Project Report on External Commercial Borrowing (ECB)

SIP PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE PGDM PROGRAM

Table Of Contents

EXECUTIVE SUMMARY…...…………………………..…………………………………5

1. Objective of the Study…………………………………………………………................6

2. Research Design…………………………………………….............................................6

3. Company Profile.................................................................................................................7

3.1 Kankroli & Banmore Tyre Plants…………………………………………................8

3.2 Acquisition of Vikrant Tyres Ltd…………………………………………................9

3.3 Selling & Distribution Network……………………………………………..............9

3.4 Competitiveness……………………………………………………………............10

3.5 Exports.......................................................................................................................11

3.6 Research and Development.......................................................................................11

3.7 Environment..............................................................................................................12

4. Introduction to ECB………………………………........................................................ 14

5. Overview of ECB................................................................................................……… 17

6. Advantages…………………………………………….................................................. 18

7. Disadvantages…………………………………………...................................................19

8. Current Trend…………………………………………...................................................19

9. Regulations and policies issued by RBI…………….......................................................20

9.1 Automatic Route…………………………………….................................................20

9.2 Approval Route……………………………………..................................................27

10.Pricing…………………………………………………….............................................33

11.Reporting Requirements………………………………...................................................35

12.Special Allowances……………………………………..................................................36

13.Procedure for issuing ECB……………………………...................................................38

14.Different companies who have issued ECB………….....................................................40

15.Structural Obligation……………………………………................................................42

16.Post Issue Guidelines…………………………………....................................................43

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17.Future Scenario………………………………………….................................................44

18.FCCB

18.1 Introduction………………………………………..................................................46

18.2 Guidelines……………………………………….....................................................47

18.3 Current Scenario……………………………….......................................................48

18.4 Advantages/Disadvantages…………………….......................................................49

18.5 Valuation of FCCB………………………………...................................................50

18.6 Recent FCCB issues………………………….........................................................51

18.7 Future Scenario………………………………….....................................................52

19.GDR/ADR……………………………………………....................................................53

20.Analysis of ECB issue for JKTI……………………………………………...................57

21.Conclusion………………………………………………………………………............58

22.Recommendations……………………………………………........................................59

23.Bibliography…………………………………………….................................................60

24.Annexure…………………………………………………......…………………………63

Annexure I (ECB Form)……………………………………………………… 63

Annexure II (Form 83)……………………………………………………….. 69

Annexure III (ECB 2)………………………………………………………… 71

Some Important Issues………………………………………………………….80

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Executive Summary

The objective of the study of fund raising through ECB (External Commercial

Borrowing) was to understand ECB and its advantages and disadvantages with special

reference to JKTI (JK Tyre and Industries Ltd). ECB is one of the cheapest sources of

raising funds in the present scenario, when the interest rates are very high in the

domestic market. It was just a feasibility study not that JKTI will raise funds through

it; they are just thinking it as a source of raising funds. In this study I have to suggest

how JKTI should go about issuing ECB, whether they should issue ECB or not, if yes

then what steps they should take to get the maximum benefit of the issue.

The project was completed in few phases. First phase was to know the guidelines of

issuing ECB and are there any special restrictions which can affect JKTI for issuing it.

Second, I went to some banks to know about the interest rates that will be charged.

After going to banks I made some suggestions regarding what rates can be charged for

issuance for different maturity periods and for different amounts. Along with the

study of ECB I also studied the feasibility of issuing FCCB (Foreign Currency

Convertible Bonds) as it is one of the other sources of raising foreign funds.

The report contains the detail and guidelines for issuance of ECB and FCCB in

general not for specific JKTI, as it is not company policy to disclose the key financial

data. As the interest rate can reflect the company credit rating and other key

informations which are not public.

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1.0 Objectives

1. To find out that issuing ECB in comparison to other debt raising sources

like FCCB, Euro Bonds, Foreign Bonds can prove a cheaper source for

JKTI for raising funds.

2. To find out will there be any adverse impact of ECB issue on JKTI

financials.

2.0 Research design

General Methodology

The research was based on visiting banks for financing JKTI’s in its ECB issue and

getting information about interest rates will be charged by them.

Sources of data

Primary Data

The primary data was collected from various sources. This was done

through the medium of informal discussion with the relevant person.

Secondary data

The secondary data was collected from the websites, master circular

etc, which is mentioned in Bibliography.

Data Analysis

The data was analyzed using both quantitative and qualitative techniques.

The software used to analyse data was MS Excel.

