BANK

As the current lending rates of Indian banks are hovering around 15%, by resorting to external commercial borrowings, CFOs of large Indian companies are trying to minimise the finance charges in their P&L account. Thus, CFOs are resorting to ECB as one of the financial engineering strategies to maximise the profitability of the company. However, heavy reliance on ECB can be a landmine to a company if there is a high volatile exchange rate fluctuation. Thus, by resorting to new financial instruments like hedging the forex exposures, CFOs of large companies are trying to pool in the international funds in Indian markets at a lower cost so that they could remain as profit making and as a competitive company.  This research essay gives you a vista and comprehensive picture of current ECB regulations in India and how the companies are benefiting out of it.

ECB as A Strategy of Long-term Funding for the Large Indian Companies

Eligible Indian borrowers are now permitted to avail commercial loans which are known as External Commercial Borrowings (ECB) with a minimum average maturity period of 3 years from eligible recognised non-resident lenders. ECB can take the following forms; loan from banks, supplier’s credit, buyer’s credit, securitised instruments and debt instruments.

There are two routes for raising ECB; one is automatic route where no prior approval is needed from RBI subject to adherence with the reporting needs immediately after availing the ECB and another one is under approval route.

                                                                                                                                    Restrictions on Use of ECB’s       

v  For investment in real estate sector; however, companies engaged in construction of “integrated township” is now allowed to avail ECB under approval route.

v  As per RBI Master Circular 2011, for repayment of existing Rupee loans, working capital, and general corporate purpose. However, under approval rate, RBI allows this as a special case. For instance, under approval route, RBI has permitted M/s Tata Teleservices Ltd and IDEA Cellular Ltd to refinance their INR Loan 3-G Spectrum-fee.  In May 2011 alone, RBI has permitted about 70 Indian companies to avail ECB under automatic route. RBI also allows by way of take-out finance for infrastructure companies to switch their rupee loan into ECB under approval route.

v  For issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

v  For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc., are also considered as investment in capital markets).

v  Individuals, Trusts and Non-Profit making organizations are not eligible to raise ECB.

v  Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

Conditions as regards to Securities to Foreign Lenders under ECB guidelines

Creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject toRegulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, respectively, as amended from time to time. AD Category - I banks have been delegated powers to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. It is to be noted that there is a restriction for a foreign lender to acquire immovable property, the issue of personal or corporate guarantees and, creation of charge over financial securities. In case of default by the Indian borrowers, the foreign lenders are not eligible to acquire automatically the immovable property charged to them in India. The international lender should sell such properties to an Indian resident and then repatriate the sale proceeds out of India.

TAKE-OUT FINANCE

As per the extant norms, refinancing of domestic Rupee loans with ECB is not permitted. However, keeping in view the special funding needs of the infrastructure sector, a scheme of take-out finance has been put in place. Accordingly, take-out financing arrangement through ECB, under the approval route, has been permitted for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects.

All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are valid until reviewed: Average Maturity Period		All-in-cost Ceilings over 6 month LIBOR*
	Three years and up to five years	300 basis points
	More than five years	500 basis points

ECB by NON BANKING FINANCIAL COMPANIES (NBFC)

Non-Banking Financial Companies (NBFCs) are eligible to raise ECB under approval routefrom eligible lenders. Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy. Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects is allowed under current ECB guidelines.

ECB by Telecom Companies

The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources by the successful bidders, to be refinanced with a long-term ECB, under the approval route, subject to the following conditions:

(i) The ECB should be raised within 12 months from the date of payment of the final instalment to the Government;

(ii) The designated AD - Category I bank should monitor the end-use of funds;

(iii) Banks in India will not be permitted to provide any form of guarantees; and

(iv) All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, etc, should be complied with.

ECB CAN BE RAISED FOR LIQUIDATION OF OR PREPAYMENT OF FCCBs

RBI through its circular dated 4 July 2011 has briefed that Fresh ECBs/ FCCBs can be raised with the stipulated average maturity period and applicable all-in-cost being as per the extant ECB guidelines; The amount of fresh ECB/FCCB shall not exceed the outstanding redemption value at maturity of the outstanding FCCBs; The fresh ECB/FCCB shall not be raised six months prior to the maturity date of the outstanding FCCBs;
The purpose of ECB/FCCB shall be clearly mentioned as ‘Redemption of outstanding FCCBs’ in Form 83 at the time of obtaining Loan Registration Number from the Reserve Bank; The designated AD - Category I bank would monitor the end-use of funds; All other aspects of ECB policy under the automatic route, such as, eligible borrower, recognised lender, end-use, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged;
ECB / FCCB beyond USD 500 million for the purpose of redemption of the existing FCCB will be considered under the approval route;and ECB / FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 500 million available under the automatic route as per the extant norms. 

Parking of ECB proceeds

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses.

ECB proceeds parked overseas can be invested in the following liquid assets (a) 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 (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.

ECB funds may also be repatriated to India for credit to the borrowers’ Rupee accounts with AD Category I banks in India, pending utilization for permissible end-uses.

