ECB (External Commercial Borrowings)

ECB (External Commercial Borrowings)

ECB stands for External Commercial Borrowings are a type of financial security using which a country will borrow money from foreign countries to invest in domestic commercial activities. There are fixed regulations that these funds cannot be misused or invested again in stock markets with the intention of making profits. Basically ECB can be termed as the loans of the particular country from other foreign countries with purpose of developing commercial activities domestically.

The minimum tenure for these loans are usually 3 years and ECB is significant in bringing FDI (Foreign Direct Investment) and FII (Foreign Indirect Investment) excluding the FPI. ECB includes credit by the suppliers, credit by the commercial banks, floating rate notes, corporate bonds and so on. ECB is quantitatively significant parameter in the balance of payment of country. In the recent years, the percentage of ECB in each sector is increasing bringing in more foreign capital to the country.

How to raise ECB?

Any corporate looking to raise funds from outside the country can raise through ECB. They can raise using the automated route, where the process is automated as per the norms by the RBI and over seen by the authorised dealer who will take care of transfer of funds. Corporates can also raise funds through approval route, where they will send the project proposal for raising funds to the regulatory body which is RBI. This process is examined by the underlying AD which will also take care of transfer of funds. Authorised Dealer (AD).

Money can be raised through ECB in either Indian currency or convertible foreign currency. But corporates raised money in INR are obligated not to use liabilities arising out of it to convert to another currency. While all the corporates can raise funds through ECB but the LLP (Limited Liability Partnership) firms are restricted from raising capital. The permissible limit in each sector and industry is defined and set by the RBI and all the firms are mandated to follow the rules and regulations and also not violate any.

The average minimum term loan under ECB is 5 years for medium term loan and for long term loans the minimum term is 10 years. Funds raised through INR has average minimum term of 3-5 years.

Examples

• EBI has set the limit up to 50% in infrastructure and Greenfield projects sector for raising funds through ECB (FII and FDI).

• ECB loans are loans, Securitized instruments, Buyer’s-supplier’s credit, foreign convertible bonds, Foreign Currency Exchangeable Bonds and leases.

• Corporates borrowed 24.3 Billion USD in the first half of financial year 2020, the same was 16.46 Billion USD in FY 2019 and 9.68 Billion USD in FY 2018.

• RBI has increased the limit across sector in ECB to 50%, this justifies the increase in ECB for India in the financial year 2020.

• Big players like L&T, Sun pharmaceuticals and BHEL are in the process to issue the commercial papers for their respective firm, in order to raise funds through ECB.

Difference between ECB and FDI

The main difference between FDI and ECB is that the money raised through FDI can be invested as equity capital whereas the funds raised through ECB can never be used for equity capital or even in stock markets.

There exists two sets of different regulations by RBI, one for ECB and the other for FDI. The way in which each is applied for should meet that particular regulations appropriately in order not to be scrutinized for compliance.

FDI follows the control of management in order to raise and use the funds in the firms, whereas the ECB is tool used by government to encourage the foreign investment in domestic markets. In this way there is limitation on ECB loan over its usage where as there are limited limitations in case of FDI.

Usually FDI results in giving a part of ownership to the investor as it will contributing to the equity capital, but in ECB the ownership is not given as the fund is supplied merely as a creditor or interest earning security.

Need and importance of ECB

For developing countries where the interest rate is usually high. Firms may be so profitable when they want to raise capital from such markets. Their margin will take a hit. To compensate this, the central bank which in case of India is the Reserve Bank of India will permit firms to raise from foreign institutions or non-residing investors. This privilege is downloaded through the ECB. The government wanting to support any particular sector or industry can tweak the ECB permissible percentage to ensure the inflow of funds into the domestic market.

The funds borrowed through ECB can be used for capital expenditure alone and cannot be used for further investment or in stock markets. As a result the borrowing firm will get the support for infrastructure and expansion, indirectly the whole industry or sector will be benefited. Funds raised through FDI can be invested for equity capital whereas the ECB loan cannot be done so.

Advantages of ECB

• The cost of funds are cheaper compared to domestic interest rate.

• The lock in period is minimum of 5 years in case of ECB loans, so no pre closure risk of the capital raised.

• Credit by supplier and vendors can really give the competitiveness to the firm to compete with domestic ones the support for the funds.

• Volume of these loans are usually huge which is a boost to the economy.

• Corporates can use ECB loans through internationals banks, credit agencies as such for their business expansion.

Disadvantages of ECB

• The ECB loans is a process and requires a lot of paper work and documentation to be done as mandatory by regulatory agencies. This in a way is burden to run the business.

• A borrower of ECB loan will have to rethink when refinancing for the capital requirement, due to the existing ECB loan, the complication is going to increase.

• There is no pre mature closure of these loans, which is a drawback to the borrower in case due to any reason if he wants to repay the borrowed amount.

• The dependency of the economy will be subject to volatility in terms of the portion of FDI and FII is prevailing in the Indian markets.

• In layman terms, ECB is what a country owes to the rest of the world, lesser the better.

Conclusion

ECB is a facility and privilege organised by the regulatory authority RBI for encouraging the capital investment in companies from Non-residents source. The amount from international banks. Agencies are given out as loans to the corporates in return for the principal repayment and interest. This can be a boon if properly utilized for synergy by the domestic firms. Credit by the supplier and vendor also comes under ECB which can be utilized to increase the working capital and run the business effectively and help in improving the overall GDP of the country.