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Consultancy Services For Low-Cost External Commercial Borrowing (ECB) for Indian Companies: - Apohan Corporate Consultants Pvt. Ltd.

Consultancy Services For Low-Cost External Commercial Borrowing (ECB) for Indian Companies:

Apohan Corporate Consultants Pvt. Ltd. > Financial Strategy > Consultancy Services For Low-Cost External Commercial Borrowing (ECB) for Indian Companies:

External Commercial Borrowing (ECB):

Framework:

The ECBs are governed by the regulations of RBI and Foreign Exchange Management Act (FEMA).


Lenders eligible to provide ECB:

Members of the Financial Action Task Force (FATF)
Members of International Organization of Securities Commissions (IOSCO)
Multilateral and Regional Financial Institutions
Foreign branches & subsidiaries of Indian banks
Foreign individuals with FDI in India in a prescribed fashion
Subscribers to Indian bonds & debentures listed abroad.


Borrowers eligible to obtain ECB:

Manufacturing companies
Infrastructure companies (except real estate)
Micro-finance activities
Not for Profit companies
Registered societies/trusts/ cooperatives


Routes of ECB

Approval route:

This is available as per regulations relate to amounts, industry, the end-use of the funds, etc.

Automatic route:

This is compulsory for pre-specified sectors in which the borrowing company needs to obtain RBI or the government permission before raising funds.


Forms of lending

Loans
Commercial bank loans
Buyer’s credit
Supplier’s credit
Foreign Currency Convertible Bonds (FCCBs)
Foreign Currency Exchangeable Bonds (FCEBs)
Trade credits beyond 3 years
Financial Lease
Plain vanilla Rupee denominated bonds
Privately placement of rupee bonds
Listed rupee bond on foreign exchanges
Floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments)
Preference shares (other than fully and compulsorily convertible instruments);
Private sector window of multilateral financial Institutions such as IFC, ADB, AFIC, CDC, etc.


Benefits of External Commercial Borrowing

Low effective interest rate that is prevalent in developed countries
Larger capital requirements met from international players
No dilution of equity stake
Diversified investor base
Access to global financial markets
Additional resources of capital for SME and infrastructure
Repayment of Rupee loans availed domestically
Financial turnaround of a company if classified as an Special Mention Account (SMA-2) or Non-Performing Assets (NPA)
Debt capital for expansion projects
Conversion of ECB into equity (FDI) can be done in full or in part, at once or gradually.
If you do not choose the external commercial borrowing route, the international borrowing process becomes a special case taking huge time with uncertainties of approval.
ECBs can be raised from foreign equity holders and utilised for working capital purposes for 5 years.


Conditions for external commercial borrowing:

Minimum average maturity period is (MAMP) of 3 years across all forms of ECB. MAMP is the weighted average number of years for which different external commercial borrowing amounts are outstanding with Indian a company. However, manufacturing sector companies can raise ECB with MAMP of 1 year for ECB up to USD 50 million in a financial year.
All inclusive cost (rate of interest, other fees, expenses, charges, guarantee fees, ECA charges but don’t include commitment fees and withholding tax) of fund needs to be lesser than the benchmark rate + 4.5%
The borrowers cannot use the funds for onward lending, repaying existing loans (?), or investing in M&A.
Borrowers cannot use the funds for real estate activities, investment in capital market, equity investment.
Borrowers can raise ECB maximum up to USD 750 million or equivalent rupees per financial year under the automatic route.
For FCY denominated ECB raised from direct foreign equity investor, his ECB -equity ratio under the automatic route cannot exceed 7:1 for amounts more than USD 5 million.
Borrowing entities can not borrow in excess of debt equity ratio guidelines for the sector
There is a hedging requirement 70% for infrastructure companies
LLPs are not eligible to raise ECBs


Types of International banking

Correspondent banks

Correspondent banks involve the relationship between different banks which are in different countries. This type of bank is generally used by the multinational companies for their international banking. This type of banks is in small size and provides service to those clients who are out of their country.

Off-shore banking centre

It is a type of banking sector which allows foreign accounts. Offshore banking is free from the banking regulation of that particular country. It provides all types of products and services.

Subsidiaries of foreign banks

Subsidiaries are the banks which incorporate in one country which is either partially or completely owned by a parent bank in another country.

Affiliate Banks

The affiliates are are related to foreign banks but not owned by them and work independently.

Foreign branch bank

Foreign banks are the banks which are legally tied up with the parent bank but operate in a foreign nation. A foreign bank follows the rules and regulations of both the countries i.e. home country and a host country.


Apohan services:

Apohan helps a business in procurement of foreign currency, low-cost funds through external commercial borrowings. It provides the Consulting Services for  External Commercial Borrowings.

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