Salvus Capital Advisors Pvt. Ltd. A research report on EXTERNAL COMMERCIAL BORROWING BY INDIAN COMPANIES
TABLE OF CONTENTS Overview... 3 Regulations... 3 Eligible Borrowers... 3 Recognized Lenders... 4 Amount and Maturity... 4 All-in-cost ceilings... 4 End Use... 5 Procedure... 5 Guarantees... 5 Security... 5 Parking of ECB proceeds overseas... 6 Prepayment... 6 Refinance of existing ECBs... 6 Debt servicing... 6 Policy Impact: Tightening in ECB norms... 6 Market Analysis... 7 Amount of ECB raised over the previous year on a monthly basis... 7 Purpose wise distribution of ECBs raised during March 10-February 11... 7 Modes of raising ECBs... 8 Reasons for ECB s attractiveness to... 8 Benefits of ECBs over other sources of funds... 8 Investment Scenario... 8 Major Indian Companies availing ECB facility:-... 8 Major arrangers for ECBs in India... 9 Recent Major ECB deals... 9 Future Outlook... 9 Key issues with ECB policy... 9 Page 2
OVERVIEW Foreign currency borrowings raised by the Indian companies from sources outside India are called External Commercial Borrowings (ECBs). These are commercial loans with minimum average maturity of 3 years. The ECBs include:- Bank Loans Buyer s Credit Supplier s Credit Securitized instruments (e.g. floating rate notes and fixed rate bonds) Credit from official export credit agencies Commercial borrowings from the private sector window of multilateral financial institutions Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds ECBs act as an additional source of funds for companies to finance its investment needs. Balance of payment and foreign exchange reserves position are two important drivers to decide the level of ECBs. REGULATIONS In India, ECBs can be accessed through automatic and approval route. Major regulators governing the ECBs in India are Exchange Control Department of RBI and ECB Division in Department of Economic Affairs at Ministry of Finance. ECB policy aims at keeping maturities long, costs low and encourages infrastructure and export sector financing so as to ensure overall growth of the economy. ECB policy focuses on three aspects: Eligibility criteria for accessing external markets Total amount of borrowings to be raised and their maturity structure End use of the funds raised ELIGIBLE BORROWERS AUTOMATIC ROUTE 1. Companies except financial intermediaries 2. Units in Special Economic Zones( SEZ) 3. NGOs engaged in micro finance activities APPROVAL ROUTE 1. Infrastructure or export finance companies such as IDFC, IL&FS, Power Finance Corporation, IRCON, Power trading corporation and EXIM bank 2. Banks and financial institutions which participated in the textile or steel restructuring package 3. NBFCs to finance import of infrastructure equipment for leasing 4. Multistate Co-operative society engaged in manufacturing activities Page 3
RECOGNIZED LENDERS 1. Internationally recognized sources such as international banks, international capital markets, and multilateral financial institutions such as IFC, ADB and CDC, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders. 2. Overseas organizations and individuals with a certificate of due diligence from overseas bank adhering to host country regulations (applicable only under the automatic route). In case of foreign equity holders, AUTOMATIC ROUTE For ECBs up to USD 5 million at least 25 percent to be held directly by the lender For ECBs more than USD 5 million - at least 25 percent to be held directly by the lender and proposed ECB should not exceed four times the direct foreign equity holding APPROVAL ROUTE At least 25 percent to be held directly by the lender but proposed ECB exceeds four times the direct foreign equity holding. AMOUNT AND MATURITY AUTOMATIC ROUTE Maximum Amount of ECB in a financial year Companies other than those in hotel, hospital and software sectors Companies in services sector viz. hotels, hospitals and software sector NGOs engaged in micro finance activities - USD 500 million - USD 100 million - USD 5 million Minimum Maturity Period ECBs up to USD 20 million ECBs between USD 20 million and USD 500 million 3 years 5 years APPROVAL ROUTE Corporate can avail an additional amount of USD 250 million with average maturity of more than 10 years over and above the existing limit of USD 500 million under the automatic route. ALL-IN-COST CEILINGS All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, withholding tax payment and fees payable in Indian Rupees. Following are the all-in-cost ceilings:- Page 4
