external commercial borrowing -- shaik majid
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mba projectTRANSCRIPT
Project Report on External Commercial Borrowing (ECB)
SIP PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE PGDM PROGRAM
Table Of Contents
EXECUTIVE SUMMARY…...…………………………..…………………………………5
1. Objective of the Study…………………………………………………………................6
2. Research Design…………………………………………….............................................6
3. Company Profile.................................................................................................................7
3.1 Kankroli & Banmore Tyre Plants…………………………………………................8
3.2 Acquisition of Vikrant Tyres Ltd…………………………………………................9
3.3 Selling & Distribution Network……………………………………………..............9
3.4 Competitiveness……………………………………………………………............10
3.5 Exports.......................................................................................................................11
3.6 Research and Development.......................................................................................11
3.7 Environment..............................................................................................................12
4. Introduction to ECB………………………………........................................................ 14
5. Overview of ECB................................................................................................……… 17
6. Advantages…………………………………………….................................................. 18
7. Disadvantages…………………………………………...................................................19
8. Current Trend…………………………………………...................................................19
9. Regulations and policies issued by RBI…………….......................................................20
9.1 Automatic Route…………………………………….................................................20
9.2 Approval Route……………………………………..................................................27
10.Pricing…………………………………………………….............................................33
11.Reporting Requirements………………………………...................................................35
12.Special Allowances……………………………………..................................................36
13.Procedure for issuing ECB……………………………...................................................38
14.Different companies who have issued ECB………….....................................................40
15.Structural Obligation……………………………………................................................42
16.Post Issue Guidelines…………………………………....................................................43
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17.Future Scenario………………………………………….................................................44
18.FCCB
18.1 Introduction………………………………………..................................................46
18.2 Guidelines……………………………………….....................................................47
18.3 Current Scenario……………………………….......................................................48
18.4 Advantages/Disadvantages…………………….......................................................49
18.5 Valuation of FCCB………………………………...................................................50
18.6 Recent FCCB issues………………………….........................................................51
18.7 Future Scenario………………………………….....................................................52
19.GDR/ADR……………………………………………....................................................53
20.Analysis of ECB issue for JKTI……………………………………………...................57
21.Conclusion………………………………………………………………………............58
22.Recommendations……………………………………………........................................59
23.Bibliography…………………………………………….................................................60
24.Annexure…………………………………………………......…………………………63
Annexure I (ECB Form)……………………………………………………… 63
Annexure II (Form 83)……………………………………………………….. 69
Annexure III (ECB 2)………………………………………………………… 71
Some Important Issues………………………………………………………….80
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Executive Summary
The objective of the study of fund raising through ECB (External Commercial
Borrowing) was to understand ECB and its advantages and disadvantages with special
reference to JKTI (JK Tyre and Industries Ltd). ECB is one of the cheapest sources of
raising funds in the present scenario, when the interest rates are very high in the
domestic market. It was just a feasibility study not that JKTI will raise funds through
it; they are just thinking it as a source of raising funds. In this study I have to suggest
how JKTI should go about issuing ECB, whether they should issue ECB or not, if yes
then what steps they should take to get the maximum benefit of the issue.
The project was completed in few phases. First phase was to know the guidelines of
issuing ECB and are there any special restrictions which can affect JKTI for issuing it.
Second, I went to some banks to know about the interest rates that will be charged.
After going to banks I made some suggestions regarding what rates can be charged for
issuance for different maturity periods and for different amounts. Along with the
study of ECB I also studied the feasibility of issuing FCCB (Foreign Currency
Convertible Bonds) as it is one of the other sources of raising foreign funds.
The report contains the detail and guidelines for issuance of ECB and FCCB in
general not for specific JKTI, as it is not company policy to disclose the key financial
data. As the interest rate can reflect the company credit rating and other key
informations which are not public.
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1.0 Objectives
1. To find out that issuing ECB in comparison to other debt raising sources
like FCCB, Euro Bonds, Foreign Bonds can prove a cheaper source for
JKTI for raising funds.
2. To find out will there be any adverse impact of ECB issue on JKTI
financials.
2.0 Research design
General Methodology
The research was based on visiting banks for financing JKTI’s in its ECB issue and
getting information about interest rates will be charged by them.
Sources of data
Primary Data
The primary data was collected from various sources. This was done
through the medium of informal discussion with the relevant person.
Secondary data
The secondary data was collected from the websites, master circular
etc, which is mentioned in Bibliography.
Data Analysis
The data was analyzed using both quantitative and qualitative techniques.
The software used to analyse data was MS Excel.
3.0 Company Profile
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JK Tyre and Industries Ltd. : Hyderabad
A brief note on the background and profile of company
JK Tyre and Industries Ltd. (JKTI) is a profit making, dividend paying, and
flagship Company of the JK Group headed by Shri Hari Shankar Singhania as
its Chairman. JKTI promoted on Feb. 14, 1951 as a private limited company and
was converted into a public limited company in 1974.
The Company is into the business of manufacture and sale of Automotive Tyre,
Tubes and Flaps. With organic and inorganic growth over the years, the Company
has emerged as a titan in the Indian Tyre Industry with turnover of near about
Rs.3000 crore and globally the 16th largest tyre manufacturer in the world.
In last 25-30 years, the Company has recorded a phenomenal growth in its
operations and turnover which has been resulted in considerable increase in
Turnover, Operating profits.
Turnover – Growth since inception
The turnover has gone-up at a CAGR of 14.63% over last 25-30 years i.e. from a
turnover of Rs. 33.04 crore in 1977-78 to Rs. 2952.56 crore in 2005-06.
Operating Profit – Increase since inception.
The operating profit of the company has gone up from mere Rs. 2.59 crore in 1977-78
to Rs. 168.88 crore in 2005-06.
In 1975, JKTI set-up facilities at Jaykaygram, Kankroli, Rajasthan for manufacture
of 5 lac tyres p.a. of Automotive Tyres and Tubes each in technical collaboration
with the General Tires International Co., USA. This capacity has been expanded
through a series of expansion programs, setting up a new plant at Banmore (MP) and
acquisition of Vikrant Tyres Ltd. (since merged with JK Tyre) to reach the present
level of 81 lac tyres p.a.
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JKTI has 4 most modernised Tyre Plants strategically located at Kankroli
(Rajasthan), Banmore (Madhya Pradesh) and 2 Plants at Mysore. Tyres
manufactured are sold under the well-known brands ' JK Tyre' & ' Vikrant' .
3.1 Kankroli & Banmore Tyre Plants
In 1975 JKTI set-up facilities at Jaykaygram, Kankroli, Rajasthan for
manufacture of 5 lac tyres p.a. of Automotive Tyres and Tubes each in technical
collaboration with the General Tires International Co., USA. This capacity has
been expanded through a series of expansion programs to reach the present level
of 15.2 lac tyre p.a.
In the year 1991, the company set up a new state-of the art plant at Banmore in
Morena district of Madhya Pradesh. This plant was set up with an initial
installed capacity of 5.69 lac tyres p.a. Over a period of time the plant capacity at
Banmore has been expanded to current capacity of 27.6 lac tyres p.a.
JKTI has consciously followed a policy of continuously modernizing and
expanding its tyre manufacturing facilities to retain its edge in the Market place.
Both the tyre plants have the state-of-the-art processing equipment, which
operate at over 100% capacity. Critical operational efficiency parameters of the
plants like scrap and wastage are one of the best in the World. They also operate
at lowest process scrap and have lowest steam consumption in the country. The
Plants have ISO 9001, QS –9000 and ISO –14001 accreditation for their entire
operations. JK Tyre is the World’s first tyre manufacturer to have such
accreditations for its entire operations. In addition, JK Tyre is the first tyre
company in the world to receive ISO/TS/16949:2000 Certificate for its entire
products. It is the only Tyre Manufacturer in the country to produce high
performance ‘T’ & ‘H’ – rated steel radial tyres apart from being the first
producer of radials in India. All the new generation cars like Maruti Swift,
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Maruti Wagon R, Alto, Mitsubishi Lancer, Mahindra Maxx, Tata Indica and
Spacio were launched on JK Steel Radials. New models likely to be launched in
next 1-2 years by Car manufacturers are expected to be launched on JK Tyres.
The Company is fully geared up for forthcoming launches.
3.2 Acquisition of Vikrant Tyres Ltd.
In June 1997, the company acquired controlling interest in VTL by acquiring 52%
of its equity capital and which is thus its subsidiary. Karnataka State Industrial
Investment & Development Corporation Ltd. (KSIIDC) is a partner with 26%
equity. VTL has 2 Tyre plants, including a state-of-the-art Truck Radial Plant, the
only of its kind in the country, located at Mysore with an aggregate capacity of
13.8 lacs tyres p.a.
JKTI turned around Vikrant Tyres in first 10 months of its operations by
providing expertise in the fields of technology, R&D, marketing and procurement
apart from modernizing and creating the-state-of-the-art Truck/Bus Radial facility.
Vikrant Tyres was put back on dividend list in 1998-99 after a gap of 6 years.
The day to day operations of the company are looked after by Shri Raghupati
Singhania, Vice Chairman and Managing Director.
3.3 Selling & Distribution Network
The company has a well entrenched distribution network encompassing over
4000 dealers; 107 exclusive showrooms-Steel Wheels, 119 stocking/selling
points comprising 31 depots and 83 C& F Agents spread through the length and
breadth of the country.
3.4 Competitiveness
J K Tyres’ competitiveness is evident from the following indicators:
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J K Tyres (incl. VTL) is:
20th Largest producer of tyres in the World
No. 1 in Truck/Bus Radial tyres in India - market Share of 76%
No. 1 exporter of tyres from India; (Rs 4350 Mn in 05-06)
No. 1 producer in the Truck/Bus segment with a share of 25.2%.
No. 2 in commercial tyres (Truck/Bus & LCVs’) - market share of 22.6%
No. 2 in Radials; entire range: MUVs, Pass. Cars, Jeeps, LCVs, Truck &
Bus and Tractors
One of the largest tyre producer in the country in 4 wheeler tyres with 19.5%
share.
JK Tyre is the Radial Leader- as India’s only manufacturer of entire range of
Radials Tyres for Truck/Bus, MUVs, Jeeps, LCVs & Pass. Cars.
JK Tyre has indomitable position in the car Radial Tyre segment being one
of the largest manufacturers in the country.
JK Tyre has been successful in maintaining its market leadership by
continuous improvement in product quality and better customer service with
several innovative marketing strategies.
One of the largest distribution networks in the Tyre Industry in India with
strategic plant locations across the country.
J K Tyre was the first tyre manufacturer in the world to have received ISO
9001 & QS 9000 certifications for its entire operations. All the Tyre Plants
have also received ISO 14001 accreditation for their environment
management systems.
3.5 Exports
We are the no. 1 exporters from India and export tyres under our brands – “JK
TYRE” and “VIKRANT” to 60 countries across six continents. JK Tyre has been
awarded the ‘Capexil’ award for the highest exports in the non-mineral sector. It
is also the first manufacturer in India to have the prestigious 'E' Mark certification
– a pre-requisite for exports to Europe.
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Outsourcing of tyres from China
JK Tyre is now further spreading its wings and has entered into strategic alliance
with a leading Chinese Tyre manufacturing company for outsourcing of Light
Truck Tyres for export markets. JKTIL has also signed collaboration agreement
with the same company for manufacture of bias truck tyres for sales in Chinese
market. Arrangements are also being made with some other manufacturers in
China for outsourcing of Heavy Duty Truck and Farm Tyres for exports.
