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