External Commercial Borrowing (Basic Overview)

An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings). ECBs provide an additional source of funds to the companies allowing them to supplement domestically available resources and take advantage of lower rates of interest prevailing in the international financial markets. ECBs have become very popular amongst the Indian companies, during the past few years due to the limitations in the Indian debt market in the form of short maturity period and high rate of interest.

Types of ECBs

At present, Indian companies are allowed to access funds from abroad in the following methods:

(i) External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.

(ii) Foreign Currency Convertible Bonds (FCCBs) mean 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

(iii) Preference shares (i.e. non-convertible, optionally convertible or partially convertible) for issue of which, funds have been received on or after May 1, 2007 would be considered as debt and should conform to the ECB policy. Since these instruments would be denominated in Rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread as permissible for ECBs of corresponding maturity.

(iv) Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency

Why companies opt for ECBs

  1. Foreign currency funds: Companies need funds in foreign currencies for many purposes such as, paying to suppliers in other countries etc that may not be available in India.
  2. Cheaper Funds: The cost of funds borrowed from external sources at times works out to be cheaper as compared to the cost of Rupee funds.

iii. Diversification of investor’s base: Another advantage is the addition of more investors thus diversifying the investor base

  1. Satisfying Large requirements: The international market is a better option in case of large requirements, as the availability of the funds is huge when compared to domestic market.

Corporate can raise ECBs from internationally recognised sources such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets etc.

The government through the ECB policies is trying to nourish 2 sectors:

  1. Infrastructure
  2. SME

The policies do not require any approval for investment under a limit in these 2 sectors. Thus it is easy to acquire foreign loans for such enterprises. Apart from that, the low cost of funds in the global market provides the small and medium enterprises funds at low costs thus bringing in more money in these sectors

Benefits of ECBs over other sources of funds

  1. Cost of raising ECBs is much lower than that of domestic borrowings
  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.

Disadvantages of ECBs

Since the funds are raised through ECBs in foreign currency and the interest & redemption proceeds are also payable in the foreign currency, the issuing company has to hedge its foreign exchange exposure, which involves expenditure. In case the company opts to keep its foreign exchange exposure unhedged, it carries a huge risk due to fluctuation in foreign exchange rates. RBI has also acknowledged this problem and has instructed the banks to put in place a system for monitoring the unhedged foreign exchange exposure of small and medium enterprises.

The funds raised through ECBs have to be utilized in accordance with the end uses permitted under the guidelines; as such these funds cannot be utilized for working capital or general corporate purposes.


  1. External Commercial Borrowings (ECBs) are defined to include commercial bank loans, buyers’ credit, 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.
  2. ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment.
  3. The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management.
  4. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Development Financial Institutions,

through their sub-lending against the ECB approvals are also expected to give priority to the needs of medium and small scale units.

  1. Applicants will be free to raise ECB from any internationally recognised source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. offers from unrecognised sources will not be entertained.

 Rules and Regulations regarding ECBs

The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

The ECB policy basically deals with the following aspects:-

1.Eligibility criteria for accessing international financial markets

2.Total quantum / limit of funds that can be raised through ECBs

3.Maturity period and the cost involved

4.End use of the funds raised

5.Conversion of ECBs into Equity

ECB can be accessed under two routes, viz.; (1) Automatic Route outlined (2) Approval Route

ECB for investment in real estate sector, industrial sector, especially infrastructure sector in India, are under Automatic Route, i.e. do not require RBI / Government approval. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route

  1. i) Eligible Borrowers
  1. a) Corporates, including those in the hotel, hospital, software sectors and Infrastructure Finance Companies (IFCs) except financial intermediaries, such as banks & other financial institutions (FIs), are eligible to raise ECB. Individuals, Trusts and Non-Profit making organizations are not eligible to raise ECB.
  1. b) Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area
  1. c) Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail of ECB
  1. d) Micro Finance Institutions (MFIs) engaged in micro finance activities are eligible to avail of ECBs
  1. ii) Recognised Lenders

Borrowers can raise ECB from internationally recognized sources, such as:

  1. a) International banks b) international capital markets c) multilateral financial institutions (such as IFC, ADB etc. d) export credit agencies e) suppliers of equipment f) foreign collaborators and g) foreign equity holders 

1.iii) Amount and Maturity

  1. a) ECB above USD 20 million or equivalent and up to USD 750 million or its equivalent with a minimum average maturity of five years.
  2. b) ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years.


  1. iv)  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.

Average Maturity Period All-in-cost Ceilings over 6 month LIBOR
Three years and up to five years 350 basis points
More than five years 500 basis points


  1. v) End-uses 
  1. a) ECB can be raised for investment such as import of capital goods, new projects, modernization/expansion of existing production units in real sector – industrial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors, namely, hotel, hospital, software in India.
  2. b) For first stage acquisition of shares in the disinvestment process
  3. c) Interest During Construction (IDC) for Indian companies which are in the infrastructure sector
  4. d) For lending to self-help groups or for micro-credit or for micro finance activity including capacity building by NGOs engaged in micro finance activities.
  5. e) Payment for Spectrum Allocation
  1. vi) End-uses not permitted

The borrowings shall not be utilized for any other purpose including the following purposes:

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

(b) for real estate sector

(c) for working capital, general corporate purpose and repayment of existing rupee loans.

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