Indian companies have altogether raised more than US$3.43 billion via ECB (external commercial borrowings) in July 2021. According to data from the RBI, Indian companies had borrowed US$2.15 billion in July 2020, so there’s a 60% increase in ECB from last year.
A total of US$3.03 billion from borrowings in July 2021 was derived from automatic ECB, while only US$400 million came through the approval route.
Let’s look at this unique loan type and which companies are using it for their benefit.
What are ECBs, and How Do They Work?
ECBs are commercial loans that help Indian firms and organisations raise funds from outside the country in foreign currencies. With this facility, companies can take banks loans, suppliers’ credit, buyers’ credit, bank loans, or securitised instruments from any recognised entity outside the country.
One of the primary advantages to not raise capital within the country is that companies can generally avail lower interest rates. For instance, if a company can get loans from the Eurozone or the USA, it can benefit from much lower interest rates. They can also benefit from exposure to a much larger market, which allows them greater opportunities.
Another benefit of ECBs is that they are simple loans and do not dilute a company’s stakes. ECBs are also beneficial for the local economy as foreign investments can flow directly into SMEs and infrastructure, fostering growth.
ECBs in India can be accessed through two routes- i) the automatic route and ii) the approval route. The former allows a borrower to avail funds from recognised foreign entities without requiring prior approval from RBI. However, the company will need to register its loan agreement with the RBI.
Financial institutions dealing with infrastructure, export finance, textile or steel sector, etc., have to take the approval route for ECBs. With this, borrowers have to submit an application with the RBI to get their loans from foreign sources approved. Only a certain amount of funds (US$500 million in five years) can be withdrawn with this method.
How Have Indian Companies Come to Rely On ECBs?
Over the years, RBI has relaxed stringent restrictions on the end-use of ECBs, which led to companies to raise a higher quantum of funds. From 2019, RBI has permitted companies to utilise funds for general corporate purposes, repaying INR loans and working capital requirements.
As a result of these changes, Indian companies are actively tapping overseas markets and taking advantage of low-interest rates. In the first four months of 2021 alone, India Inc has raised $8.024 billion, which is 42% higher than the previous year’s $5.654 billion. In July 2021, Indian companies received a total of $3.434 billion, an increase of 131% from the previous month.
Among the major borrowers, REC Ltd, a financial institution engaged in the power sector, has raised US$400 million via the approval route. Other major borrowers include:
- Matix Fertilisers and Chemicals – US$320 million to refinance INR loans and another US$237.5 for working capital requirements
- Cadila Healthcare – borrowed US$66.7 million to refinance earlier ECBs
- Adani Ports and Special Economic Zone – received US$750 million for working capital needs
- Adani Electricity Mumbai Ltd – received US$300 million to refinance their earlier ECBs.
- Roquette India Pvt Ltd – US$43.75 million for working capital requirements
- Indian Oil Corporation – US$500 million to refinance their earlier ECBs
- Housing Development Finance- US$250 million for on/sub-lending
India Inc started the current financial year with external borrowings of US$3.7316 billion in January 2021. With another high ECB mop-up at US$3.434 billion this year, it’s clear that many companies are using ECBs are primary investment vehicles. If RBI further relaxes regulations on ECBs, more foreign capital will flow into the economy, making the Indian GDP more stable.
Frequently Asked Questions
- What are ECBs in India?
External commercial borrowings refer to debts taken for commercial purposes by eligible entities in India from recognised external sources outside the country.
- Which borrowers are eligible for ECBs?
As per the ECB master circular, eligible borrowers include any entity which can seek foreign direct investments (FDI). This also includes special entities like Port Trusts, Small Industries Development Bank of India, and Units in Special Economic Zones. Only certain ‘recognised lenders’ can provide ECBs.
- How much funds can a company raise through approval of ECBs?
Companies can raise a maximum ECB of US$500 million with a minimum maturity of five years. They can also avail additional funds amounting to US$250 million over the minimum limit with a maturity of over ten years.