external commercial borrowing

In this article, Jyoti Nath who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses Ten things you should know about external commercial borrowing.


From the year 1950 to early 1980s, access to international capital market was limited. In course of time, sources of finance were found inadequate and were supplemented with commercial borrowing through international capital markets. In mid 1980s the policy framework encouraged financial institutions and public sector undertakings to access the international market.

With the introduction of economic reforms since the balance of payment crisis, external assistance ceased to be an important element of capital inflows and private capital flows gained prominence. ECB rose significantly in this period, India pursued a regulatory approach of encouraging non-debt creating flows and placing restrictions on debt creating flows. Earlier Ministry of Finance used to decide the ECB policy however, in due course of time the responsibility of review and revision and implementation of ECB framework was transferred to RBI, under the consultation of Government of India.

Ten things to know about External Commercial Borrowing

  1. Cheaper Funds – Firms if borrow from external sources globally the spread of rate of interest will be attractive and be lower than what is domestically available in India. The firms will get a wider scope of to borrow capital with an attractive rate of interest.
  2. Global Playground – The scope of global financial market with attractive financial borrowing terms will be beneficial to the Start-ups or the new firms.
  3. Controls – External Commercial Borrowing is a form of loan and hence the stake in the Company remains with the borrower and hence the Start-up and firms have major control over the stake as it cannot be converted to equity or given any voting rights.
  4. Access to international market gives a better exposure to opportunities globally.
  5. Economic development-Development of infrastructure and overall development will lead due to such financial inflow in the economy.
  6. Improve profitability – Due to lower cost funds profitability and margin can be

To make Start-ups attractive under “Ease of Doing Business” under the Make in India policy so that Capital is easily available and at an affordable rate of interest External Commercial Borrowings (ECBs) is one such improvement towards financial reforms to enable the Start-up firm’s ability to obtain finance globally.

In 2015, Reserve Bank of India reviewed the decade old ECB framework, the aim was to strengthen the macroeconomic policy and broaden the reach of overseas debts of Indian borrowers. The revised comprehensive ECB framework was announced by RBI through the circular no. 32, date 30th November 2015. However before we go deeper into RBI remodelling the old ECB framework, let us also look at Section 6 (3) (d) of the Foreign Exchange management Act, 1999 which was the origin for RBI control and regulate the borrowing or lending of external borrowings of capital. Therefore, RBI had categorised various forms of borrowing, like ECB, Convertible Bond from Foreign Currency, Shares & Exchangeable Bonds which are issued by an Indigenous Companies and subscribed by Non –resident. RBI has the power to modify, regulate through various notifications. Major changes are highlighted in July every year.

Therefore, RBI had categorised various forms of borrowing, like ECB, Convertible Bond from Foreign Currency, Shares & Exchangeable Bonds which are issued by an Indigenous Companies and subscribed by Non –resident. RBI has the power to modify, regulate through various notifications. Major changes are highlighted in July every year.

ECB can be reviewed under two routes- Automatic and through approval route. No approval is required under the automatic route however, borrowing not under the purview of Automatic route are allowed under the approval route. However, borrowing under both the routes are no less independent of rules and regulations and various controls and restrictions. Like for example under the Automatic route firms registered under Companies Act 1956, however, the span of eligible borrowers have expanded and now NBFCs, NGOs SEZs  all are part of the automatic route.

Also, it is interesting to note that borrowing of USD 750 million by Corporates and USD 200 million by Hotel and hospital and software sector is allowed under the automatic route however beyond the amount the same is considered under approval routes. Borrowers who would be eligible under the approval routes can be Banks and financial institutions like housing finance companies, Small Industries Development Bank, SEZ developers.  It is also imperative to reduce and dismantle restrictions on borrowers, lenders, all in cost ceilings, amount of borrowing, end use etc. wherever it does not directly conflict with the objective of reducing systemic risk.

That leads to the RBI current circular dated 30th November 2015 wherein introduces to the new framework for External Commercial Borrowing (ECB), replacing the old guidelines. The ECB has being separated into three Tracks – like Track I, II, III respectively along with amendments in maturity timelines.

Track I wherein the EBC is for 5 years is a minimum maturity timeline for a value of up to USD 50 million three years maturity which was previously around USD 20 million. If it is greater than USD 50 million than the timelines are 5 years, Companies which were eligible were from manufacturing sector, software development, shipping and airlines companies, units in SEZs, Small industries and development bank of India and Exim bank.

Track II – Over ten years irrespective of amount, the eligible borrowers shall be all entities under track I and Infrastructure companies, holding companies, Core investment companies.

Track III- ECB in Indian Rupees and eligibility as track I and the eligible borrowers will be R&D companies, Companies supporting infrastructure, Logistic services, SEZ developers.

It is understood that LLPs are still not included in the list of eligible borrowers also the Hotels and hospitals which were covered under specified service sectors) however not covered in the list under three tracks.

The major lenders under the new framework were international banks, international capital markets, multilateral/regional / government -owned financial institutions, export credit agencies, suppliers of equipment, foreign equity holders and overseas long-term investors like pension funds, wealth funds, overseas branches/ subsidiaries of Indian Bank (Track I borrowers). We can conclude that new entry like overseas long term investors. Also it was mandatory that Lenders be from country which accepts FATF statutory guidelines along with due diligence from an overseas bank.

It is also noted that all in cost ceiling for track I shall be 3-5 years, 300 bps over a 6 month LIBOR. And greater than 5 years it is 450 bps over the 6 month LIBOR which has a penal interest of minimum amount 2% over and above contracted interest rate. Track II has a maximum spread of 500 bps per annum over the benchmark and Track III is aligned to market conditions. The crucial part to remember is that all in cost includes guarantee fees also. There is a reduction in 50 bps under track I as compared to the earlier policy.

ECB also has categorised under the three tracks:

Track I- Import of services, goods, technical know-how and license fees for capital goods. Modernisation and expansion of existing units, Shipping and airlines companies only for import of vessels and aircrafts respectively. ECBs under approval routs for import of second hand goods as per Directorate General of Foreign Trade guidance/notification & Exim bank lending.

Track II- Any end user other than following  – Real estate, lending to other entities with any of the above objectives, purchase of land.

Track III- SEZ developer only for infrastructure facilities with SEZs.

Some major key factors to understand under new Framework are highlighted below;

Limits under automatic route has been revised

Like Companies in infrastructure and manufacturing sectors –up to USD 750million. For companies in Software sector, the amount is raised to USD 200 million. For firms in micro financing activities the ECB limit is till USD 100 million and for other entities, it is upto USD 500 million. However, the call /put options are not permitted under the current framework. And future opportunities in regards to such revision exist.

Part refinancing

Part refinancing is permissible provided there is no reduction of residual in maturity of the ECB

Pre payment of ECB is allowed without any restrictions on amount subject to compliance with stipulated minimum average maturity.

Change of designated AD bank

Change of designated AD bank is allowed subject to NOC from existing AD bank.

Dissemination of ECB

All the details will be put up in RBI website for the automatic route purpose.

However, there might be some inherent risk too. Like exposure to foreign exchange fluctuations if they do not hedge their currency and can have a negative impact on their balance sheet. The Government of India should remove restrictions on the amount a firm is looking to borrow. It should be linked to hedge the currency exposure emanating from ECB. The policy should focus on removing of obstructions to develop domestic rupee debt market.

In short, the risk to the system from the ECP borrowing should be hedged through natural hedge or through financial hedge. The ratio of hedge will be the indicator of ECB policy and it would be modified to address systemic risk when required.


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