JK Tyre is currently scouting for more low cost outsourcing production bases in
Latin America, South East Asia and East Europe.
3.6 Research and Development
JK Tyre is the only tyre company in India to set up an independent R & D facility
- ‘HASETRI’ which is engaged in the advancement of tyre technology & polymer
chemistry. This nerve centre helps translate consumer needs and expectations into
reality by suitably developing products and continuously measuring their
performance to provide world class products to the Indian consumers.
It is recognized by the Department of Scientific and Industrial Research (DSIR),
Govt. of India, and is also the first facility in India to get ISO 9002, ISO/IEC
Guide 25 and EN 45001 certification.
The deep commitment of the company to research & development activities not
only ensures the incorporation of latest technology in its products but also helps in
development of new tyres.
HASETRI has contributed significantly to various costs saving initiatives
undertaken by the company and has played a key role in J K Tyre’s success.
3.7 Environment
JK Tyre and Industries Ltd.’s current position and Future Prospects
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JK Tyre and Industries ranks second in the Indian Tyre Industry with 21%
market share, enjoying leadership in the truck and bus tyre segment with 25%
market share. It strong brand ‘JK Tyre’ & ‘Vikrant’ and wide distribution
network gives an edge over peers.
With organic and inorganic growth over the years, the Company has emerged
as a titan in the Indian Tyre Industry with a turnover of near about Rs 3000
crore and globally the 20th largest tyre manufacturer in the World.
The company is well positioned to capture the growth phase of Automobile
sector. The company has chalked out a plan to augment overall capacities.
JKTI has indomitable position in the car Radial Tyre segment being one of the
largest manufacturers in the country.
JK Tyre is leading the revolution in Truck Radials in Truck Radials as well
and continues to be country’s only manufacturer enjoying 90% market share.
JKTI is the largest exporter of tyres from India and a recognized Indian brand
in truck bias tyre market of USA, Africa, Middle East and south East Asia.
The company is well positioned to capture growth opportunities.
The outlook for the company largely depends on the prospects for the auto industry,
especially the commercial vehicle segment, as a whole. JKTI’s competitive position
in the industry is good. With a wide product range, large distribution network and a
renewed retail push, it is expected to retain its market leadership. However, high
prices of raw material inputs like carbon black, nylon tyre cord and natural rubber
will keep pressure on margins. Secondly, its presence in a number of unrelated
industries is also a point of concern.
Earnings sensitivity factors
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Raw material price fluctuations: The prices of natural rubber, an agricultural
commodity. In the last few months, prices have recovered due to increase in
international prices. Other raw materials are mainly petrochemical based and
movements are cyclical. The government’s decision to impose 10% safeguard duty
on carbon black, hiking benchmark prices of natural rubber and hiking import duties
on natural rubber will have adverse impact on the operating margins.
4.0 EXTERNAL COMMERCIAL BORROWINGS (ECB)
Introduction
External Commercial Borrowing (ECBs) is a key component of India’s overall debt.
Policy on External commercial Borrowings (ECB) is framed by the Government of
India in consultation with RBI. For the convenience of investors and borrowers,
Government brings out the consolidated ECB Guidelines in the form of a brochure.
External commercial borrowing is a complicated process. It is not the loan agreement
alone that is sufficient. It involves a number of other documents. The exact kind and
number of documents to be executed in an external commercial borrowing depend on
various factors including the nature of the lenders, that is, whether it is an
international financial institution, a financial institution of a country, an export import
bank, a commercial bank or a syndicate of such banks. The extent and the period for
which the funds are required by the borrower also play an important role in the
process. The purpose of the borrowing is also significant.
The important aspect of ECB policy is to provide flexibility in borrowings by Indian
Corporates, at the same time maintaining prudent limits for total external borrowings.
The guiding principles of ECB policy are to keep borrowing maturities long, costs low,
and encourage infrastructure and export sector financing which are crucial for overall
growth of the economy.
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Government has been streamlining / liberalizing ECB procedures in order to enable
Indian Corporates, to have greater access to international financial markets.
Government has now empowered Reserve Bank of India to give ECB approvals in
accordance with the guidelines brought out by the RBI.
Before we discuss ECB in detail let us look at some of the other sources of raising
foreign currency:
(a) Eurocurrency Loans : Eurocurrency is any freely convertible currency deposited
in banks outside the country of its origin. Eurocurrency loans are made on the
basis of floating interest rates using LIBOR (London interbank offered rate) as
the benchmark. A borrower can borrow in multiple currencies from the
Eurocurrency market and may choose to make payment of interest and
principal in one or more currencies. Usually the size of the Eurocurrency loans
is very large and these loans are syndicated by more than one bank.
(b) Eurobonds : A company can also raise funds by issuing Eurobonds and foreign
bonds to investors in other countries. Eurobonds are bonds sold outside the
country in whose currency they are denominated, for example, a dollar-
denominated bond issued by a U.S. company in Japan. Eurobonds are directly
issued by borrowers to investors. Eurobond market is free from the national
government regulation. Both fixed rate and floating rate bonds are issued by the
borrowers.
(c) Foreign Bonds : It is issued by a company in the domestic capital market of a
foreign country. It is denominated in the currency of the country where it is
issued and is subject to the laws and regulations of that country. A yen
denominated bond issued in Japan by a U.S. company is a foreign bond.
(d) Foreign Currency Convertible Bonds ( FCCBs) mean a bond issued by an
Indian company expressed in foreign currency, and the principal and interest
in respect of which is payable in foreign currency. Further, the bonds are
required to be issued in accordance with the scheme viz., "Issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary
Receipt Mechanism) Scheme, 1993”, and subscribed by a non-resident in
foreign currency and convertible into ordinary shares of the issuing company 13
in any manner, either in whole, or in part, on the basis of any equity related
warrants attached to debt instruments. The policy for ECB is also applicable to
FCCBs. The issue of FCCBs are also required to adhere to the provisions of
Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from
time to time.
(e) Depository Receipts:
It is difficult for companies from developing countries to raise equity capital
from developed markets. The country risk of these companies is high and the
listing and disclosure requirements in developed capital markets like the U.S.
market are very stringent. An indirect method of raising equity capital from
developed markets is to issue depository receipts. For example an Indian
company can issue American Depository Receipts (ADRs) in U.S. The Indian
firms can also issue Global Depository Receipts (GDRs) in many other
countries. A company issues its shares to a depository which will be a reputed
international financial institution. The depository bundles a specified number of
shares as a depository receipt and issues them to investors in the foreign
country. The depository receives dividends from the issuing company and pays
it to the depository receipt holders. Depository receipts can be listed on
international stock exchanges.
These are some of the major sources of raising foreign currency.
Now we will explain ECB in detail. This evolving policy regime was based broadly
on the recommendations of the Rangarajan Committee (1993) which implied;
(i) the continuation of an annual cap, minimum maturity restrictions and
prioritizing the use of ECBs;
(ii) LIBOR based ceilings on interest rates and minimum maturity
requirements on NRI deposits to discourage the volatile component of
such deposits;
(iii) Containment of short term debt together with controls to prevent its undue
increase in future;
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(iv) Retiring/ restructuring/ refinancing of more expensive external debt;
(v) Measures to encourage non-debt creating financial flows such as foreign
direct and portfolio investments;
(vi) incentives and schemes to promote exports and other current receipts; and
(vii) Conscious build-up of foreign exchange reserves to provide effective
insurance against external sector uncertainties.
5.0 Overview of ECB
ECB POLICY:
1. External Commercial Borrowings (ECBs) are defined to include commercial
bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as
Floating Rate Notes and Fixed Rate Bonds etc., credit from official export
credit agencies and commercial borrowings from the private sector window of
Multilateral Financial Institutions such as International Finance Corporation
(Washington), ADB, AFIC, CDC, etc. It is availed from non-resident lenders
with minimum average maturity of 3 years
2. ECBs are being permitted as an additional source of finance to augment the
resources available domestically to Indian Corporates for financing import of
capital goods, new projects, modernization/expansion of existing production
units in real sector - industrial sector including small and medium enterprises
(SME) and infrastructure sector - in India.
3. External Commercial Borrowings are approved within an overall annual
ceiling, consistent with prudent debt management.
4 The policy also seeks to give greater priority for projects in the infrastructure
and core sectors such as Power, oil Exploration, Telecom, Railways, Roads &
Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export
sector. Financial Institutions dealing exclusively with infrastructure or export
finance through their sub-lending against the ECB approvals are also expected
to give priority to the needs of medium and small scale units.15
5. Applicants will be free to raise ECB from any internationally recognized
source such as banks, export credit agencies, suppliers of equipment, foreign
collaborators, foreign equity-holders, international capital markets etc. Offers
from Non-recognized sources will not be entertained.
6. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii)
Approval Route
6.0 The major advantages that accrue from availing an ECB are:
a. Lower interest rate - First, the foreign currency loan is offered in the international
markets frequently against the guarantee from a bank. Therefore the borrower
should add against the guarantee fee payable by him to his bank to the cost of
raising the foreign currency loan. The interest rate the guarantee commission and
other incidental costs should aggregate to less than the cost of funds in the
domestic market.
b. The availability of the funds from the International market is huge as compared to
domestic market and corporate can raise large amount of funds depending on the
risk perception of the International market.
c. Non-encumbrance on assets - The third advantage is that since specific assets are
usually not charged for funds raised abroad, the borrowing capacity in the
domestic company is not affected.
d. Freedom from exchange risk - The exchange loss on conversion can be avoided
provided the purpose for which the loan is raised can be paid for in the currency of
the loan and the source of repayment is also in the same currency. For instance,
the loan is raised to pay in dollars for raw materials imported and export proceeds
are also received in US dollars. If the sources of repayment are in a currency other
than the currency of loan, the borrower will be facing exchange risk. Forward
cover may arrange, but this should be added to the cost of borrowing. Further,
hedging exposures for longer periods is costly.
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7.0 The major disadvantages that accrue from availing an ECB are:
1. Interest Rate Risk : As ECB’s are issued for a longer period of time and in this
meanwhile if the interest rate in domestic country goes down, it can convert ECB
in an expensive source of financing.
2. Exchange Rate Risk : If the domestic currency gets depreciated at the time of
payment of ECB, then borrower will have to pay extra rupee because of the
domestic currency depreciation.
3. Leverage : ECB is a debt instrument, and if it is raised beyond a limit, it can
increase the country’s dependence on the Lender’s country. As they will be in a
condition to impose their decision on borrowing county.
8.0 Current Trend
There has been quantum jump in borrowings by Indian companies abroad during
2006-07, which now account for over a quarter of the country’s total debt stock. i.e.
25.2 per cent of India's $ 142.7 billion external debt in December 2006. In the
previous quarter (September 2006), commercial borrowings represented 23.8 per cent
of the total external debt of $136.5 billion. ECBs accounted for $ 9.11 billion of the
total accretion of $ 16.24 billion to the debt stock of the country during the first three
quarters of 2006-07 (Apr 2006-Dec 2006). Lower spreads on external borrowings and
rising financing requirements for capacity expansion domestically has enabled higher
recourse to ECB’s.