An ECB borrower is required to keep ECB funds parked abroad till the actual requirement in India. Further, as per RBI norms, a borrower cannot utilize the funds for any other purpose as there are end use restrictions for ECB. However, Reliance Infrastructure now Reliance Energy has parked its foreign loan proceeds worth $300 million with its mutual fund in India for 315 days, and then repatriated the money abroad to a joint venture company. These actions, according to an RBI, violated various provisions of the Foreign Exchange Management Act (FEMA). In doing so, Reliance had not applied for prior approval of RBI as it contravened the end use restrictions and also it repatriated the ECB funds for investments in its overseas joint venture without prior approval of RBI.

For the justification of its levy of fine of Rs 125 Crores, RBI viewed that as the Reliance has made additional income of Rs 124 crores by parking its ECB in its mutual funds in contravention of ECB end use restrictions. Hence, borrowing companies in India should be very careful about the parking of funds abroad or end use of the same in India.

Statistics on ECB in India

Reserve Bank of India (RBI) has allowed ECB during the month of May 2011 (latest month statistics) as per details given below:

Under Automatic Route	Under RBI Approval Route	Total ECB collected
USD 1,497,371,540	USD 11,55,449.288	USD 2,652,820,828

RBI has allowed the maturity period for the ECB from minimum of 3 years to the maximum of 14 years 3 months. The purpose for which ECB has been allowed has been given as under:

ü  Rupee Expenditure Loc.CG                                 

ü  New Project

ü  Import of Capital Goods

ü  Onward/Sub-lending

ü  Import of Capital Goods

ü  Modernisation

ü  Power

ü  Road

ü  Overseas Acquisition

ü  Port

ü  Micro Finance

ü  Refinance of INR Loan 3-G Spectrum Fee

RBI has permitted during the month of May 2011 alone about 70 Indian companies to avail ECB under automatic route and about 10 Indian companies are allowed to access ECB under approval route.

Conclusion

As I said, ECB is an excellent financial engineering tool where CFO can use the same to bring down their finance costs and to enhance the bottom line of the company but it has to be carried with abundance prudence and caution as there involves foreign exchange fluctuation risks where in certain scenarios it may exceed the costs of local borrowing but such risks can be averted by resorting to forex hedging tools against future fluctuations in forex rates

Chinese Olympics versus the Indian Commonwealth Games – a tale of two attitudes!

The saga of shame of the Indian Commonwealth Games continues as more and more shameful skeletons tumble out of the cupboard. And it only makes my heart cringe. More so because I believe that sports is literally one of the key routes to a healthy nation. From child health to adult health – both physical and mental – sports has a great role to play, especially in today’s day and time where children are getting addicted to videogames and to the internet. To me, personally, the Commonwealth Games event – good or bad – was in reality a great opportunity for India to develop the Indian sports scene. Instead, we found it a great opportunity to plunder more and more money. And that’s what forces me to take a look at how the Chinese used the Olympics as a great leap forward and how they have over years made sports a way of life.

Compared to the Indian games, the 2008 Beijing Olympics actually spoke volumes about China’s commitment to sports. Not only did China refurbish the entire host city to welcome the game and honour the sport at large, but it also set a new record in its medals’ tally. But what was most noteworthy was the leap that China has taken in sports over the years. This unprecedented transition in Chinese sports gets largely visible when one compares the first ever entry of the Chinese to Olympics, vis-à-vis the way they stole the show at the 2008 Olympics. In 1932, during the Los Angeles Olympics, the Chinese representation was just a lone athlete who represented 450 million Chinese and came back home empty handed. Their tryst with the first gold medal happened 52 years later, again in the same venue; and from there on, there was no turning back. And finally, in 2008, a nation which was considered an underdog in many events previously, shocked the world by topping the medals’ tally with 51 gold medals (a jump from 32 gold medals in 2004 Athens Olympics and 28 gold medals in 2000 Sydney Olympics); they were followed by the US which had just 36 gold medals! But then, this jump in the medal tally didn’t happen overnight.

China started preparing its athletes for this event even before they started their infrastructural development (unlike our preparation, where during the CWG, neither was the infrastructure ready, nor did the sportsmen have space and facilities for training). As soon as the nation won the bid for hosting the 2008 Olympics, the government announced its most ambitious sports plan called “Winning pride at the Olympics”, which defined the number of gold medals China could possibly win in different events – after analyzing the strengths and weaknesses of their athletes. The government laid down clear cut policies and strategies to target sports and the number of gold medals that China needed to win in every sports event! The country also launched Project 119 and Plan for Olympics Glory – something that is very unique and equally strategic. The project defined how China could win 119 gold medals (a figure that was later increased to 122) based on their performance in the 2000 Olympics (as the bid for 2008 was won by China in 2001). The flow of funds was never a constraint. During the Olympics, the sports budget was increased to $700 million (an increase by $300 million) along with building specialized sports infrastructure at the Qingdao City costing $30 million. Interestingly, all women sports events received huge funding and got special attention (this is rare even in the West). No wonder, China won 46 gold medals in the ladies’ events (including team and doubles) in the 2008 Olympics!

