RBI allows companies to use ECB for general corporate purposes

In a bid to attract capital flows, the RBI relaxed the External Commercial Borrowing (ECB) norms by permitting companies to use funds raised from their foreign equity holder company with minimum average maturity of 7 years for general corporate purposes. Till now borrowings in the form of ECB were not allowed to be used for general corporate purpose.

Nevertheless, the RBI has put certain conditions. As per the conditions, the minimum paid-up equity of 25% should be held directly by the lender (overseas partner) and the repayment of the principal will commence only after completion of minimum average maturity of seven years and no prepayment will be allowed before maturity.

What is External Commercial Borrowing (ECB)?

• Any money that has been borrowed from foreign sources for financing the commercial activities in India are called External Commercial Borrowings.
• The Government of India permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.

The ECBs are defined as money borrowed from foreign resources including the following:

• Commercial bank loans
• Buyers’ credit and suppliers’ credit
• Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
• Credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

Objective of External Commercial Borrowing (ECB):

• Government permits the ECBs as an additional source of financing for expanding the existing capacity as well as for fresh investments. The ECB policy of the Government seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc.
• There is also emphasis on the need of capital for Small and Medium scale enterprises.

How ECB is different from FDI?

• It must be noted that ECB means any kind of funding other than Equity. If the foreign money is used to finance the Equity Capital, it would be termed as Foreign Direct Investment. 
• The ECB should satisfy the ECB regulations stipulated by the Government or its agencies such as RBI. The Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature are included in ECB.

The following are not included in the ECBs

• Any Investment made towards core capital of an organization such as equity shares, convertible preference shares or convertible debentures. We should note here that those instruments which can be converted into equity are called convertible. The convertible instruments are covered under the FDI Policy.
• Any other direct capital is not allowed in ECB.

Month: Current Affairs - September, 2013