The requirements of having a longer maturity for larger borrowing, caps on borrowing
cost and restrictions on end use of ECB have helped in avoiding the difficulties,
which some of the Southeast Asian Countries are currently facing. The guiding
principles for ECB Policy are to keep maturities long, costs low, and encourage
infrastructure and export sector financing which are crucial for overall growth of the
economy. Today, most of the borrowing is from the external commercial borrowing
(ECB) route because there is a clear arbitrage between domestic rates and the offshore
rates to the extent that corporate not affected by rising interest rates
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There have been high recourse to ECBs by Indian corporates which has resulted in
raising the ECB ceiling twice in the last financial year from 14bn to 18 bn and then to
22bn. The dependence of Indian corporates on ECB has almost insulated them from
the rising interest cost in the domestic market as they now have other options to
borrow and this trend is showing that ECB’s inflows will increase in the future.
The RBI to curb ECB issue has not yet allowed banks to go in for ECBs of up to 50%
of their tier-I capital, although the central bank had promised to do so in its October,
2006 monetary policy statement. At present, the banks are allowed ECBs of up to
25% of their unimpaired tier-I capital. This move is consistent with the stand adapted
by government to check inflation.
9.0 Regulations and Policies issued by RBI
ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval
Route
9.1 AUTOMATIC ROUTE
ECB for investment in the real sector - industrial sector, especially infrastructure
sector in India – is under the Automatic Route, i.e. will not require RBI /
Government approval. The maximum amount of ECB which can be raised by an
eligible borrower under the Automatic Route is USD 500 million during a
financial year. However, NGOs engaged in micro-finance activities have been
permitted to raise ECB up to USD 5 million during a financial yearn for
permitted end use.
In case of doubt as regards eligibility to access Automatic Route, applicants
may take recourse to the Approval Route.
ECB under Automatic Route do not require approval of Government of India /
RBI.
i) Eligible borrowers
(a) Corporates (registered under the Companies Act except financial
intermediaries (such as banks, financial institutions (FIs), housing finance
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companies and NBFCs) are eligible to raise ECB. Individuals, Trusts and
Non-Profit making Organisations are not eligible to raise ECB.
(b) Non-Government Organisations (NGOs) engaged in micro finance activities
are eligible to avail ECB. Such NGO (i) should have a satisfactory
borrowing relationship for at least 3 years with a scheduled commercial bank
authorised to deal in foreign exchange and (ii) would require a certificate of
due diligence on `fit and proper’ status of the board/committee of
management of the borrowing entity from the designated Authorised Dealer
(AD) bank.
(c) Individuals, Trusts and non-profit making organizations, [except NGOs
engaged in micro-finance activities as mentioned earlier] are not eligible to
raise ECB.
(d) Units in Special Economic Zones (SEZ) are allowed to raise ECB for their
own requirement. However, they cannot transfer or on-lend ECB funds to
sister concerns or any unit in the Domestic Tariff Area.
ii) Recognised Lenders
(a) Borrowers can raise ECB from internationally recognised sources such as:
(i) International banks,
(ii) International capital markets,
(iii) Multilateral financial institutions (such as IFC, ADB, CDC etc),
(iv) Export credit agencies,
(v) Suppliers of equipment,
(vi) Foreign collaborators and
(vii) Foreign equity holders (other than erstwhile OCBs).
A "foreign equity holder" to be eligible as “recognized lender” under the
automatic route would require minimum holding of equity in the borrower
company as set out below:
(i) For ECB up to USD 5 million - minimum equity of 25 per cent held
directly by the lender,
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(ii) For ECB more than USD 5 million - minimum equity of 25 per cent
held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e.
the proposed ECB not exceeding four times the direct foreign equity
holding).
(b) Overseas organizations and individuals complying with following
safeguards may provide ECB to Non-Government Organisations (NGOs)
engaged in micro finance activities.
(i) Overseas organizations proposing to lend ECB would have to furnish a
certificate of due diligence from an overseas bank which in turn is subject
to regulation of host-country regulator and adheres to Financial Action
Task Force (FATF) guidelines to the AD bank of the borrower. The
certificate of due diligence should comprise the following (i) that the
lender maintains an account with the bank for at least a period of two
years, (ii) that the lending entity is organised as per the local law and held
in good esteem by the business/local community and (iii) that there is no
criminal action pending against it.
(ii) Individual Lender has to obtain a certificate of due diligence from an
overseas bank indicating that the lender maintains an account with the
bank for at least a period of two years. Other evidence /documents such as
audited statement of account and income tax return which the overseas
lender may furnish need to be certified and forwarded by the overseas
bank. Individual lenders from countries wherein banks are not required to
adhere to Know Your Customer (KYC) guidelines are not eligible to
extend ECB.
iii) Amount and Maturity
(a) The maximum amount of ECB which can be raised by a corporate is USD
500 million or equivalent during a financial year.
(b) ECB up to USD 20 million or equivalent in a financial year with
minimum average maturity of three years
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(c) ECB above USD 20 million and up to USD 500 million or equivalent
with minimum average maturity of five years.
(d) NGOs engaged in micro finance activities can raise ECB up to USD 5
million during a financial year. Designated AD bank has to ensure that at
the time of drawdown the forex exposure of the borrower is hedged.
(e) ECB up to USD 20 million can have call/put option provided the
minimum average maturity of 3 years is complied with before exercising
call/put option.
iv) All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign
currency except commitment fee, pre-payment fee, and fees payable in Indian
Rupees. Moreover, the payment of withholding tax in Indian Rupees is
excluded for calculating the all-in-cost.
The all-in-cost ceilings for ECB are indicated from time to time. The current
ceilings are as below:
Average Maturity Period All-in-cost Ceilings over 6 month
LIBOR*
Three years and up to five years 150 basis points
More than five years 250 basis points
* For the respective currency of borrowing or applicable benchmark.
All-in-cost includes rate of interest, other fees and expenses in foreign
currency except commitment fee, pre-payment fee, and fees payable in Indian
Rupees. Moreover, the payment of withholding tax in Indian Rupees is
excluded for calculating the all-in-cost.
v) End-use
(a) Investment e.g. import of capital goods (as classified by DGFT in the
Foreign Trade Policy), implementation of new projects, and
21
modernization/expansion of existing production units in real sector -
industrial sector including small and medium enterprises (SME) and
infrastructure sector - in India. Infrastructure sector is defined as (i)
power, (ii) telecommunication, (iii) railways, (iv) road including bridges,
(v) sea port and airport (vi) industrial parks and (vii) urban infrastructure
(water supply, sanitation and sewage projects)
(b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned
Subsidiaries (WOS) subject to the existing guidelines on Indian Direct
Investment in JV/WOS abroad.
(c) The first stage acquisition of shares in the disinvestment process and also
in the mandatory second stage offer to the public under the Government’s
disinvestment programme of PSU shares.
(d) For lending to self-help groups or for micro-credit or for bonafide micro
finance activity including capacity building by NGOs engaged in micro
finance activities.
(e) Refinancing of an existing ECB
The existing ECB may be refinanced by raising a fresh ECB subject to
the condition that the fresh ECB is raised at a lower all-in-cost and the
outstanding maturity of the original ECB is maintained.
(f) NBFCs can utilise ECB proceeds towards import of infrastructure
equipment for leasing to infrastructure projects.
(g) Housing Finance Companies with strong financials can utilise FCCB
proceeds for meeting their housing finance requirements.
vi) End Uses not permitted
(a) Utilization of ECB proceeds is not permitted for on-lending or investment
in capital market or acquiring a company (or a part thereof) in India by a
corporate.
(b) Utilisation of ECB proceeds is not permitted in real estate. The term ‘real
estate’ excludes development of integrated township as defined by
Ministry of Commerce and Industry, DIPP, SIA (FC Division. Integrated
22
township includes housing, commercial premises, hotels, resorts, city and
regional level urban infrastructure facilities such as roads and bridges,
mass rapid transit systems and manufacture of building materials.
Development of land and providing allied infrastructure forms an
integrated part of township’s development. The minimum area to be
developed should be 100 acres for which norms and standards are to be
followed as per local bylaws/rules. In the absence of such bylaws/rules, a
minimum of two thousand dwelling units for about ten thousand
population will need to be developed.
(c) Utilisation of ECB is not permitted for working capital, general corporate
purpose and repayment of existing Rupee loans.
vii) Guarantees
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, Financial Institutions and Non-Banking Financial
Companies (NBFCs) relating to ECB is not permitted.
viii) Security
The choice of security to be provided to the lender/supplier is left to the
borrower. However, creation of charge over immovable assets and financial
securities, such as shares, in favor of the overseas lender is subject to
Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and
Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000 as
amended from time to time, respectively.
ix) Parking of ECB proceeds overseas
ECB proceeds shall be parked overseas until actual requirement in India. ECB
proceeds parked overseas can be invested in the following liquid assets:
(a) Deposits or Certificate of Deposit or other products offered by banks rated
not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s;
(b) Deposits with overseas branch of an authorised dealer in India; and
23
(c) Treasury bills and other monetary instruments of one year maturity having
minimum rating as indicated above. The funds should be invested in such
a way that the investments can be liquidated as and when funds are
required by the borrower in India.
x) Prepayment
Prepayment of ECB has raised up to USD 400 million from USD 300 million
(in the credit policy of 2007-2008) may be allowed by AD banks without prior
approval of RBI subject to compliance with the stipulated minimum average
maturity period as applicable to the loan.
xi) Debt Servicing
The designated Authorised Dealer (AD) bank has the general permission to
make remittances of installments of principal, interest and other charges in
conformity with ECB guidelines issued by Government / Reserve Bank of
India from time to time.
xii) Procedure
Borrowers may enter into loan agreement complying with ECB guidelines
with recognised lender for raising ECB under Automatic Route without prior
approval of RBI. The borrower must obtain a Loan Registration Number
(LRN) from the Reserve Bank of India before drawing down the ECB.
9.2 APPROVAL ROUTE
All cases which fall outside the purview of the automatic route, will be decided
by an Empowered Committee set up by RBI
The following types of proposals for ECB are covered under the Approval
Route
i) Eligible borrowers
24
a) Financial institutions dealing exclusively with infrastructure or export finance
such as IDFC, IL&FS, Power Finance Corporation, Power Trading
Corporation, IRCON and EXIM Bank are considered on a case by case basis.
b) Banks and financial institutions which had participated in the textile or steel
sector restructuring package as approved by the Government are also
permitted to the extent of their investment in the package and assessment by
Reserve Bank based on prudential norms. Any ECB availed for this purpose
so far will be deducted from their entitlement.
c) ECB with minimum average maturity of 5 years by Non-Banking Financial
Companies (NBFCs) from multilateral financial institutions, reputable
regional financial institutions, official export credit agencies and international
banks to finance import of infrastructure equipment for leasing to
infrastructure projects.
d) Foreign Currency Convertible Bonds (FCCB) by housing finance companies
satisfying the following minimum criteria: (i) the minimum net worth of the
financial intermediary during the previous three years shall not be less than
Rs. 500 crore, (ii) a listing on the BSE or NSE, (iii) minimum size of FCCB is
USD 100 million, (iv) the applicant should submit the purpose / plan of
utilization of funds.
e) Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set
up to finance infrastructure companies / projects exclusively, will be treated as
Financial Institutions and ECB by such entities will be considered under the
Approval Route.
f) Multi-State Co-operative Societies engaged in manufacturing activity
satisfying the following criteria i) the Co-operative Society is financially
solvent and ii) the Co-operative Society submits its up-to-date audited balance
sheet.
25
g) Cases falling outside the purview of the automatic route limits and maturity
period indicated at paragraph I (A) (iii).
ii) Recognised Lenders
(a) Borrowers can raise ECB from internationally recognised sources such as (i)
international banks, (ii) international capital markets, (iii) multilateral financial
institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v)
suppliers' of equipment, (vi) foreign collaborators and (vii) foreign equity
holders (other than erstwhile OCBs).