Average Maturity Period Three to five years More than five years All-in-cost Ceilings over 6 month LIBOR 300 basis points 500 basis points END USE Permitted for 1. Investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in industrial sector including SMEs and infrastructure sector. 2. Overseas direct investment in Joint ventures and Wholly owned subsidiaries 3. First stage acquisition of shares in the disinvestment process and in the mandatory second stage offer under the Government s disinvestment programme of PSU shares. 4. NGOs engaged in micro finance activities can utilize the proceeds for a. lending to self-help groups b. micro credit c. bonafide micro finance activity including capacity building Not permitted for 1. On-lending or investment in capital market or acquiring a company 2. Investment in real estate 3. Working capital, general corporate purpose and repayment of existing rupee loan PROCEDURE AUTOMATIC ROUTE Borrower enters into a loan agreement with the lender Submits the agreement to RBI for registration APPROVAL ROUTE Borrower submits the application through Authorized Dealer (AD) to RBI GUARANTEES 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 permitted. SECURITY Choice of security is left to the borrower but in case of creation of charges over immovable assets and financial securities such as shares is subjected to FEMA regulations. Page 5
PARKING OF ECB PROCEEDS OVERSEAS ECB proceeds should be invested overseas until the actual requirement in India. These investments should be liquid in nature so that they can be liquidated as and when required by the borrower. These investments include:- 1. 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 2. Deposits with overseas branch of an authorized dealer in India 3. Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above PREPAYMENT Prepayment up to USD 200 million is allowed by ADs without prior approval of RBI but minimum average maturity period needs to be maintained. For prepayment more than USD 200 million, approval from RBI is required. REFINANCE OF EXISTING ECBS Refinancing of ECBs is allowed but outstanding maturity of the original loan needs to be maintained. DEBT SERVICING Designated Authorized Dealers (ADs) make remittances of installments of principal, interest and other charges. POLICY IMPACT: TIGHTENING IN ECB NORMS In case of tightening ECB norms, capital inflows gets controlled which in turn restricts the rupee to appreciate further. IMPACT ON VARIOUS SECTORS Positive 1. Banking a. Need for more credit in domestic market 2. IT and BPO a. Rupee depreciation Negative 1. Infrastructure a. Higher borrowing cost in the domestic market Page 6
US $ Billions A research report on External Commercial Borrowing by Indian Companies IMPACT ON ECONOMIC VARIABLES In case of tightening of ECB norms, Total capital flow in the economy will reduce Domestic credit take off will increase Upward pressure on the lending rate Rupee will depreciate vis-à-vis foreign currency Domestic liquidity especially the short term will reduce MARKET ANALYSIS AMOUNT OF ECB RAISED OVER THE PREVIOUS YEAR ON A MONTHLY BASIS 4.5 4.3 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1.1 2.7 0.6 0.3 0.4 1.9 1.9 1.5 1.1 1.1 0.8 1.3 3.1 0.7 1.1 0.9 0.7 1.5 3.2 2009 2010 PURPOSE WISE DISTRIBUTION OF ECBS RAISED DURING MARCH 10- FEBRUARY 11 0.03% 0.06% 22.01% 30.09% 10.18% 10.25% 7.42% 12.31% 2.84% 0.39% 2.26% 2.16% 0.01% FCCB Buy-Back Import of Capital Goods Micro Finance Modernisation New Project On-lending to Power Sector Onward/Sub-lending. Others Overseas Acquisition Power Refinancing of old loans Rupee Expenditure Loc.CG Working Capital Page 7
