External Commercial Borrowings (ECB) – Economic, Business and Commercial Laws Important Questions

Question 1.
Write a short note on Foreign Currency Convertible Bond (FCCB).
Answer:
Meaning:

  1. Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.
  2. These bonds assume great importance for multinational corporations and in the current business scenario of globalization, where companies are constantly dealing in foreign currencies.
  3. They are issued according to Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993

Peculiarities of FCCB:

  • FCCB is a hybrid instrument. It is issued as a bond but later it is converted into shares.
  • FCCB carries a fixed rate of interest until the bond is converted into shares.
  • FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured.
  • FCCBs are denominated foreign currency.
  • Interest is payable in foreign currency.
  • The redemption price is payable in foreign currency (if the option of conversion is not exercised).

Question 2.
Write a short note on External Commercial Borrowing.
Answer:
(a) External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities.

(b) Externa] Commercial Borrowings should conform to the parameters j such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

(c) ECB can be accessed under two routes:

  1. Automatic Route
  2. Approval Route

(d) Types of ECB

  1. Foreign Currency denominated ECB
  2. Indian Rupee Denominated ECB

(e) Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3 )(d) of the Foreign Exchange Management | Act, 1999 (FEMA)

(f) Example: RIL avails loan from a bank in the USA is called ECB

Question 3.
FCCB and ECB are different inodes for raising foreign capital. [Dec 2011 (3 Marks)]
Answer:
Following are the main points of difference between ECB and FCCB:

PointsECBsFCCBs
MeaningECBs refer to commercial loans in the form of bank loans, securitized instruments, buyer’s credit, supplier’s credit availed of from non-resident lenders with a minimum average maturity of 3 years.FCCBs means a bond issued by an Indian company expressed in foreign currency and the principal and interest in respect of which is payable in foreign currency or shares
NatureECB is borrowing and is thus purely debt finance.FCCB is a hybrid instrument. It is issued as a bond but later it is converted into equity.
ProcedureECBs are to be availed as per the relevant guideline, notifications, and circulars issued by the RBI from time to time.FCCBs are required to be issued in accordance with the scheme viz., Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
ListingSince ECB is borrowing/loan it cannot be listed at all in the stock exchange.FCCBs can be listed in the stock exchange after their conversion into shares.
TermGenerally, Short termGenerally, Long Term

Question 4.
Distinguish between: FCCB & FCEB. [Dec 2015 (2 Marks)]
Answer:
FCCBs are issued by a company to non-residents giving them the option to convert them into shares of the same company at a predetermined price.

On the other hand, FCEBs are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified group company at a predetermined price.

The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies – the bonds are usually of the parent company while the shares offered are of the operating company which must be a listed company.

Question 5.
What do you understand by ‘external commercial borrowings (ECBs)? Discuss the type of ECB. [June 2012 (5 Marks)]
Answer:
(a) External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities.

(b) Externa] Commercial Borrowings should conform to the parameters j such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

(c) ECB can be accessed under two routes:

  1. Automatic Route
  2. Approval Route

(d) Types of ECB

  1. Foreign Currency denominated ECB
  2. Indian Rupee Denominated ECB

(e) Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3 )(d) of the Foreign Exchange Management Act, 1999 (FEMA)

(f) Example: RIL avails loan from a bank in the USA is called ECB

Question 6.
Externa] commercial borrowings (ECBs) refer to commercial loans. [June 2013 (4 Marks)]
Answer:
(a) External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities.

(b) Externa] Commercial Borrowings should conform to the parameters j such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

(c) ECB can be accessed under two routes:

  1. Automatic Route
  2. Approval Route

(d) Types of ECB

  1. Foreign Currency denominated ECB
  2. Indian Rupee Denominated ECB

(e) Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3 )(d) of the Foreign Exchange Management | Act, 1999 (FEMA)

(f) Example: RIL avails loan from a bank in the USA is called ECB

Question 7.
“Both foreign currency exchangeable bonds (FCEBs) and foreign currency convertible bonds (FCCBs) are convertible into equity shares.” Since both are convertible into equity shares, you are required to highlight the advantages of FCEBs over FCCBs. [Dec 2014 (6 Marks)]
Answer:
Foreign Currency Exchangeable Bonds (FCEB) as defined includes the following:

  • A bond expressed in foreign currency.
  • The principal and the interest of which is payable in foreign currency.
  • The issuer of the bond is an Indian company.
  • The bonds are subscribed by a person resident outside India.
  • The bonds are exchangeable into equity shares of another company which is also called the offered company.

Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and in¬terest in respect of which is payable in foreign currency.

The launch of the FCEB scheme affords a unique opportunity for Indian promoters to unlock value in group companies. FCEBs are another arrow? in the quiver of Indian promoters to raise money overseas to fund their new projects and acquisitions, both Indian and global, by leveraging a part of their shareholding in listed group entities.

FCEB involves three parties: The issuer company offered company (OC) and an investor.

Under this option, an issuer company may issue FCEBs in foreign currency, and these FCEBs are convertible into shares of another company (offered company) that forms part of the same promoter group as the issuer company. Thus, FCEBs are exchangeable into shares of the offered company. They have an inherent advantage in that it does not result in dilution of shareholding at the offered company level.

Question 8.
What do you mean by foreign currency convertible bonds (FCCBs)? State the benefits of FCCBs to investors and the issuer. [Dec 2016 (5 Marks)]
Answer:
Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.

Peculiarities of FCCB:

  • FCCB is a hybrid instrument. It is issued as a bond but later it is converted into shares.
  • FCCB carries a fixed rate of interest until the bond is converted into shares.
  • FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured.
  • FCCBs are denominated foreign currency.
  • Interest is payable in foreign currency.
  • The redemption price is payable in foreign currency (if the option of conversion is not exercised).

Benefits of FCCB to the issuer company:

  • FCCB generally has a low rate of interest as compared to pure debt instruments. Thus, it reduces the debt financing cost.
  • FCCB does not require a credit rating.
  • FCCB saves risks of immediate equity dilution as in the case of public shares.
  • FCCB can be raised within a month while pure debt takes a longer period to raise.

Benefits of FCCB to investors:

  • FCCB has the advantage of both equity and debt.
  • FCCB gives the investor much of the upside of investment in equity, and the debt portion protects the downside.
  • Assured return on bond in the form of fixed interest payments.
  • Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds, which are activated when the price of a stock reaches a certain point.
  • Significant Yield to maturity (YTM) is guaranteed at maturity.
  • Lower tax liability as compared to pure debt instruments due to the lower interest rates.

Question 9.
State the conditions required to be fulfilled for conversion of external commercial borrowings (ECBs) into equity. [June 2010 (4 Marks)]
Answer:
Conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the following conditions:

  1. The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment (FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity participation has been obtained as per the extant FDI policy.
  2. The conversion, which should be with the lender’s consent and without any additional cost, will not result in a breach of the applicable sector cap on the foreign equity holding.
  3. Applicable pricing guidelines for shares are complied with.
  4. Reporting requirements under the ECB framework are complied with.
  5. If the borrower concerned has availed of other credit facilities from the Indian banking system, including overseas branches/subsidiar¬ies, the applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring are complied with.
  6. Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders of the borrower,

Question 10.
Who can access external commercial borrowings (ECB) as per the guidelines/directions issued by the Reserve Bank of India? [Dec. 2009 (5 Marks)]
Answer:
The following are the Eligible Borrowers of External Commercial Borrowing:
(a) Foreign Currency Denominated ECB: The following entities are also eligible to raise ECB:

  1. Port Trusts;
  2. Units in SEZ;
  3. SIDBI; and
  4. EXIM Bank of India.

(b) Indian Currency Denominated ECB:

  1. All entities eligible to raise Foreign Currency ECB;
  2. Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ co-operatives, and Non-Government Organisations

Question 11.
Discuss in brief reporting requirements with respect or external commercial borrowings.
Answer:
Reporting Requirements: Borrowings under ECB Framework are subject to reporting requirements in respect of the following:
1. Loan Registration Number (LRN): Any draw-down in respect of an ECB, as well as payment of any fees/charges for raising an ECB, should happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank.