(b) From 'foreign equity holder' where the minimum equity held directly by the
foreign equity lender is 25 per cent but debt-equity ratio exceeds 4:1(i.e. the
proposed ECB exceeds four times the direct foreign equity holding).
iii) All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign
currency except commitment fee, pre-payment fee, and fees payable in Indian
Rupees. Moreover, the payment of withholding tax in Indian Rupees is
excluded for calculating the all-in-cost. The current ceilings are as below:
Average Maturity Period All-in-cost Ceilings over 6 month
LIBOR*
Three years and up to five
years
150 basis points
More than five years 250 basis points
* For the respective currency of borrowing or applicable benchmark.
All-in-cost includes rate of interest, other fees and expenses in foreign
currency except commitment fee, pre-payment fee, and fees payable in Indian
Rupees. Moreover, the payment of withholding tax in Indian Rupees is
excluded for calculating the all-in-cost.
26
iv) End-use
(a) Investment [such as import of capital goods (as classified by DGFT in the
Foreign Trade Policy), implementation of new projects,
modernization/expansion of existing production units], in real sector
(industrial sector including small and medium enterprises (SME) and
infrastructure sector) in India. Infrastructure sector is defined as (i) power,
(ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea
port and airport, and, (vi) industrial parks and (vii) urban infrastructure
(water supply, sanitation and sewage projects);
(b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned
Subsidiaries (WOS) subject to the existing guidelines on Indian Direct
Investment in JV/WOS abroad.
(c) The first stage acquisition of shares in the disinvestment process and also
in the mandatory second stage offer to the public under the Government’s
disinvestment programme of Public Sector Units shares.
(d) Refinancing of an existing ECB
Existing ECB may be refinanced by raising a fresh ECB subject to the
condition that the fresh ECB is raised at a lower all-in-cost and the
outstanding maturity of the original ECB is maintained
v) End Uses Not Permitted
(d) Utilization of ECB proceeds is not permitted for on-lending or investment
in capital market or acquiring a company (or a part thereof) in India by a
corporate.
(e) Utilisation of ECB proceeds is not permitted in real estate. The term ‘real
estate’ excludes development of integrated township as defined by
Ministry of Commerce and Industry, DIPP, SIA (FC Division), Press Note
27
3 (2002 Series) dated January 4, 2002. Integrated township includes
housing, commercial premises, hotels, resorts, city and regional level
urban infrastructure facilities such as roads and bridges, mass rapid transit
systems and manufacture of building materials. Development of land and
providing allied infrastructure forms an integrated part of township’s
development. The minimum area to be developed should be 100 acres for
which norms and standards are to be followed as per local bylaws/rules. In
the absence of such bylaws/rules, a minimum of two thousand dwelling
units for about ten thousand population will need to be developed.
(f) Utilisation of ECB is not permitted for working capital, general corporate
purpose and repayment of existing Rupee loans.
vi) Guarantee
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, financial institutions and NBFCs relating to ECB is not
normally permitted. Applications for providing guarantee/standby letter of
credit or letter of comfort by banks, financial institutions relating to ECB in
the case of SME will be considered on merit subject to prudential norms.
With a view to facilitating capacity expansion and technological upgradation
in Indian Textile industry, issue of guarantees, standby letters of credit, letters
of undertaking and letters of comfort by banks in respect of ECB by textile
companies for modernization or expansion of textile units will be considered
under the Approval Route subject to prudential norms.
vii) Security
The choice of security to be provided to the lender / supplier is left to the
borrower. However, creation of charge over immovable assets and financial
securities, such as shares, in favor of the overseas lender is subject to
Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and
Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000 as
amended from time to time, respectively.
28
viii) Parking of ECB proceeds overseas
ECB proceeds shall be parked overseas until actual requirement in India. ECB
proceeds parked overseas can be invested in the following liquid assets:
(a) Deposits or Certificate of Deposit or other products offered by banks rated
not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s;
(b) Deposits with overseas branch of an authorised dealer in India; and
(c) Treasury bills and other monetary instruments of one year maturity having
minimum rating as indicated above. The funds should be invested in such
a way that the investments can be liquidated as and when funds are
required by the borrower in India.
ix) Prepayment
(a) Prepayment of ECB has raised up to USD 400 million from USD 300
million (in the credit policy of 2007-2008) may be allowed by the AD
bank without prior approval of Reserve Bank subject to compliance with
the stipulated minimum average maturity period as applicable to the loan.
(b) Pre-payment of ECB for amounts exceeding USD 200 million would be
considered by the Reserve Bank under the Approval Route.
x) Debt Servicing
The designated AD bank has general permission to make remittances of
installments of principal, interest and other charges in conformity with ECB
guidelines issued by Government / Reserve Bank from time to time.
xi) Procedure
Applicants are required to submit an application in form ECB through
designated AD bank to the Chief General Manager, Foreign Exchange
Department, Reserve Bank of India, Central Office, External Commercial
Borrowings Division, Mumbai – 400 001 along with necessary documents.
29
xii) Empowered Committee
Reserve Bank has set up an Empowered Committee to consider proposals
coming under the Approval Route.
10.0 Pricing
The pricing of the foreign currency loans/ services implies the total cost to the
company comprising –
i. Rate of interest / margin ( it is linked with the risk profile of the intending
borrower)
ii. Arrangement/ upfront fee and other fees.
The arrangement fee / upfront fee is a onetime cost. The pricing depends on various
factors such as the credit rating of the borrower, tenor of the loan, demand/supply
position of the foreign currency available, market conditions etc. The prices keep on
changing as per the market scenario and are normally valid for a period of -30- days.
In addition to the pricing, there are legal/ documentation / out of pocket expenses etc.
These are normally in the range of US$ 15,000 or US$ 20,000, but can be higher in
some cases. Pricing offered is flexible, can be discussed and negotiated.
Effective Interest cost of ECB (3-5 years) [Estimation]:
(a) LIBOR Rate for 5 years…..………………………………………5.01
(b) Spread (maximum)............................................................…...1.50
(c) Other Exp (upfront, arrangement) (assumption)...…………….0.49
(d) Interest before withholding Tax [(a) + (b) + (c)]……………….7.00
(e) Withholding Tax 20% of (d) ……………………………….1.75
1-0.2
(f) Effective Interest Rate [(d) + (e)]...…………………………….8.75
30
Effective Interest cost of ECB (Above 5 years) [Estimation]:
(a) LIBOR Rate for 5 years…..………………………………………5.01
(b) Spread (maximum)……………………………………………….2.50
(c) Other Exp (upfront, arrangement) (assumption)...…………….0.49
(d) Interest before withholding Tax [(a) + (b) + (c)]………………..8.00
(e) Withholding Tax 20% of (d) ………………………………..2.00
1-0.2
(f) Effective Interest Rate [(d) + (e)]...……………………………..10.00
Applicants will be free to raise ECB from any internationally recognised source such
as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign
equity-holders, international capital markets etc. Offers from unrecognized sources
will not be entertained.
Corporates are now eligible for ECBs even for project related rupee expenditure up to
35% of the total project cost and are permitted to obtain credit enhancements from
international banks / international financial institutions / joint venture partners for
their domestic rupee denominated structural obligations
Prepayment of ECB
(a) Prepayment would be permitted if they are met out of inflow of foreign
equity.
(b) In addition to ECB being prepaid out of foreign equity, corporates can
avail either of the two options for prepayment of their ECBs:
(i) On permission by the Govt., prepayment may be undertaken within the
permitted period, of all the ECBs with residual maturity up to one year.
OR
(ii) Prepayment up to 10% of the outstanding ECB to be permitted once
during the life of the loan, subject to the company complying with the
ECB approval terms. Those companies who had already availed
prepayment facility of 20% earlier would not be eligible.
(c) Validity of the permission under the above two options will be as under:
(i) Prepayment permission for ECBs other than the Bonds
/Debentures/FRNs will be valid up to 15 days or period up to the next
interest payment date, which ever is later.31
(ii) In case of Bonds/FRNs, validity of permission will not be more than 2
months from the date of RBI’s approval.
Prepayment will be allowed with the prior permission of ECB sanctioning
authority i.e. Department of Economic Affairs, Government of India / ECD,
RBI.
For providing greater transparency, information with regard to the name of the
borrower, amount, purpose and maturity of ECB under both Automatic Route and
Approval Route are put on the Reserve Bank website on a monthly basis with a lag of
one month to which it relates.
11.0 Reporting requirements , responsibility of compliance with ECB guidelines, and
dissemination of information by RBI will be discussed here
REPORTING ARRANGEMENTS AND DISSEMINATION OF
INFORMATION
(a) With a view to simplify the procedure, submission of copy of loan
agreement is dispensed with.
(b) For allotment of loan registration number, borrowers are required to
submit Form 83, in duplicate, certified by the Company Secretary (CS) or
Chartered Accountant (CA) to the designated AD bank. [Note: copies of
loan agreement, offer documents for FCCB are not required to be
submitted with form 83)
(c) The borrower can draw-down the loan only after obtaining the loan
registration number from DESACS, Reserve Bank.
(d) Borrowers are required to submit ECB-2 Return certified by the
designated AD bank on monthly basis so as to reach DESACS, RBI
within seven working days from the close of month to which it relates.
COMPLIANCE WITH ECB GUIDELINES
The primary responsibility to ensure that ECB raised / utilised are in conformity
with the ECB guidelines and the Reserve Bank regulations / directions is that of
the concerned borrower and any contravention of the ECB guidelines will be 32
viewed seriously and will invite penal action under FEMA 1999 (cf. A. P. (DIR
Series) Circular No. 31 dated February 1, 2005). The designated AD bank is also
required to ensure that raising / utilisation of ECB is in compliance with ECB
guidelines at the time of certification.
Dissemination of Information
For providing greater transparency, information with regard to the name of the
borrower, amount, purpose and maturity of ECB will be put on the RBI website by
the next working day of the approval under Approval Route and on a monthly basis
with a lag of one month to which it relates under Automatic Route.
12.0 Special allowances
Special allowances to exporters/foreign exchange earners, Long term borrowers and
the conditions under which conversion of ECB into equity is permitted and the
various provisions relating to reporting of such conversion
Exporters / Foreign Exchange Earners Scheme
Corporates who have foreign exchange earnings are permitting to raise up to three
times the average amount of annual exports during the previous three years
subject to a maximum of USD 200 million without end-use restrictions, i.e. for
general corporate objectives excluding investment in stock markets or in real
estate. The maximum entitlement in any one year is a cumulative limit and debt
outstanding under earlier approvals (erstwhile USD 15 mio exporter schemes and
thereafter) will be netted out to determine annual eligibility.
Long-Term Borrowers
a) ECB of ten years average maturity and above will outside the ECB ceiling,
though MOF's prior approval for such borrowings would continue to be
applicable. The extent of debt under this window will be reviewed by the
Government periodically.
33
b) Corporate borrowers able to raise long-term resources with an average maturity
of 10 years and 20 years will be allowed to use ECB proceeds without the
normal end-use restrictions upto USD 100 million for issue of 10 years and
above upto 20 years and USD 200 million for issue of 20 years and above.
These amounts will be available for general corporate objectives excluding
investments in stock markets or in real estate.
c) To be eligible for this purpose, the debt instrument should not include any
"put" or "call" options potentially reducing the stated maturities.