MODES OF RAISING ECBS ECBs provide a broad range from where funds can be raised. It provides an option to take both simple forms of credit such as supplier s credit to complex forms of credit such as securitization instruments. Some of the well-known and prevalent ways of raising ECBs are as follows: Commercial Bank Loan in form of term loans from foreign banks Buyer s Credit Suppliers Credit Securitized instruments such as Syndicated loans Credit from official export credit agencies Commercial borrowing from the private sector window of multilateral financial institutions such as International Finance Corporation, Asian Development Bank etc. Loan from foreign equity holders and corporate with good credit rating Lines of credit from foreign banks and financial institutions Financial Leases Import Loans Investment by FIIs in dedicated debt funds Non-convertible, optionally convertible or partially convertible debentures REASONS FOR ECB S ATTRACTIVENESS TO LENDER ECB is for specific period which can be as short as 3 years Interest and borrowed money is repatriable BORROWER Large amounts of funds can be raised Easy availability of funds for large reputed borrowers Diversification of lender s base BENEFITS OF ECBS OVER OTHER SOURCES OF FUNDS 1. Cost of raising ECBs is much lower than that of domestic borrowings (Current Spread is around 300 bps without considering cost of hedging). 2. Global financial market is a much bigger source of credit. 3. Foreign lenders provide far more flexibility in terms of providing security for ECBs. INVESTMENT SCENARIO MAJOR INDIAN COMPANIES AVAILING ECB FACILITY:- 1. Telecom companies such as Idea, Aircel, Tata Teleservices, Vodafone and Sistema Shyam Teleservices 2. Reliance Industries Page 8
3. Financing companies in power sector such as Power Finance Corporation, Rural Electrification Corporation 4. Infrastructure companies such as Jai Prakash Associates, IVRCL and Larsen & Toubro MAJOR ARRANGERS FOR ECBS IN INDIA 1. State Bank of India 2. Punjab National Bank 3. Industrial Development Bank of India 4. Standard Chartered 5. Citibank RECENT MAJOR ECB DEALS 1. Usha Martin raised USD 125 million for a tenure of 7 years to part finance its expansion plans with State Bank of India as the lead arranger ( January 11 ) 2. Power Finance Corporation raised USD 260 million for a tenure of 6 years for lending purposes to power sector ( February 11) 3. HPCL Mittal Energy Ltd. mopped up USD 100 million for a tenure of 5 years for new project ( February 11) FUTURE OUTLOOK We can expect an increase in demand for ECBs amongst the Indian Companies because of the following reasons:- 1. Plans for Huge Spending on Infrastructure project 2. Domestic interest rates are moving upwards KEY ISSUES WITH ECB POLICY 1. Domestic loan refinancing by ECBs is not available to companies in sectors such as retail, construction, services etc. a. Similar policy available for companies developing sea ports, airports, roads, bridges and power b. These sectors require cheap source of funding to remain competitive in global markets 2. Use of ECBs for on-lending is not allowed a. Inability of wholly owned subsidiaries(woss) and Special Purpose Vehicles (SPVs) to raise cost effective debt due to lack of strong balance sheet b. SPVs and WOSs prevalent in infrastructure sector which are capital intensive 3. Absence of full capital account convertibility and thus a cap on rupee expenditure of ECBs. Page 9
www.salvuscapital.com A research report on External Commercial Borrowing by Indian Companies Vishnu Deuskar Managing Director E-mail: vdeuskar@salvuscapital.com Kamlesh Thakur Director E-mail: kthakur@salvuscapital.com Rahul Saxena Associate Vice President E-mail: rsaxena@salvuscapital.com Salvus Capital Advisors Pvt. Ltd. Gool Mansion, 6 Homji Street, Fort, Mumbai 400 001, INDIA Tel: + 91 22 2267 1111/5237 Fax: + 91 22 2266 2011 Salvus Capital Advisors Pvt. Ltd. All rights reserved. Any unauthorized use, duplication, or disclosure is prohibited by law and will result in prosecution. Page 10