GREECE CRISIS

                                                   Members of the Eurozone had ample opportunity to preclude the Greek debt crisis from spiralling out of control.....

            Whistler, British Columbia - The Greek debt crisis has caused considerable grief for just about everyone involved. The country is broke, the future of the Euro is in question, banks around the world are overexposed to Greek debt and the French and Germans have no choice but to foot the bill. The future of the Eurozone hangs in the balance and one (more) poor decision could precipitate another global financial meltdown. However, while the situation is dire it was to be expected. Greece should never have been admitted to the Eurozone in the first place, and the Europeans have only themselves to blame for the current fiscal disaster.

First, What is the Eurozone?

            The Eurozone, not to be confused with the European Union, is an economic union of 17 countries in Europe that use the Euro as their currency of legal tender. It was formed in 1999 to promote a strong and unified continental economy with fewer trade barriers and centralized monetary governance, which is directed by the European Central Bank (ECB). The Euro would facilitate extensive economic integration, which, by default (no pun intended) would push countries to work closely together to protect and improve their collective financial arenas.

            In recognition of the diverse nature of European economies, countries are required to meet certain criteria before joining the Eurozone. The Maastricht Treaty, signed prior to convergence, set forth four tenets for admission: low inflation, a manageable government deficit, moderate exchange rate fluctuations and low long-term interest rates. The Maastricht Treaty sought to ensure that Eurozone members were fiscally similar so that the union could function with limited inhibition.

Greece in the Eurozone

            Greece was admitted to the Eurozone in January 2001. A relatively small economy, it added only minimal value to the union, but member states were eager to strengthen the fledgling currency through enlargement. In spite of its size, Greek integration into the Eurozone led to heavy investment into the country by a number of large regional financial institutions. Most notably, French banks hold US$93 billion and German ones hold over $40 billion of Greek debt. If Greece defaults on its debt, which it may, those banks will lose sums large enough to significantly reduce global credit liquidity. A number of analysts have referred to Greece as the Lehman Brothers of Europe. This is why the entire Eurozone is now in danger of collapse.

            The admission of Greece into the Eurozone was bad news from the beginning. In 2004, three years after it joined, it was discovered that the country falsified its economic reports to comply with the Maastricht criteria. While Eurozone countries were expected to have a budget deficit of less than three percent of their national Gross Domestic Product, Greece had actually been running a deficit of at least 3.38 percent since 1999. Further reports suggest that the country may not have, in fact, met any of the stipulated requirements.

            Greece’s economy has been mismanaged for years, but the 2004 Athens Olympics and the 2007-2008 global economic downturn plunged the nation to new financial lows. The reason for Greece’s current debt woes, of course, is because it went decades spending money that it didn’t have. The Summer Games, alone, cost the country over $11 billion and much of the infrastructure developed for the Olympics is unused today. In short, that money basically went to waste. And, four years later when most of the world fell into recession the situation in Greece only worsened.

Europe Should Have Stopped Greece While It Had the Chance

            As much as Greece is dragging down the Eurozone, much of this is also the fault of those European states. Recall that in 2004 Greece admitted to fudging its numbers in order to join the union: at 3.38%, its budget deficit as a percentage of GDP was nearly half a percent too high. However, the Eurozone didn’t even turn a blind eye; it simply announced its disappointment in Greece but said that it would not question the country’s membership. Unsurprisingly, by 2009 the deficit had ballooned to 15.4% of GDP.

            Why didn’t France and Germany suspend Greece from the Eurozone, or at least force it to clean up its fiscal house? Why did they let things get this bad? The answer, of course, is quite simple: they wanted to expand the Euro and didn’t anticipate that Greece could trigger a global economic crisis. The Eurozone member states were short-sighted, unrealistic at best and greedy at worst. Yes, Greece lied and is ultimately responsible for the ensuing crisis. Its government severely mismanaged the economy and the Greek citizens never cared to hold their leaders accountable for it. But the Eurozone had ample opportunity to take the necessary measures to preclude a disastrous outcome, which is what we now face.

Conclusion

            What the outcome of the Greek debt crisis will be remains to be seen. France, Germany and the International Monetary Fund can administer as many economic band-aids as they deem necessary, but the only sustainable solution lies within Greece, itself. The problem is not just the Greek government; it is the people who elect the government. The country’s society is permeated by corruption, which is widely regarded as one of the catalysts for the Euro crisis. For example, in 2009, alone, the average Greek person paid €1,335 in bribes and rampant tax evasion costs the government €20 billion annually. How can a country function if its people won’t support the government? Conversely, why should the people support a government that does so little for them? This vicious cycle needs to come to an end. Moreover, citizens of France and Germany should also hold their respective governments accountable for their lax handling and oversight of Greece’s membership in the Eurozone. While there is enough blame to go around, it is clear that Greece’s problems are far below skin-deep, and if they’re not solved it will cost the rest of Europe dearly.