In turn, the AD Category-I bank will forward one copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India. Copies of the loan agreement for raising ECB are not required to be submitted to the RBI.

2. Changes In terms and conditions of ECB: Permitted changes in ECB parameters should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form 83 the changes should be specifically mentioned in the communication.

3. ReportIng of actual transactions: The borrowers are required to report actual ECB transactions through ECB 2 Return through the AD Category I bank on a mõnthly basis so as to reach DSIM within seven working days from the close of the month to which it relates. Changes, if any, in ECB parameters should also be incorporated in ECB 2 Return.

Format of ECB 2 Return is available at Annex III of Part V of Master Directions – Reporting under Foreign Exchange Management Act.

4. Reporting on account of the conversion of ECB into equity: In case of partial or full conversion of ECB into equity, the reporting to the RBI will be as under:
(a) Partial conversion: For partial conversion, the converted portion is to be reported to the concerned Regional Office of the Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in ECB 2 Return will be with suitable remarks “ECB partially converted to equity”.

(b) Full conversion: For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of ECB 2 Return is not required.

(c) For conversion of ECB into equity in phases, reporting through ECB 2 Return will also be in phases.

Question 12.
Discuss the end-use of external commercial borrowings under the approval route. [June 2009 (5 Marks)]
Answer:
The negative list, for which the ECB proceeds cannot be utilized, would include the following

  • Real estate activities.
  • Investment in the capital market. ,
  • Equity investment.
  • Working Capital

Exception: (ECB allowed to be used)

  1. EÇB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years),

General Corporate Purposes
Exception: (ECB allowed to be used)

  1. ECB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years)

Repayment of Rupee Loan
Exception:

  1. Loan availed for capital expenditure (7 years)
  2. Loan availed for other than capital expenditure (10 years)

On lending to entities Exception

  1. Working capital (10 years)
  2. Capital Expenses (7 years)
  3. Other than Capital Expenses (10 years)

Question 13.
What is the parking of external commercial borrowings (ECB) pro¬ceeds? [June 2011 (5 Marks)]
Answer:
ECB proceeds are permitted to be parked abroad as well as domestically in the manner given below:
Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization.

Till utilization, these funds can be invested in the following liquid assets:

  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. Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above.
  3. Deposits with overseas branches/subsidiaries of Indian banks abroad. Parking of ECB proceeds domestically: ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category-I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category-I banks in India for a maximum period of 12 months. These term deposits should be kept in an unencumbered position.

Question 14.
Describe the end use of external commercial borrowings under the approval route. [June 2014 (5 Marks)]
Answer:
The negative list, for which the ECB proceeds cannot be utilized, would include the following

  • Real estate activities.
  • Investment in the capital market. ,
  • Equity investment.
  • Working Capital

Exception: (ECB allowed to be used)

  1. EÇB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years),

General Corporate Purposes
Exception: (ECB allowed to be used)

  1. ECB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years)

Repayment of Rupee Loan
Exception:

  1. Loan availed for capital expenditure (7 years)
  2. Loan availed for other than capital expenditure (10 years)

On lending to entities Exception

  1. Working capital (10 years)
  2. Capital Expenses (7 years)
  3. Other than Capital Expenses (10 years)

Question 15.
Whether conversion of ‘External Commercial Borrowing’ into equity is permissible? [June 2019 (4 Marks)]
Answer:
Conversion of ECB into equity: Conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the following conditions:
1. Activity of the borrowing company is covered under the automatic route for Foreign Direct Investment (FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity participation has been obtained as per the extant FDI policy.

2. The conversion, which should be with the lender’s consent and without any additional cost, will not result in a breach of the applicable sector cap on the foreign equity holding.

3. Applicable pricing guidelines for shares are complied with.

4. Reporting requirements under the ECB framework are complied with.

5. If the borrower concerned has availed of other credit facilities from the Indian banking system, including overseas branches/subsidiar¬ies, the applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring are complied with.

6. Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders of the borrower.

Exchange rate for conversion of ECB dues into equity: For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender.

Leave a Comment

Your email address will not be published. Required fields are marked *