CONVERSION OF ECB INTO EQUITY
(i) Conversion of ECB into equity is permitted subject to the following conditions:
(a) The activity of the company is covered under the Automatic Route for
Foreign Direct Investment or Government approval for foreign equity
participation has been obtained by the company,
(b) The foreign equity holding after such conversion of debt into equity is within
the sectoral cap, if any,
(c) Pricing of shares is as per SEBI and erstwhile CCI guidelines/regulations in
the case of listed/unlisted companies as the case may be.
(ii) Conversion of ECB may be reported to the Reserve Bank as follows:
(a) Borrowers are required to report full conversion of outstanding ECB into
equity in the form FC-GPR to the concerned Regional Office of the Reserve
Bank as well as in form ECB-2 submitted to the DESACS, RBI within seven
working days from the close of month to which it relates. The words "ECB
wholly converted to equity" should be clearly indicated on top of the ECB-2
form. Once reported, filing of ECB-2 in the subsequent months is not
necessary.
(b) In case of partial conversion of outstanding ECB into equity, borrowers are
required to report the converted portion in form FC-GPR to the concerned
Regional Office as well as in form ECB-2 clearly differentiating the
converted portion from the unconverted portion. The words "ECB partially
converted to equity" should be indicated on top of the ECB-2 form. In
34
subsequent months, the outstanding portion of ECB should be reported in
ECB-2 form to DESACS.
Infrastructure Projects
Holding Companies/promoters will be permitted to raise ECB upto a maximum of
USD 50 million equivalent to finance equity investment in a subsidiary/joint
venture company implementing infrastructure projects. This flexibility is being
given in order to enable domestic investors in infrastructure projects to meet the
minimum domestic equity requirements.
In case the debt is to be raised by more than one promoter for a single project then
the total quantum of loan by all promoters put together should not exceed USD 50
million.
13.0 Procedure for issuing ECB
Detailed analysis of steps to be taken to obtain RBI approval, here various forms
required to be submitted will be annexed and various documents required will be
mentioned
Procedure for Seeking ECB Approval
Applications may be submitted by the borrowers in the prescribed format (Annex. II)
to the Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance,
North Block, Hyderabad-110 001.The application should contain the following
information:-
An Offer letter from the lender giving the detailed terms and conditions;
Copy of Project Appraisal Report from a recognised Financial
Institution/Bank, if applicable;
Copies of relevant documents and approvals from Central/State Governments,
wherever applicable, such as FIPB, CCEA, and SIA clearances, environmental
clearance, techno-economic clearance from Central Electricity Authority,
valid licenses from Competent Authorities, no objection certificate from
35
Ministry of Surface Transport, evidence of export/foreign exchange earnings
from the statutory auditor based on the bankers realisation certificate,
registration with RBI in case of NBFCs, approval for overseas investment
from RBI etc.
Approval Under FEMA
After receiving the approval from ECB Division, Department of Economic Affairs,
Ministry of Finance, the applicant is required to obtain approval from the Reserve
Bank of India under the Foreign Exchange Management Act, and to submit an
executed copy of the Loan Agreement to this Department for taking the same on
record, before obtaining the clearance from RBI for drawing the loan. Monitoring of
end-use of ECB will continue to be done by RBI.
At present, ECB approvals under US $ 3 million scheme (enhanced to US $ 5 million)
is given by RBI and all other ECB proposals are processed in DEA. As a measure of
further simplification and rationalisation, Government has decided to delegate the
ECB sanctioning power to RBI up to US $ 10 million under all the ECB schemes
except structured obligation which is at present being administered by DEA.
Accordingly, applications for approval upto US $ 10 million will be considered by the
Exchange Control Department of RBI, Mumbai. Accordingly, corporates seeking
ECBs upto US $ 10 million may approach RBI.
Validity of Approval
Approvals are valid for a period of six month. i.e. the executed copy of the loan
agreement is required to be submitted within this period. In the case of FRNs, Bonds
etc., the same are required to be launched within this period. In case of power
projects, the validity of the approval will be for a period of one year. Extension will
not be granted beyond the validity period. However, borrowers are free to submit
fresh application, after a gap of six month, which will be evaluated in the light of the
ECB guidelines applicable at that time.
36
In case of infrastructure projects, however, because financial closure may get delayed
for reasons beyond the investor's control, extension of validity may be considered on
merits.
14.0 Various Indian companies which have gone for ECB recently
1. Essar Steel (ESL)
It has raised Rs 540 crore ($120m) through external commercial borrowings
(ECB) in June 2006, which will be syndicated by Barclays Capital and State Bank
of India (SBI). The funds will be used for expanding ESL’s capacity from 3m
tonne per annum to 4.6m tonne.
The loans will be syndicated at London Inter Bank Offering Rate (Libor) plus 255
bps. Company is also planning to raise another Rs 135 crore ($30m) under the
green shoe option.ESL, however, stands to gain from such borrowings because of
a natural hedge of export earnings that the company has. ESL has foreign currency
revenue of over Rs 2,250 crore ($500m) a years. ESL is India’s largest exporter of
steel.
2. Tata Steel Ltd
Tata Steel signed an external commercial borrowing agreement of US$ 500 million
(Japanese Yen equivalent of US$ 495 million and US$ 5 million) at Singapore for
funding its growth projects and acquisitions through approval route in March
2006.The syndicated term loan facility was for US$ 400 million with a greenshoe
option of further US$ 100 million.
The syndicated term loan facility was for US$ 400 million (or its equivalent in
JPY) with a greenshoe option of further US$ 100 million (or its equivalent in
JPY). Seventeen banks across various geographies participated in the aforesaid
syndicated term loan facility. The issue was oversubscribed and the company
exercised the greenshoe option. The loan has a door-to door maturity of seven
years. The coupon of the loan will be Libor plus 45 basis points.
37
3. POWER Finance Corporation (PFC)
PFC has raised funds from the overseas markets in Feb 2006. The funds will be
utilised to fund power projects, as part of PFC's lending programme. So far, PFC
has borrowed $3.8 billion from the overseas and Indian markets and on lent it to
various power projects.
The power sector specific-financial institution is now planning to take equity
stakes in power projects. This will be done through India Power Fund (IPF), a
venture capital fund, which is being set up PFC. IPF will take up to 10 per cent
equity stakes in power generation, transmission, distribution and trading projects.
The preference will be towards quick yielding projects. According to PFC, the
fund will not invest in projects where the IPF sponsors have more than 15 per cent
equity participation. PFC plans to make an initial investment of Rs 200 crore in
the fund. It is currently soliciting investments from the public sector undertakings,
etc, to fill the IPF corpus.
4. Ceat Ltd
Ceat has raised ECB of USD 10 million from ICICI Bank Limited, Bahrain, in
October 2006, to meet the cost of expansion in capacity of Radials and OTR /
niche products and modernisation of mixing facility at Bhandup factory.
The Company has been able to raise the 6-1/2 year ECB at interest rates of 160
basis points above the prevailing six months Libor. The Company has also made
arrangements for hedging to cover the future forex risk on drawdown basis
The Company will utilize part or the proceeds of the ECB to enhance radial
capacity in its Nasik plant from 40,000 tyres to 1,00,000 tyres per month in two
phases. The enhancement will largely be in passenger car and utility vehicle
radials and also some LCV sizes. The rest will be utilized in capacity addition of
its 0TR (0ff The Road) and niche products capacities, as also in modernization of
mixing facilities at its Bhandup plant.
A list of other Indian corporates who has issued ECB is annexed in the report.
38
15.0 Structured Obligations
In order to enable corporates to hedge exchange rate risks and raise resources
domestically, domestic rupee denominated structured obligations would be permitted
to be credit enhanced by international banks/international financial institutions/joint
venture partners subject to following conditions :-
a. In the event of default, foreign banks giving guarantee will make payment of
defaulted amount of principal and interest after bringing in the equivalent
amount of foreign exchange into the country.
b. FEMA clearance should be obtained from RBI in advance of issuance.
c. Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be
obtained.
d. In the event of default, the default should be foreign exchange equivalent
amount equal to the principal and interest outstanding calculated in rupee
terms.
e. The liability of Indian company will always be rupee denominated and the
debt servicing may be done in equivalent foreign exchange funds.
f. The guarantee fee/commission/charges and other incidental expenses to the
Indian company should be in rupee terms only. All-in-cost on this account
should not exceed 3% p.a. in rupee terms.
g. In case of the proposals relating to sectors where conditions apply clearances
e.g. relating to the assignability licenses etc., these should be obtained in
advance.
h. In case of default, the interest rate could be coupon on the Bond/or 250 bps
over prevailing secondary market yield of 5-year GOI security, whichever is
higher.
16.0 Post issues of ECB
The corporate can undertake liability management for hedging the interest and/or
exchange rate risk on their underlying foreign currency exposure. Prior approval of
this Department or RBI has been dispensed with for concluding or winding up of the
following transactions:-
39
Interest rate swaps: IT helps companies to alter their exposure to interest-rate
fluctuations, by swapping fixed-rate obligations for floating rate obligations, or vice
versa. By swapping interest rates, a company is able to alter their interest rate
exposures and bring them in line with management's appetite for interest rate risk.
Currency swaps: A currency swap is a foreign exchange agreement between two
parties to exchange a given amount of one currency for another and, after a spec ified
period of time, to give back the original amounts swapped. It can be negotiated for a
variety of maturities up to at least 10 years
1. Coupon swaps: Purchase of interest rate caps/collars: When interest rate
swap involves the swapping of a stream of payments based on the fixed
interest rate for a stream of floating interest rate, then it is called a coupon
swap.
2. Forward rate agreements : forward rate agreement (FRA) is a forward
contract in which one party pays a fixed interest rate, and receives a
floating interest rate equal to a reference rate (the underlying rate). The
payments are calculated over a notional amount over a certain period, and
netted, i.e. only the differential is paid. It is paid on the termination date.
The reference rate is fixed one or two days before the termination date,
dependent on the market convention for the particular currency
Refinancing the Existing Foreign Currency Loan
Refinancing of outstanding amounts under existing loans by raising fresh loans at
lower costs may also be permitted on a case-to case basis, subject to the condition that
the outstanding maturity of the original loan is maintained. Rolling over of ECB will
not be permitted.
A corporate borrowing overseas for financing its Rupee- related expenditure and
swapping its external commercial borrowings with another corporate which required
foreign currency funds will not be permitted.
40
17.0 Future scenario
There has been steep rise in inflation in recent times which has been partly attributed
to addition in domestic money supply due to Indian company's recourse to ECBs.
Inflow of foreign funds increases liquidity in the domestic market when part of these
borrowings is used to pay back expensive rupee denominated loans. Put simply,
cheaper funds raised abroad are used to pay back high-cost loans from domestic
markets. This increases liquidity in the system. In the light of the current situation
RBI is unlikely to raise the ceiling on external commercial borrowings from the
current level to $22 billion. Also the cap of $500 million per year for the Indian
corporate is unlikely to be raised. Similarly, a number of restrictions are expected to
remain in place on the end-use of ECBs.
Moreover, in the present scenario, rupee appreciation is one of the major discouraging
point for increasing ECB inflows. Rupee is at 9 year high in comparison to Dollar. As
corporate will get less rupee in comparison to dollars as rupee is at new peak, they
may have to pay extra at the time of payment, if rupee depreciate from the current
level. For ex: If a company borrows $ 20 million today, it would be near about Rs 81-
81.5 crore, but if rupee depreciate to the last year level they may have to pay Rs 85-90
crore plus the timely interest. That’s why rupee appreciation can discourage ECB.
The government’s move to retain the ECB cap for FY08 at the current level comes at
a time when cost of borrowing in the domestic market is witnessing a steady rise.
