External Commercial Borrowings (ECBs)

External Commercial Borrowings (ECBs) are a significant source of financing for Indian companies. In the financial year 2023-24 (FY24), Indian companies registered ECBs worth $49.2 billion, almost double the amount in FY23 ($26.6 billion).

About ECBs:

1. Definition: ECBs refer to the borrowing of funds by Indian companies from foreign sources in the form of loans, bonds, or other financial instruments.
2. Purpose: ECBs can be used for various purposes, including business expansion, asset acquisition, and repayment of existing debt.
3. Sources: ECBs can be obtained from various sources, such as foreign banks, international financial institutions, and foreign subsidiaries of Indian companies.
4. Types: ECBs can be rupee-denominated loans, which are repaid in Indian rupees, or foreign currency-denominated loans, which are repaid in a foreign currency.
5. Regulation: ECBs are subject to regulatory oversight by the Reserve Bank of India (RBI), which sets limits on the amount of ECBs that Indian companies can obtain and the purposes for which they can be used.
6. Key Regulations: ECBs fall under the purview of the Master Direction - External Commercial Borrowings, Trade Credits, and Structured Obligations, and the Foreign Exchange Management Act, 1999 (FEMA).
7. Criteria: ECBs must adhere to specific criteria, such as minimum maturity periods, maximum all-in-cost ceilings, and permitted and non-permitted end-uses.
8. Approval Routes: There are 2 paths to raise funds through ECBs: the approval route and the automatic route. Companies seeking funds through the automatic route must meet specific eligibility criteria related to amounts, industry, and the end-use of funds. Companies falling under certain pre-specified sectors must obtain RBI or government approval before raising funds through the ECB approval route.
9. Eligibility: All entities except Limited Liability Partnerships are allowed to raise ECBs as per RBI guidelines.

Benefits of ECBs:

1. Large Funds Availability: ECBs provide an opportunity for Indian companies to borrow large volumes of funds.
2. Long-Term Availability: ECB funds are available for a relatively long term.
3. Lower Interest Rates: Interest rates on ECBs are generally lower compared to domestic funds.
4. Foreign Currency Access: ECBs are in the form of foreign currencies, enabling corporations to have foreign currency for import needs.

Risks Associated with ECBs:

1. Exchange Rate Risk: Fluctuations in the value of the Indian rupee against foreign currencies can affect the cost of repaying the loan.
2. Sovereign Risk: The ability of a foreign government to repay its debt can impact the creditworthiness of foreign lenders.
3. Credit Risk: Foreign lenders may not have the same level of protection as domestic lenders in the event of default.
4. Regulatory Risk: Changes in government regulations or policies related to ECBs can affect their availability and cost.

What are Bonds:

1. A bond is a fixed-income instrument where individuals lend money to a government or company at a certain interest rate for a specific period.
2. The entity repays the individuals with interest along with the original face value of the bond.

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