The Reserve Bank of India (RBI) relaxed External Commercial Borrowing (ECB) norms for companies raising foreign funds for infrastructure projects. As per the relaxation given by the central bank, firms can now raise funds through the ECB route for their infrastructure projects through their holding companies or core investment firms, which will facilitate them to arrange finances for these projects expeditiously.
As per RBI, such funds should be used in Special Purpose Vehicles (SPVs) for a specific project. Currently, SPVs are permitted to raise ECB funds for infrastructure projects, while there were restrictions for parent firms in doing so.
However, the central bank has stipulated a number of conditions to avail this facility. For example, infrastructure projects are required to be executed by the SPV set up exclusively for the project. The SPV should give an undertaking that no other method of funding, such as trade credit, will be used for that portion of fresh capital expenditure funded through ECB proceeds.
What is External Commercial Borrowing (ECB)?
- Any money that has been borrowed from foreign sources for financing the commercial activities in India are called External Commercial Borrowings.
- The Government of India permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment
The ECBs are defined as money borrowed from foreign resources including the following:
- Commercial bank loans
- Buyers’ credit and suppliers’ credit
- Securitised 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.
Objective of External Commercial Borrowing (ECB)
- Government permits the ECBs as an additional source of financing for expanding the existing capacity as well as for fresh investments. The ECB policy of the Government seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc.
- There is also emphasis on the need of capital for Small and Medium scale enterprises.
How ECB is different from FDI?
It must be noted that ECB means any kind of funding other than Equity. If the foreign money is used to finance the Equity Capital, it would be termed as Foreign Direct Investment.
The ECB should satisfy the ECB regulations stipulated by the Government or its agencies such as RBI. The Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature are included in ECB.
The following are not included in the ECBs
- Any Investment made towards core capital of an organization such as equity shares, convertible preference shares or convertible debentures. We should note here that those instruments which can be converted into equity are called convertible. The convertible instruments are covered under the FDI Policy.
- Any other direct capital is not allowed in ECB.