External Commercial Borrowings – Raising Funds from Overseas

In the dynamic interconnected global economy, businesses like yours are constantly exploring different options to accelerate their growth, expand business operations and get the competitive edge. One of the most common (nowadays) and quite powerful tool that Indian companies leverage to access the substantial international funds is External Commercial Borrowing (ECB). But what is ECB, why businesses are attractive towards it and why it has become a vital element of corporate finance strategies in India? Let’s delve into the nuances of ECBs, from basic definition to its advantage, real time status and the regulatory landscape that shapes this most sought-after financing option.

What is ECB?

External Commercial Borrowing (ECB) refers to any loan or funding raised by Indian entities from foreign institutions, generally in foreign currencies. These borrowings are typically for commercial purposes such as financing business expansion, infrastructure projects or capital expenditures and even for refinancing existing debt. Governed by the Reserve Bank of India (RBI), ECB offers a pathway for Indian businesses to tap into international finance that are often available at more competitive interest rates in comparison to domestic lending.

Broad Framework of ECB based on RBI Guidelines

A) FCY Denominated ECB

• Currency: Any freely convertible foreign
• Different Forms of ECB:

1. Loans (including bank loans)
2. Fixed-rate notes, floating-rate notes, debentures, bonds (excluding fully and compulsorily convertible instruments)
3. Trade credits beyond 3 years
4. FCCBs (Foreign Currency Convertible Bonds)
5. FCEBs (Foreign Currency Exchangeable Bonds)
6. Financial leases

• Eligible Borrowers:

1. All entities eligible to receive FDI
2. Additional eligible entities: Units in SEZ, Port Trusts, SIDBI, EXIM Bank of India

B) INR Denominated ECB

• Currency: Indian Rupee
• Different Forms of ECB:

1. Loans (including bank loans)
2. Fixed-rate notes, floating-rate notes, debentures, bonds (excluding fully and compulsorily convertible instruments)
3. Preference shares
4. Trade credits beyond 3 years
5. Financial leases
6. Plain vanilla rupee-denominated bonds issued overseas (privately placed or listed on exchanges per host country regulations)

• Eligible Borrowers:

1. All entities eligible for FCY-denominated ECB
2. Registered entities engaged in micro-finance activities, including:
3. Not-for-profit companies
4. Registered societies/trusts/cooperatives
5. Non-Governmental Organizations (NGOs)

 

C)  Minimum Average Maturity Period (MAMP)

General Rule: MAMP for ECB will be three years. Call and put options, if any, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories, the MAMP will be as prescribed therein:

Category	MAMP
Manufacturing companies (up to USD 50 million or equivalent per financial year)	1 Year
Foreign equity holder (for working/general capital purposes or repayment of rupee loans)	5 Years
ECB raised for: On-lending by NBFCs for working capital or general corporate purposes Working capital/general corporate purposes	10 Years
ECB raised for: On-lending by NBFCs (for the same purpose)               Repayment of rupee loans availed domestically for capital expenditure	7 Years
ECB raised for:             On-lending by NBFCs (for the same purpose)               Repayment of rupee loans availed domestically (for purposes other than capital expenditure)	10 Years

 
Typically, banks provide ECB for a tenure of 5-7 years but some banks offer a tenure of 7-10 years depending upon the project. Therefore, borrowers can expect an average tenure of 7 years.

D) Routes of Raising ECB

• Automatic Route – As the name suggests, the borrowers can raise ECB without any prior approval from the RBI. The process is streamlined and handled directly by Authorized Dealer Category-I (AD Category-I) Banks, which are generally the large commercial banks that are authorized to deal in foreign exchange transactions.
• Approval Route – Borrowers need to obtain explicit approval from the RBI prior to raising the ECB. This involves submitting an application to the RBI through AD Category-I Bank that act as an intermediary. Approval route is reserved for the cases that are outside the parameters of Automatic Route including high-value loans, specific sectors or certain strategic projects.

 

E)  How much Funds Can be raised through ECB?

Under the automatic route, eligible borrowers are allowed to raise upto USD 1.5 billion or its equivalent in one financial year. However, if the borrower raises FCY denominated ECB directly from a foreign equity holder such as parent company or major foreign investor, they must adhere to the liability-equity ratio cap of 7:1. This limit is to ensure that financial stability and avoid excessive reliance on debt.
 

F)   Procedure for raising ECB

• Automatic Route: Cases that meet the parameters of automatic route doesn’t need to seek prior RBI approval. Under such cases, the borrower approaches an AD Category – I Bank with a proposal and submits the duly filled form for processing.
• Government Approval Route: Under such cases, borrowers submit an application in prescribed form with the RBI for an examination through AD Category – I Bank. RBI will assess the application based on overall guidelines, economic conditions, and proposal’s merit. In case the ECB exceeds the threshold, the proposal is reviewed by the Empowered Committee (EC) that provides its recommendations to RBI, based on which the RBI takes final decision.

