    (Rs)

    2

    change

    Spread

     

     

    LIBOR3

    change

    of ECB (%)

     

     

     

     

     

     

     

     

     

     

    01-01-17

    8.154

     

    67.9547

    45.58%

    1.3073%

    6.91%

    1.00%

    9.21%

     

     

     

     

     

     

     

     

     

     

     

    01-04-16

    9.20

     

    66.3329

    42.10%

    0.9018%

    7.21%

    1.00%

    9.12%

     

     

     

     

     

     

     

     

     

     

     

    05-10-15

    9.30

     

    65.2905

    39.87%

    0.5372%

    7.47%

    1.00%

    9.00%

     

     

     

     

     

     

     

     

     

     

     

    08-06-15

    9.70

     

    64.1100

    37.34%

    0.4164%

    7.46%

    1.00%

    8.87%

     

     

     

     

     

     

     

     

     

     

     

    10-04-15

    9.85

     

    62.3660

    33.60%

    0.3995%

    6.94%

    1.00%

    8.34%

     

     

     

     

     

     

     

     

     

     

     

    07-11-13

    10.00

     

    62.5740

    34.05%

    0.3804%

    10.01%

    1.00%

    11.39%

     

     

     

     

     

     

     

     

     

     

     

    19-09-13

    9.80

     

    61.7480

    32.28%

    0.3804%

    9.88%

    1.00%

    11.26%

     

     

     

     

     

     

     

     

     

     

     

    04-02-13

    9.70

     

    52.9730

    13.48%

    0.4890%

    5.11%

    1.00%

    6.60%

     

     

     

     

     

     

     

     

     

     

     

    20-09-12

    9.75

     

    54.3375

    16.40%

    0.6717%

    7.27%

    1.00%

    8.94%

     

     

     

     

     

     

     

     

     

     

     

    13-08-11

    10.00

     

    45.3740

    N.C

    0.4592%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    11-07-11

    9.50

     

    44.3705

    N.C

    0.3976%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    12-05-11

    9.25

     

    44.7900

    N.C

    0.4141%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    25-04-11

    8.50

     

    44.4500

    N.C

    0.4423%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    14-02-11

    8.25

     

    45.5000

    N.C

    0.4554%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    03-01-11

    8.00

     

    44.6700

    N.C

    0.4584%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    21-10-10

    7.60

     

    44.3600

    N.C

    0.4550%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    01-07-10

    7.50

     

    46.6800

    N.C

    0.7518%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

     

     

     

    Note:

     

    1. SBI has started computation of Interest on MCLR (MARGINAL COST OF FUNDS BASED LENDING RATE) plus Spread basis, effective from 1st April, 2016. Between 01-07-2010 and 31-03-2016 the interest was computed on Base Rate plus Spread Basis.

     

    1. 6 Months Average LIBOR rate was taken on nearest date basis and for indicative purpose only. Actual rate may vary

     

    1. % of change in FX Rates&Avg % of Forex change have been computed by taking base date as 1st July, 2010

    N.C = Not Computed

    Conclusion

     

    On a review of the above table it is apparent that unless the Borrower has Exports receivable and the inflow schedule matches with the Principle and Interest Payment obligations, the currency risk plays major role in determining the cost effectiveness of the ECB.

     

    In case the borrower does not have sufficient Exports receivables, the borrower needs to obtain Hedging Contracts (derivatives), failing which the entire risk of Foreign Exchange fluctuation will severely impact the overall cost and may prove to be bane

     

    In case the Borrower is able to raise the Rupee Denominated ECBs, then the foreign currency risk will be borne by the lender(s) and the borrower is insulated from such risk.

     

    In view of the expected fall of Borrowing Costs in India, post Demonitisation of Specified Bank Notes (Rs.

     

    500 and Rs. 1000), whether ECB will still be a lucrative option or not, one has to wait and watch.

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