ECB

Within a narrow span of five years, foreign debt has more than tripled! As per data from Reserve Bank of India (RBI), the total external commercial borrowings – i.e. loans granted by non-resident entities to eligible Indian borrowers in foreign currency is clocking 60 billion USD annually.

External Commercial Borrowings (ECB) refers to the debt shouldered by an Indian entity from external sources, i.e. from any recognized entity outside India. These borrowings are expected to conform to norms and conditions put forth by the RBI.

ECBs have been of great help in raising funds from beyond India’s borders, especially for bringing in fresh investments.  As of today, there exist two paths to raise funds by employing ECBs- the approval route, and the automatic route. There are eligibility rules for availing of finance under the automatic route. These regulations are in relation to amounts, industry, the end-use of the funds, etc. If the firm meets these eligibility criteria; funds can be raised without the need for approval from RBI. However, the full documentation must be made available to the bank before bringing in the funds. The approval route, on the other hand, mandates an explicit permission from RBI, prior to raising funds through External Commercial Borrowing. The RBI has issued circulars and formal guidelines,

Over the passage of time, RBI has relaxed the stringent restrictions on end-use of ECBs raised. The most notable development is the permissibility of ECB for working capital, and general corporate purposes. Furthermore, the ECB proceeds can also be harnessed for the repayment of rupee loans availed domestically.

The cost of capital is generally lower when borrowed from external sources. For instance, there are a multitude of economies that have a lower interest rate; if Indian firms and organisations were to borrow at lower interest rates from the Eurozone and the United States, they would generally stand to benefit. But firms must also be cautious on any exchange rate risks that they might incur in the process.

Despite the vast benefits of ECB, firms struggle to obtain approval from their banks and service their loans as the compliance structure is fairly complex. This is where Yosaney can step in and manage the complexity on your behalf.