With the latest rate hike from RBI, a high quality Indian company has to pay at least
12% for a rupee loan in India, while a foreign loan, even if fully hedged, works out
close to 10-10.5%. And if the corporate does not hedge the currency risk, then the
company can save over 3%. This though has made recourse to external commercial
borrowing more attractive the ECB cap would come as a dampener to companies,
considering their large investment plans on the back of a high economic growth. In
the financial year just ended, bankers say at least USD 20 billion worth loans were
borrowed in the form of ECBs. Such borrowings were expected to increase by 50%
during the current year. Investment bankers say the ECB rush this year is likely to be
further fuelled by small and medium sized companies, as borrowing costs for them in
India are exceptionally high.41
Central Bank is also discouraging the use of ECB to slow down the domestic demand
in the Indian market, that’s why central bank is even considering to curb ECB issues
through automatic route along with the approval route. Infact the government has
decided against Real Estate sector for easing the ECB norms So, corporates which are
thinking of raising capital through automatic route has to decide whether to issue ECB
or not as soon as possible, as there are chances of RBI taking strict measures
regarding ECB.
18.0 FCCB
18.1 Introduction
The revival of the equity-linked instruments came in May 2004 via FCCBs, which
created a very active market with a lot of issuance. The start of the FCCB market
coincided with a great equity boom, helping foreign investors make a lot of money.
Local firms raised $15.76 billion in foreign borrowings during April-December 2006.
This signals an 80% rise in such borrowings compared to April-December 2005 when
Indian companies borrowed $8.77 billion.
Issue of FCCB is governed by Foreign Exchange Management (Transfer or Issue of
any Foreign Security) Regulations, 2004.
The Regulations define FCCB as a bond issued by an Indian company expressed in
foreign currency, and the principal and interest in respect of which is payable in
foreign currency. A convertible bond is a quasi-debt instrument, which can be
converted into equity shares at the choice of investor either immediately after issue, or
upon maturity, or during a set period, at a predetermined strike rate. It acts like a bond
by making regular interest and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock.
The investor benefits if the conversion price is higher than the traded price and
suffers a loss if the traded price is higher than the conversion price. However, the
investor has the discretion to hold the bond till maturity, receive regular interest
42
payments and principal on maturity, without exercising the option of converting the
debt instruments into equity.
Issue of FCCBs will have to conform to the Foreign Direct Investment (“FDI”) policy
(including sectoral caps and sectors where FDI is permissible) of the Government of
India and the RBI’s regulations/directions issued from time to time.
ECB guidelines are also applicable on FCCB. It is treated on par with ECB, with
automatic clearance upto USD500 mn. Subject to average maturity of 5 years. Its
prepayment guidelines which are amended in 2003 are as follows:
18.2 Guidelines for prepayment of FCCB issues by the Indian Companies.
With a view to further liberalising the scheme, it has been decided by the Government
to allow Indian companies to prepay the existing FCCBs subject to the following
conditions:-
(a) This provision of pre-payment (premature purchase) of existing FCCBs will be
available upto 30th September, 2003. The existing condition of minimum maturity
period for redemption of bonds (i.e. 5 years) is put on hold till 30th September,
2003.
(b) The initiation power/right of prepayment is vested with the issuer of Bonds and
not with the holder of bonds. However, the actual pre-payment is subject to the
consent of the holder of the bond.
(c) The pre-payment should be at most the face value of bonds and not exceeding the
face value (inclusive of all expenses for such buyback).
(d) The bonds purchased from the holders must be cancelled and should not be re-
issued or re-sold.
(e) The funds resources for making such prepayment by the Company shall not be by
resorting to fresh external debt.
43
(f) This prepayment scheme of FCCBs will not have any effect on the bondholders of
Indian Companies not opting this window or on the non-participating bondholders
of Indian companies opting this window.
After completing the transactions, the companies would be required to furnish full
particulars thereof including the number of bonds repurchased (ie. prepaid), the rate of
repurchase (including expenses, if any), the number of residual bonds, source of funds
to the Ministry of Finance, Department of Economic Affairs and the Exchange
Control Department of the Reserve Bank of India, Central Office, Mumbai within 30
days of completion of such transactions.
All transactions under this scheme shall be performed on or before 30 th September,
2003.
18.3 Current Scenario:
Volatility in the stock markets appears to have hit issuance of foreign currency
convertible bonds (FCCBs) by Indian corporates. FCCBs issuances in the first quarter
of this calendar year are almost down 45% from the corresponding period last year.
Also, while interest rates on FCCBs have gone up, the conversion prices are fixed at a
premium of around 30% over current prices against 40-60% last year. With growth,
Indian corporates have more avenues to meet funding needs and can take a decision
based on supply rather than be demand driven. Other than wariness over high
premium deals investors are concerned over a fall in the markets. This has resulted in
the floor price for many of the issues now ruling at below the market prices.
With the stock market having come off sharply, companies, which raised funds
through foreign currency convertible bonds (FCCBs) in 2005 and 2006, suddenly find
that their current stock price is way below the conversion price or the price at which
the bonds can be converted into equity. In some instances, the prevailing market price
is less than half the conversion price. While in most cases, there is considerable time
—-at least three to four years, during which these bonds can be converted — it
remains to be seen whether the markets will rally hard enough for those prices to be
reached once again. What is more worrying is that several of these companies have
not made adequate provisions for the debt they have raised.
44
There is also delivery timeframe and associated risks involved which may result in
convertible to trade up to 15% discount to its conversion price. If an investor buys an
FCCB at 100 per cent of par and the stock rises such that the conversion value is 150
per cent of par, investors may wish to convert. The current conversion process means
that it takes four to six weeks for physical delivery of the shares. This leaves the
investor exposed to the risk that the share price drops before delivery. The ability to
sell shares today against the convertible and then take physical delivery of the shares
in a few weeks - to deliver against the short position - effectively locks in the value of
the convertible. Because this mechanism is not available at present, several
convertibles trade at a substantial discount to their conversion value.
Total borrowings for the full fiscal ’06-07 now seem set to top the $22-billion mark.
This record level of foreign borrowings has already prompted policy makers to
consider a proposal to tighten the norms to discourage issuances. Large inflows
through this route create problems in currency and inflation management for the
monetary policy managers especially. Of the $15.76 billion, which local firms raised
during the nine-month period, FCCB issuances accounted for $2.91 billion. The
decline is due to the lukewarm response of overseas investors as almost 80 per cent
non-Sensex stocks posted over 50 per cent negative returns compared to their May 10
levels. The FCCBs issued in 2005-06 to overseas investors at hefty premiums are
trading at huge discounts.
18.4 Advantages/Disadvantages of issuing FCCB
Issuing FCCB is beneficiary in Bullish market as it will fetch more premiums for the
companies. As the investors will be more optimistic about the future prices of that
particular security. Where as in Bearish Market it will fetch less premium, as the stock
prices fall and it becomes difficult to garner capital.
In a rising stock market, FCCB is preferred means of raising medium to long term
resources. The advantages are:
45
1. The pricing is in favour of the issuers - priced generally at 2 to 3% less than the
non-convertible bonds in Rupee terms (or, about 30% less than normal
coupon, in terms of USD)
2. The company gains higher leverage, as debt is reduced and equity capital is
enhanced upon conversion - subject to favourable stock price.
3. The impact on cash flow is positive, as most companies issue FCCB with a
redemption premium, which is payable on maturity, only if the stock price is
less than the conversion price.
4. FCCB does not dilute ownership immediately, as the holders of ADR /GDR do
not have voting rights.
5. Conversion premium adds to the capital reserves.
6. FCCB carries fewer covenants as compared to a syndicated loan or a debenture,
hence more convenient to raise funds for M & A.
The negative aspects of FCCB are:
1. In a falling stock market, there is no demand for FCCB. In globally listed
companies, prices in other stock exchanges also impact the issue of FCCB.
2. FCCB, when converted into equity, bring down the earnings per share, and
eventually, dilute the ownership.
3. In the long run, equity is costlier than debt, and hence, when interest rates are
falling, FCCB are not preferred.
4. Book value of converted shares depends on prevailing exchange rate.
18.5 Valuation of FCCB
1. The FCCB has a bond component and an equity component.
46
2. The Present Value of the bond component is arrived at by discounting the
future cash flows at LIBOR+ credit premium.
3. The value of call option on equity is arrived at as per Black Sholes model.
4. The values so arrived are mutually exclusive - at any point of time value of
the bond would be higher of the two + accrued interest.
5. The investor also needs to evaluate the currency risk on final redemption
of the investment in addition to a) credit risk, in terms of credit spread
included in the YTM, and, b) earnings risk on the equity
6. There is also impact of capital gains tax - applicable as on the date of
conversion, in contrast to tax on coupon income (if taxable in home
country).
7. For the issuer, the cost of capital would be: post-tax coupon of the bond
and cost of equity. While average cost of capital may be adopted as a
matter of convenience, the average cost post-conversion would be vastly
different from the pre-conversion cost.
8. By providing for conversion option, the issuer of FCCB is dispensing with
a very substantial foreign currency risk inherent in the ECB, though he still
carries some risk in the anticipated Rupee value of the equity upon
conversion. The structure of FCCB of course, can include a pre-
determined exchange rate for arriving at the conversion price, based on
domestic stock price.
18.6 Various companies which have issued FCCB are as follows:
1. HDFC:
Housing Development Finance Corporation Ltd (HDFC) has issued Zero Coupon
Foreign Currency Convertible Bond (FCCB) offering of USD 500 million in Sep
2005.The FCCB issue is having a tenor of 5 years and one day are convertible into
47
equity shares of the Company at any time after August 24, 2006 at price of Rs 1399
per share.
2. 3i Infotech:
3i Infotech issued Foreign Currency Convertible Bonds (FCCB) offering of € 30
million (Rs 174 crore) in Mar 2007. The funds are raised to help the company in
its acquisition plans.
The FCCB issue will be convertible over a five-year period at a conversion price
of Rs 308.63 and will be listed on the Singapore Stock Exchange. The conversion
price of the zero coupon bonds is at 25 per cent premium to the company's closing
share price on BSE as on March 26.
3. Larsen & Toubro:
L&T has issued $100-million foreign currency convertible bonds (FCCB) issue
denominated in Japanese yen. The zero-coupon convertible bonds have a maturity
of five years and are convertible into global depository shares at a premium of 35
per cent over the BSE closing share price of Rs 1,850.70 on January 4, 2005.
18.7 Future Scenario:
Future of the FCCB doesn’t looks well in the present scenario, because of the
volatility and the ever rising interest rate. This has led in the decrease of current price
premium at the time of conversion.
However the low volume is not a function of demand. Demand is very strong for
Indian FCCBs, albeit with some sensitivity to very high premia structures. With
growth, Indian corporates have more avenues to meet funding needs and can take a
decision based on supply rather than be demand driven. Other than wariness over high
premium deals investors are concerned over a fall in the markets. This has resulted in
the floor price for many of the issues now ruling at below the market prices.
Also the premium payable on redemption of FCCB can presently be charged to the
securities premium account and they don’t have to provide for it out of the P&L. 48
whereas the correct practice is to charge it to the profit and loss account over the life
of the instrument. Institute of Chartered Accountants of India, the apex body which
sets accounting standards, has acknowledged the problem and is preparing a draft
standard. The new standard is unlikely to come into force before 2007-08 or even
2008-09.
The conversion price can’t be less than the higher of the previous six month average
or the average for two weeks prior to the EGM or AGM that approved the issue. In a
rising stock market, this limitation is not a problem, but does become relevant in
periods like May to July of this year when the market declined.