 

G) Eligible Lenders

• A resident of the International Organization of Securities Commissions (IOSCO) or the Financial Action Task Force (FATF).
• Multilateral and Regional Financial Institutions to which India is a member country.
• Individual subscribers to bonds and debentures listed abroad.
• Foreign Equity Holders including a direct equity holder who owns a minimum of 25% direct equity holding in the borrowing entity, an indirect equity holder who owns a minimum of 51% indirect equity holding, and a group company with an overseas parent.
• Branches or subsidiaries of Indian Banks in a foreign country are permitted as lender’s foreign currency denomination ECBs apart from FCCBs and FCEBs.

  

H) Limitation on usage of funds raised through ECB

 
As per RBI guidelines, ECB cannot be utilized for following activities:

• Real Estate Activities – Funds raised through ECB cannot be utilized for businesses that specifically in development and investment of real estate except for certain permitted activities.
• Capital Markets – ECB funds cannot be used for investment in stocks or bond markets.
• Equity Investments – ECB proceeds are not allowed to be used for any type of equity-related investments except where it aligns with permissible use.
• Working Capital Purposes – Generally usage of ECB funds for working capital purpose is restricted except the cases permitted under MAMP guidelines.
• General Corporate Purpose – Similar to above, ECB funds can be used for only those general corporate purpose which are specifically permitted under the MAMP guidelines.
• Repayment of Rupee Loan – ECB funds cannot be used for repayment of domestic loans until and unless it is permitted under the MAMP guidelines.
• On-lending to other entities is prohibited except for NABCs which may raise international funds for further permitted lending purpose.

 

Interest Rate for ECB

One of the primary reasons which attracts most of the borrowers to raise international funds is the competitive cost. However, there are certain misconceptions related to the computation of cost of funds. Under the Master Directions, the RBI has provided clear guidelines and set a ceiling for the All-in-Cost. 

In case of new ECBs, All-in-Cost is the ‘Benchmark rate plus 500 bps spread’. The Benchmark Rate is a standard interest rate used to determine the borrowing cost for companies raising funds internationally. This rate varies depending on the currency of the ECB, and the actual borrowing rate is usually set as a spread over this benchmark, reflecting the borrower’s credit risk and other factors.

For example, we have outlined below the all-in-cost for three major economies based on the current benchmark rate:

Name	Country	Benchmark Rate (Current)	All in Cost expected as per RBI Direction
Secured Overnight Financing Rate (SOFR)	USA	4.57%	8% to 10%
Tokyo Overnight Average Rate (TONAR)	Japan	0.228%	3.5% to 5.227%
Euro Short-Term Rate (€STR)	Europe	3.167%	5.5% to 8.664%

 
USA and Europe are the two major economies that borrowers target to raise ECB. However, the rates have been quite high in these markets earlier this year due to varied economic conditions. But in the past couple of months, the rates have significantly reduced and are expected to further go down in next couple of months.

On the other hand, Japan is lower benchmark rates and is a lucrative option nowadays but due to its strict regulations, penetrating this market is a bit difficult unless you have good relationships and knowledge of the market.

Concept of Hedging

Another most important aspect of raising ECB is the ‘Hedging Cost’. Hedging is defined as strategy used by borrowers to mitigate the risks while raising ECB such as exchange rate fluctuations, interest rates volatility and other financial uncertainties.

Since ECBs are generally in foreign currency, borrowers are advised to hedge against the currency risk to protect themselves from fluctuations in the exchange rates. Similarly, borrowers may also engage in interest rate hedging if the loan is tied to floating interest rates such as SOFR. Tools like interest swap rates or FRAs help stabilize the borrower’s repayment structure.

Natural Hedging:

Many borrowers are not aware of the natural hedging and how the same could be used to mitigate the risk and help keep the cost low. If you have forex income or revenue, you can utilize the same to offset financial risks, like currency fluctuations or interest rates volatility, and reduce exposure without engaging in external financial instruments like derivatives.

For Example: Toyota, a global car manufacturer, raises significant amount funds in foreign currencies due to its worldwide operations. Suppose it raised USD denominated debts from international market. However, it generates substantial revenue in USD from its sales in North America. This creates a natural hedge for Toyota against the exchange rate fluctuation risk because the foreign currency i.e. USD that it uses to payoff its debt could be offset by the revenues it earns in same currency. Therefore, when there is any fluctuation in the exchange rate, the company is somewhat protected from the effect since both its revenue and debt obligations are in same currency.

Hence, by aligning your liabilities with the revenues in same currency, you can create a natural hedge that will minimize the risk associated with exchange rate fluctuations and reduce the need for expensive external derivative for hedging.

RBI Guidelines for Hedging:

• Borrowers can use financial instruments like forward contracts and options for hedging currency risks. Natural Hedging is encouraged.
• For interest risks, companies can use swaps aligning with the ECB repayment schedule.
• Borrowers are required to document and report hedging strategies to RBI through Authorized Dealers.
• RBI advises companies to establish internal risk management practice to ensure non-speculative hedging.

Conclusion

ECB is an effective pathway to get access to substantial international funds at competitive costs but its is essential to understand the regulatory framework, eligibility, and strategic considerations like hedging and compliance to maximize the benefits while effectively mitigating the associated risks.