ECBs Current Affairs

RBI issues clarifications on Hedging for External Commercial Borrowings

The Reserve Bank of India (RBI) has issued the Clarifications on hedging for External Commercial Borrowings (ECB) in a bid to effectively address currency risk at the systemic level.

The Clarifications were issued by RBI under section 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999.

What are External Commercial Borrowings (ECBs)?

  • ECBs are commercial loans borrowed from foreign sources for financing the commercial activities in India.
  • It may be bank loans, securitised instruments, buyers’ credit, suppliers’ credit, foreign currency convertible bonds, etc.
  • It should be noted that ECBs are not FDI. In case of FDI, foreign money is used only to finance the equity Capital. But in case ECBs, foreign money is used to finance any kind of funding other than equity.

What hedging means?

  • Hedging is an investment mechanism to cut the risk of adverse price movements in an asset. Usually, a hedge involves taking an offsetting position in a related security.

Highlights of the Clarifications

  • The ECB borrower will be required to cover both principal as well as coupon payments through the hedges done, starting from the day of borrowing.
  • The hedging period will be for the entire life of the liability with a minimum 1 year rollover option. It will be ensuring that the total exposure is not unhedged at any point of time.
  • The borrower has to hedge in such a manner that the projected cash flows match the expectation of the borrowers irrespective of the fluctuations in the foreign currency.
  • The designated banks will have the responsibility of verifying that 100% hedging requirement is complied with.

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RBI allows startups to raise $3 million via ECBs annually

The Reserve Bank of India (RBI) has permitted startups to raise external commercial borrowings (ECBs) of up to $3 million in a financial year for three year tenure

The new rules issued by RBI aims at boosting innovation and promoting job creation in the country. It will apply to startups looking to raise foreign borrowings and restrictions on such funds will be kept minimum.

Key Facts

  • Under the ECB route, borrowing of startups should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof.
  • In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through bank in India.
  • Under this, Funds can be raised with a minimum maturity of 3 years. There will no cost-ceiling or restriction on the end use of the funds raised.
  • The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares and minimum average maturity period will be 3 years.
  • The ECBs can be raised from a country which is either a member of Financial Action Task Force (FATF) or either through FATF-Style Regional Bodies.
  • Overseas branches and subsidiaries of Indian banks and overseas wholly-owned subsidiary or joint venture of an Indian company will not be considered as recognised lender.

What is External Commercial Borrowings (ECBs)?

  • Any money borrowed from foreign sources for financing the commercial activities in India are called ECBs. The Central Government permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.
  • Thus, ECBs are defined as money borrowed from foreign resources including the following: (i) Commercial bank loans (ii) Buyers’ credit and suppliers’ credit (iii) Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc. (iv) Credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as World Bank, ADB, AFIC, CDC, etc.

How ECB is different from FDI?

In case of Foreign Direct Investment, the foreign money is used to finance the Equity Capital. But in case ECBs, foreign money is used to finance any kind of funding other than Equity.

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