Although 50-odd companies have made plans to raise a combined $2 billion through
the FCCB route, they are waiting for the stock markets to revive so the issues can get
attractive premiums in conversion. With the rise in interest rates internationally, the
yield to maturity on FCCBs has increased to 8-9 per cent from 3-5 per cent a year ago.
Therefore various mall and medium companies are planning to delay their FCCB
issues.
The terms may not be so attractive the next time, given that dollar interest rates have
been close to their historic lows and will not drop further.
19.0 GDR/ADR
GDR means a security issued by a bank or a depository outside India against
underlying rupee shares of a company incorporated in India. Security issued by a bank
or depository in USA against underlying rupee shares of a company incorporated in
India is known as American Depository Receipt (“ADR”). Therefore, the difference
between ADR and GDR is only with respect to the location of depository or bank
issuing the shares. FCCB is denominated in dollars or any other currency other than
rupee. This brings about an element of exchange risk in the issue of FCCB due to
currency fluctuations. In contrast, GDR is denominated in dollars with the equity
shares comprised in each GDR denominated in rupees, hence, there is no exchange
risk for the issuer.
49
Issue of shares by Indian companies under ADR / GDR
An Indian corporate can raise foreign currency resources abroad through the issue of
American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). The
Indian company is allowed to issue its Rupee denominated shares to a person resident
outside India being a depository for the purpose of issuing GDRs and / or ADRs,
subject to the conditions that:
the ADRs / GDRs are issued in accordance with the Scheme for issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the
Central Government there under from time to time
The Indian company issuing such shares has obtained an approval from the
Ministry of Finance, Government of India to issue such ADRs and / or GDRs
or is eligible to issue ADRs / GDRs in terms of the relevant scheme in force or
notification issued by the Ministry of Finance, and
Is not otherwise ineligible to issue shares to person’s resident outside India in
terms of these Regulations.
These instruments are issued by a Depository abroad and listed in the overseas stock
exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually
required in India. There are no end use restrictions except for a ban on deployment /
investment of such funds in Real Estate or the Stock Market. There is no monetary
limit upto which an Indian company can raise ADRs / GDRs. However, the Indian
company has to be otherwise eligible to raise foreign equity under the extant FDI
policy and the foreign shareholding after issue should be in compliance with the FDI
policy.
The ADR / GDR can be issued on the basis of the ratio worked out by the Indian
company in consultation with the Lead Manager to the issue. The Indian company
will issue its rupee denominated shares in the name of the Overseas Depository and
will keep the shares in the custody of a domestic Custodian in India. On the basis of
the ratio worked out and the rupee shares kept with the domestic Custodian, the
Overseas Depository will issue ADRs / GDRs abroad.
50
In order to bring the ADR/GDR guidelines in alignment with SEBI’s guidelines on
domestic capital issues, it has been decided by the Government to incorporate the
following changes to the GDR/ADR guidelines by amending the Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism)
Scheme:-
A. For Listed Companies
a) Eligibility of issuer: An Indian Company, which is not eligible to raise
funds from the Indian Capital Market including a company which has been
restrained from accessing the securities market by the Securities and
Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign
Currency Convertible Bonds and (ii) Ordinary Shares through Global
Depositary Receipts under the Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
b) Eligibility of subscriber: Erstwhile Overseas Corporate Bodies (OCBs)
who are not eligible to invest in India through the portfolio route and
entities prohibited to buy, sell or deal in securities by SEBI will not be
eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii)
Ordinary Shares through Global Depositary Receipts under the Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary
Receipt Mechanism) Scheme, 1993.
c) Pricing: The pricing of Global Depositary Receipt and Foreign Currency
Convertible Bond issues should be made at a price not less than the higher
of the following two averages:
(i) The average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange during the six months
preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the
related shares quoted on a stock exchange during the two weeks
preceding the relevant date.
51
The “relevant date” means the date thirty days prior to the date on which
the meeting of the general body of shareholders is held, in terms of
section 81 (IA) of the Companies Act, 1956, to consider the proposed
issue.
d) Voting rights: The voting rights shall be as per the provisions of the
Companies Act, 1956 and in a manner in which restrictions on voting
rights imposed on Global Depositary Receipt issues shall be consistent
with the Company Law provisions. RBI regulations regarding voting rights
in the case of banking companies will continue to be applicable to all
shareholders exercising voting rights.
B. For unlisted companies
Unlisted companies, which have not yet accessed the Global Depositary
Receipt / Foreign Currency Convertible Bond route for raising capital in the
international market would require prior or simultaneous listing in the
domestic market, while seeking to issue (i) Foreign Currency Convertible
Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the
Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993.
It is clarified that unlisted companies, which have already issued
Global Depositary Receipts / Foreign Currency Convertible Bonds in the
international market, would now require to list in the domestic market on
making profit beginning financial year 2005-06 or within three years of such
issue of Global Depositary Receipts / Foreign Currency Convertible Bonds,
whichever is earlier.
A limited Two-way Fungibility scheme has been put in place by the Government of
India for ADRs / GDRs. Under this scheme, a stock broker in India, registered with
SEBI, can purchase the shares from the market for conversion into ADRs /GDRs. Re-
issuance of ADRs /GDRs would be permitted to the extent of ADRs / GDRs which
have been redeemed into underlying shares and sold in the Indian market.
52
An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism,
the company offers its resident shareholders a choice to submit their shares back to
the company so that on the basis of such shares, ADRs / GDRs can be issued abroad.
The proceeds of the ADR / GDR issue is remitted back to India and distributed among
the resident investors who had offered their rupee denominated shares for conversion.
These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in
India by the shareholders who have tendered such shares for conversion into ADR /
GDR.
The ADR / GDR / FCCB proceeds can be utilised for first stage acquisition of shares
in the disinvestment process of Public Sector Undertakings / Enterprises and also in
the mandatory second stage offer to the public in view of their strategic importance.
Reporting of such Issues
The Indian company issuing ADRs / GDRs shall furnish to the Reserve Bank, full
details of such issue in the form specified in Annexure C to Schedule 1 to Notification
No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time, within 30
days from the date of closing of the issue. The company should also furnish a
quarterly return in the form specified in Annexure D, therein, to Reserve Bank within
15 days of the close of the calendar quarter.
20.0 Analysis of ECB issue for JKTI
If JKTI issue ECB it can raise capital at lower rate in comparison to other sources of
foreign capital raising. But the interest rates are bit higher for JKTI In comparison to
its competitors. Analysis of JKTI’s financials vis a vis are not shown in detail as
financial data can’t be revealed, these are only those informations which we can make
out from annual report. These financials in compare with others in the industry reveals
the following:
1. JKTI’s low ranking is basically due to low marks in financials risk parameter.
if we compare JKI with other tyre manufacturing companies such as CEAT,
Apollo and MRF we see that JKI is mainly falling behind them on low current
and interest coverage ratio. 53
2. JKTI interest coverage ratio is very low compared to MRF and APOLLO,
which have a very healthy ratio. This is because JK is mainly debt funded
leading to huge outflow of cash in interest payment.
3. JKTI PAT is also very low around 1%. If we analyze JKTI cost structure we
see that JKTI wages and Raw Material cost is least in the industry. JKTI low
profitability is on account of high administration and selling & distribution
expenses.
21.0 Conclusion
ECB will prove the cheaper source in comparison to others sources like
FCCB.
Interest rates in the market are near about 12-13% whereas for ECB it will be
near about 8-10%.
Other debt fund raising option like foreign bonds, euro bonds, bonds will be
more expensive as it will not come into investment grade.
Issuing ECB will increase leverage. Hence interest rate on future loans will be
higher.
Issuing Equity, ADR/GDR is not feasible as JKTI share price is very low.
Sources of raising funds
ECB 8-10%
FCCB Coupon + Conversion in to Equity
Euro/foreign Bonds Not considered
Bank Loan 12%+
Factors to be considered while issuing ECB
Government taking strict measures against ECB issue and even thinking of taking
some measures for automatic route also. The reasons are:
54
Over utilization of ECB issue
High Inflation
Appreciating rupee
22.0 Recommendations
I would suggest JKTI to raise capital by issuing ECB as it can raise funds at cheaper
rates. But to still reduce the interest rate further, I recommended JKTI to improve its
financial position to get lower rate of interest, by following possible ways.
1. JKTI should reduce its administration and selling & distribution expenses
benchmarking them to the industry average. This will help JKI to increase its
PAT leading to better Interest Coverage Ratio.
2. JKTI should reduce its current liabilities so as to improve its current ratio as
this one of the very important ratio while deciding the interest rate.
3. JKTI should reduce on its debt funding and should meet its cash requirements
from alternate sources such as equity funds so as to reduce the profit outflow
in interest payments. This will help in improving the interest coverage ratio
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2007<http://www.rediff.com/rss/moneyrss.xml>.
Chaudhary, Gaurav. RBI keeps lid on India Inc's foreign loans. News Report.
Hyderabad: Hindustan Times, 2007.
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2007<http://www.dnaindia.com/report.asp?NewsID=1087977>.
Deakin, R. Mallier And A. S. "A GREEN’S FUNCTION FOR A CONVERTIBLE."
(2002): 1-2.
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The Economic Times, 2007.
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Circular No. / 02 /2006-07 1 July 2006: 7-9.
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2007<www.geocities.com/kstability/content/foreign-investment/ecb4.html>.
Naidu, Rajesh. Hike in CRR, repo rate to have far reaching effects. News Report.
Hyderabad: The Financial Express, 2007.
P.K. Jain, Josette Peyraid and Surendra S. Yadav. International Financial
Management. Hyderabad: Macmillan India, 1998.
Patel, Prayasvin. FCCBs are emerging as better funding options The Financial
Express. 29 April 2007.
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February 2007.
24.0 Annexure
Organisation Chart
Annex I
Form ECB
58
Application for raising External Commercial Borrowings (ECB) under Approval Route
Instructions
The complete application should be submitted by the applicant through the designated authorised dealer to the Chief General Manager-In-Charge, Foreign Exchange Department, Central Office, ECB Division, Reserve Bank of India, Mumbai 400 001.
Documentation:
Following documents, (as relevant) certified by authorised dealer, should be forwarded with the application:(i) A copy of offer letter from the overseas lender/supplier furnishing complete details of theTerms and conditions of proposed ECB.(ii) A copy of the import contract, proforma/commercial invoice/bill of lading.
