Making sense of the new ECB norms

The Reserve Bank of India last week relaxed norms for companies raising external commercial borrowings (ECBs) as part of measures to contain the rupee’s depreciation. Mint explains the logic and implications of the move.

What are ECBs taken by Indian companies?

ECBs are commercial loans that eligible resident entities can raise from outside India, ie from a recognized non-resident entity. ECB can be buyer’s credit, supplier’s credit, foreign currency convertible bonds, foreign currency exchangeable bonds, loans, etc. ECB can be raised through the automatic route where the cases are scrutinized by an authorized category dealer, or the approval route where it is mandatory for the borrowers to forward their request to RBI through their authorized dealers. Borrowers should adhere to the norms of minimum maturity period, maximum overall cost ceiling, end use etc.

What are the exemptions given by RBI?

In the first week of July 2022, the RBI notified that in the case of ECBs, the borrowing limit under the automatic route would be raised to $1.5 billion per financial year from $750 million or its equivalent, for a temporary period – up to December 31, 2022 – has been , Under the ECB framework, the overall cost ceiling was being raised by 100 basis points, provided the borrower is of investment grade rating. The objective of the regulatory authority was to increase the supply of foreign exchange reserves, and thus to prevent the rapid depreciation of the rupee over the past few months.

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What clarity do foreign lenders want from RBI?

Lenders want to know whether investment grade needs to be appraised by domestic or international agencies. If this is done only by global agencies, it would limit the number of potential borrowers, as companies that may be highly rated domestically may not necessarily have made investment grade when assessed by international agencies. .

Why do Indian companies go for ECB?

ECBs give companies the advantage of borrowing abroad at low interest rates. They are also an opportunity to borrow large amounts of money for a relatively long period. In addition, borrowing in foreign currencies enables companies to pay for their machinery imports, etc., thereby eliminating the effect of exchange rate variations. ECBs can help diversify the investor base and have available funds at a lower cost, thereby helping to improve the profitability of companies. ECB interest rates are also a function of their rating in the international market.

What are the risks for firms raising ECB?

Although companies are attracted to ECBs because of their low interest rates, the comfort level of the borrower depends on how stable the rate of exchange is between the time taken to borrow and repay the loan. The depreciation of the rupee would increase the debt repayment burden as compared to the time the ECB facility was availed. Thus, companies may be required to incur hedging costs to cover exchange rate risk.

Jagdish Shettigar and Pooja Mishra are faculty members at BIMTECH

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