PART-A- GENERAL INFORMATION ABOUT THE BORROWER
1. Name of the applicant
(BLOCK LETTERS)
Address
_____________________________________________________________________
______
2. Status of the applicant
i) Private Sector
ii) Public Sector
_____________________________________________________________________
______
PART-B-INFORMATION ABOUT THE PROPOSED ECB
_____________________________________________________________________
______
Currency Amount US$
equivalent
1. Details of the ECB
59
(a) Purpose of the ECB
(b) Nature of ECB [Please put (x) in the appropriate box]
(i) Suppliers’ Credit
(ii) Buyers’ Credit
(iii) Syndicated Loan
(iv) Export Credit
(v) Loan from foreign collaborator/equity holder (with
details of amount, percentage equity holding in the
paid-up equity of the borrower company)
(vi) Floating Rate Notes
(vii) Fixed Rate Bonds
(viii) Line of Credit
(ix) Commercial Bank Loan
(x) Others (please specify)
(c) Terms and conditions of the ECB
(i) Rate of interest :
(ii) Up-front fee :
(iii) Management fee :
(iv) Other charges, if any (Please specify) :
(v) All-in-cost :
(vi) Commitment fee :
(vii) Rate of penal interest :
(viii) Period of ECB :
(ix) Details of call/put option, if any. :
(x) Grace / moratorium period :
(xi) Repayment terms (half yearly/annually/bullet) :
(xii) Average maturity :
__________________________________________________________________
2. Details of the lender
60
Name and address of the lender/supplier
__________________________________________________________________
3. Nature of security to be provided, if any.
__________________________________________________________________
PART C – INFORMATION ABOUT DRAW DOWN AND REPAYMENTS
Proposed Schedule
Draw-down Repayment of Principal Interest Payment
Month Year Amount Month Year Amount Month Year Amount
PART D – ADDITIONAL INFORMATION
1. Information about the project
i) Name & location of the project :
ii) Total cost of the project : Rs. USD
iii) Total ECB as a % of project cost :
iv) Nature of the project :
v) Whether Appraised by
Financial institution/bank :
vi) Infrastructure Sector :
61
a) Power
b) Telecommunication
c) Railways
d) Roads including bridges
e) Ports
f) Industrial parks
g) Urban infrastructure - Water supply, Sanitation and sewerage.
vii) Whether requires clearance from any:
Statutory authority? If yes, furnish
The name of authority, clearance no.
and date.
2. ECB availed in the current & previous three financial years-(not applicable for the first
time borrower)
Year Registration
No.
Currency Loan Amount Amount
disbursed
Amount outstanding*
* Net of repayments, if any, on the date of application.
PART E – CERTIFICATIONS
1. By the applicant
We hereby certify that (i) the particulars given above are true and correct to the best
of our knowledge and belief and (ii) the ECB to be raised will be utilised for
permitted purposes.
________________________________________
(Signature of Authorised Official of the applicant)
62
Place_______________
Name:_________________________________
Date________________ Stamp
Designation_____________________________
Phone No. ______________________________
Fax ________________________________
E-mail _________________________________
_____________________________________________________________________
2. By the authorised dealer –
We hereby certify that (i) the applicant is our customer and (ii) we have
scrutinized the application and the original letter of offer from the lender/supplier and
documents relating to proposed borrowing and found the same to be in order.
________________________________
(Signature of Authorised Official)
Place ________________ Name
_________________________________
Date_________________ Stamp Name of the
Bank/branch__________________
A.D.Code______________________________
_____________________________________________________________________
63
Annex II
Form 83
Reporting of loan agreement details under Foreign Exchange Management Act, 1999
(for all categories and any amount of ECB)
Instructions:
1. The borrower is required to submit completed Form 83, in duplicate, certified by
the Company Secretary (CS) or Chartered Accountant (CA) to the designated
Authorised Dealer (AD). One copy is to be forwarded by the designated AD to
the Director, Balance of Payments Statistics Division, Department of Statistical
Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-
Kurla Complex, Mumbai – 400 051 within 7 days from the date of signing loan
agreement between borrower and lender for allotment of loan registration number.
2. Do not leave any column blank. Furnish complete particulars against each item.
Where any particular item is not applicable write “N.A.” against it.
3. All dates should be in format YYYY/MM/DD, such as 2004/01/21 for January 21,
2004.
4. Before forwarding Form 83 to the Reserve Bank, the Authorised Dealer must
scrutinise all the related original documents and ensure that the form is complete
in all respects and in order.
5. If space is not sufficient for giving full information/particulars against any item, a
separate sheet may be attached to the form and serially numbered as Annex.
6. Firms/companies obtaining sub-loans through DFIs/FIs/banks/NBFCs etc. should
not complete this form but approach the concerned financial institution directly
for reporting.
For rbi (desacs) use only Loan_key:
64
Cs-drms team Received on Action taken on Loan classification
Part A: Basic Details
ECB Title / Project
Registration Number
No. and Date of RBI approval (if applicable)
Loan Key Number (allotted by RBI/ Govt.)
Agreement Date (YYYY/MM/DD) / /
Currency Name Currency Code (SWIFT)
Amount (in FC) (For RBI Use)
Guarantee Status Guarantor (Name,
Address, contact number
etc. )
(Use code as per Box 1) ↑ Multi Currency Type
Name and address of the Borrower (Block Letters)
Contact Person's Name:
Designation:
Phone No. :
Fax no. :
E-mail ID :
Name and address of lender / foreign supplier /
lesser (Block Letters)
Country:
E-mail ID :
(For RBI DESACS use) (For RBI DESACS use)
Agreement Details (To be filled by borrowers of External Commercial Borrowings)
65
Annex III
ECB - 2
Reporting of actual transactions of External Commercial Borrowings (ECB)
Under Foreign Exchange Management Act, 1999
(For all categories and any amount of loan)
Return for the Month of .
1. This return should be filled in for all categories of ECB. It should be submitted
within 7 working days from the close of the month through the designated
Authorised Dealer to the Director, Department of Statistical Analysis and
Computer Services (DESACS), Balance of Payments Statistics Division, Reserve
Bank of India, C-8/9, Bandra-Kurla Complex, Bandra (East), Mumbai-400 051. If
there is no transaction during a particular period, a Nil return should be
submitted.
2. Please do not leave any column blank. Furnish complete particulars against each
item. Where any particular item is not applicable write “N.A.” against it.
3. All dates should be in format YYYY/MM/DD, such as 2004/01/21 for January 21,
2004.
4. Borrowers obtaining sub-loans through DFIs/Banks/NBFCs etc. should not
complete this form as the concerned financial institution would directly submit
ECB-2.
5. Before forwarding the return to Reserve Bank (DESACS), the Company Secretary
/ Chartered Accountant must scrutinise related original documents and ensure that
the return is complete and in order as per ECB guidelines issued by
Government/RBI.
66
6. The unique Loan Identification Number (LIN)/RBI Registration Number (in case
of loan approved prior to February 01, 2004) must be specified as allotted by RBI.
Similarly, the Loan Registration Number (since February 01, 2004) has to be
specified.
7. If space is not sufficient for giving full information against any item, a separate
sheet may be attached to the return and serially numbered as Annex.
8. For purpose of utilization of drawdowns, following codes may be used.
BOX 1: Purpose of Utilisation Code
No. CodeDescription
No CodeDescription
1 IC Import of capital goods 12 TL Telecommunication
2 IN Import of non-capital goods 13 RW Railways
3 RL Local sourcing of capital
goods (Rupee expenditure)
14 RD Roads
4 RC Working capital
(Rupee expenditure)
15 PT Ports
5 SL On-lending or sub-lending 16 IS Industrial parks
6 RP Repayment of earlier ECB 17 UI Urban infrastructure
7 IP Interest payments 18 OI Overseas investment in
JV/WOS
8 HA Amount held abroad 19 IT Development of Integrated
Townships
9 NP New project 20 DI PSU Disinvestment
10 ME Modernisation /expansion
of existing units
21 TS Textile/steel Restructuring
Package
11 PW Power 22 MF Micro finance activity
23 OT Others (Pl. specify)
9. For source of funds for remittances, following codes are to be used.
67
BOX 2: Source of Funds for remittance
No. CodeDescription
1 A Remittance from India
2 B Account held abroad
3 CExports proceeds held abroad
4 DConversion of equity capital
5 E Others (Specify)
FOR RBI (DESACS) Use only Loan_key
CS-DRMS
Team
Received on Action Taken
on
Loan Classification
Tranch
e No.
Date
(YYYY/MM/D
D)
(Please see note
below)
CurrencyAmount
Amount of loan committed but not yet
drawn at the end of the month (in loan
currency)
Currency Amount
Note: 1. In the case of import of goods or services, date of import may be furnished against
date of draw-down.
2.In the case of financial lease date of acquisition of the goods is to be mentioned as date
of draw-down.
3. In the case of securitised instruments, date of issue may be shown as date of draw-down
68
Part A: Loan Identification Particulars
Loan Registration Number (LRN)
Loan Amount Borrower Particulars
Currency Amount Name and address of the Borrower (Block
Letters)
Contact Person's Name:
Designation:
Phone No. :
Fax no. :
E-mail ID :
As per
Agreement
Revised
Part B: Actual Transaction Details
1. Draw-down during the month :
2. Schedule of balance amount of loan to be drawn in future:
Tranche
No
Expected
Date
(YY/MM/DD
)
of drawdown
Currency Amount If more than one equal installment
Total number
of drawals
No. of drawals in a
calendar year
3. Details of utilisation of draw-downs during the month:
69
Tranch
e No.
Date
(YY/MM/DD)
Purpose codes
(See BOX 1 )
Countr
y
Currency Amount Fresh Disbursement/
From A/c held
abroad
4. Amount parked abroad outstanding as on beginning of the month _____:
Date
(YY/MM/DD)
Name of bank and
branch
Account No. Currency Amount
5. Utilisation of amount parked abroad.
Date
(YYYY/MM/DD
)
Name of bank
and branch
Account
No.
Currency Amount Purpose
Tranch
e No.
Purpose Date of
Remittance
Currency Amount Source of
remittance
(See Box
2)
Prepaymen
t
of Principal
(Y/N) *
Principal
Interest @ rate
Others (Specify)
6. Debt Servicing during the month -
* In case of prepayment please provide details: Automatic Route / Approval No.
Date: Amount:
Type of Swap Swap Dealer Counter party Implementation Date
Name Country Name Country
70
Interest Rate
swap
Currency swap
Others (specify)
7. Derivative transactions (Interest rate, Currency swap) during the month (if any) -
Tranche
No.
New Currency Interest Rate on
the
New Currency
New Interest Rate
on the Loan Currency
Maturity Date
of the swap deal
8. Revised Principal Repayment Schedule (if revised / entered into Interest rate swap)
Date
(YY/MM/DD)
(First repayment
date)
Currency Amount in
Foreign
Currency in
each
transactions
If more than one equal
installments
Annuity
Rate
(if annuity
payment)
Total
Number of
installments
No. of payments in
a calendar year
(1, 2, 3, 4, 6, 12)
9. Amount of outstanding loan at the end of the month :
Currency Amount:
(For RBI Use)
71
We hereby certify that the particulars given above are true and correct to the best of
our knowledge and belief. No material information has been withheld and / or
misrepresented.
Place : ___________
Date : ___________
Stamp ___________________________________
(Signature of Authorised Official)
Name : ______________________________
Designation : _________________________
(For Borrower’s use)
Certificate from Company Secretary / Chartered Accountant
We hereby certify that the ECB availed in terms of approval granted by
Government or RBI or under approval route / automatic route is duly
accounted in the books of accounts. Further, ECB proceeds have been utilised
by the borrower for the purpose of
______________________________________________. We have verified
all the related documents and records connected with the utilisation of ECB
proceeds and found these to be in order and in accordance with the terms and
conditions of the loan agreement and with the approval granted by GoI(MoF)
or RBI or under approval route / automatic route and is in conformity with the
ECB Guidelines issued by the Government.
Authorised Signatory
Name & Address72
Place : Registration No.
Date : [Stamp]
Certificate by an Authorised Dealer
We hereby certify that the information furnished above with regard to debt
servicing, outstandings and repayment schedule is true and correct as per our
record. The drawal, utilisation and repayment of the ECB have been
scrutinised and it is certified that such drawal, utilisation and repayments of
ECB are in compliance with ECB guidelines.
_________________________________
_
[Stamp] Signature of Authorised Dealer
Place : ______________
Name:________________________________________
Date : ______________
Designation :_____________________________________
Name & Address of
Authorised Dealer
Uniform Code
No.__________________________
73