3.0 Company Profile

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JK Tyre and Industries Ltd. : Hyderabad

A brief note on the background and profile of company

JK Tyre and Industries Ltd. (JKTI) is a profit making, dividend paying, and

flagship Company of the JK Group headed by Shri Hari Shankar Singhania as

its Chairman. JKTI promoted on Feb. 14, 1951 as a private limited company and

was converted into a public limited company in 1974.

The Company is into the business of manufacture and sale of Automotive Tyre,

Tubes and Flaps. With organic and inorganic growth over the years, the Company

has emerged as a titan in the Indian Tyre Industry with turnover of near about

Rs.3000 crore and globally the 16th largest tyre manufacturer in the world.

In last 25-30 years, the Company has recorded a phenomenal growth in its

operations and turnover which has been resulted in considerable increase in

Turnover, Operating profits.

Turnover – Growth since inception

The turnover has gone-up at a CAGR of 14.63% over last 25-30 years i.e. from a

turnover of Rs. 33.04 crore in 1977-78 to Rs. 2952.56 crore in 2005-06.

Operating Profit – Increase since inception.

The operating profit of the company has gone up from mere Rs. 2.59 crore in 1977-78

to Rs. 168.88 crore in 2005-06.

In 1975, JKTI set-up facilities at Jaykaygram, Kankroli, Rajasthan for manufacture

of 5 lac tyres p.a. of Automotive Tyres and Tubes each in technical collaboration

with the General Tires International Co., USA. This capacity has been expanded

through a series of expansion programs, setting up a new plant at Banmore (MP) and

acquisition of Vikrant Tyres Ltd. (since merged with JK Tyre) to reach the present

level of 81 lac tyres p.a.

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JKTI has 4 most modernised Tyre Plants strategically located at Kankroli

(Rajasthan), Banmore (Madhya Pradesh) and 2 Plants at Mysore. Tyres

manufactured are sold under the well-known brands ' JK Tyre' & ' Vikrant' .

3.1 Kankroli & Banmore Tyre Plants

In 1975 JKTI set-up facilities at Jaykaygram, Kankroli, Rajasthan for

manufacture of 5 lac tyres p.a. of Automotive Tyres and Tubes each in technical

collaboration with the General Tires International Co., USA. This capacity has

been expanded through a series of expansion programs to reach the present level

of 15.2 lac tyre p.a.

In the year 1991, the company set up a new state-of the art plant at Banmore in

Morena district of Madhya Pradesh. This plant was set up with an initial

installed capacity of 5.69 lac tyres p.a. Over a period of time the plant capacity at

Banmore has been expanded to current capacity of 27.6 lac tyres p.a.

JKTI has consciously followed a policy of continuously modernizing and

expanding its tyre manufacturing facilities to retain its edge in the Market place.

Both the tyre plants have the state-of-the-art processing equipment, which

operate at over 100% capacity. Critical operational efficiency parameters of the

plants like scrap and wastage are one of the best in the World. They also operate

at lowest process scrap and have lowest steam consumption in the country. The

Plants have ISO 9001, QS –9000 and ISO –14001 accreditation for their entire

operations. JK Tyre is the World’s first tyre manufacturer to have such

accreditations for its entire operations. In addition, JK Tyre is the first tyre

company in the world to receive ISO/TS/16949:2000 Certificate for its entire

products. It is the only Tyre Manufacturer in the country to produce high

performance ‘T’ & ‘H’ – rated steel radial tyres apart from being the first

producer of radials in India. All the new generation cars like Maruti Swift,

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Maruti Wagon R, Alto, Mitsubishi Lancer, Mahindra Maxx, Tata Indica and

Spacio were launched on JK Steel Radials. New models likely to be launched in

next 1-2 years by Car manufacturers are expected to be launched on JK Tyres.

The Company is fully geared up for forthcoming launches.

3.2 Acquisition of Vikrant Tyres Ltd.

In June 1997, the company acquired controlling interest in VTL by acquiring 52%

of its equity capital and which is thus its subsidiary. Karnataka State Industrial

Investment & Development Corporation Ltd. (KSIIDC) is a partner with 26%

equity. VTL has 2 Tyre plants, including a state-of-the-art Truck Radial Plant, the

only of its kind in the country, located at Mysore with an aggregate capacity of

13.8 lacs tyres p.a.

JKTI turned around Vikrant Tyres in first 10 months of its operations by

providing expertise in the fields of technology, R&D, marketing and procurement

apart from modernizing and creating the-state-of-the-art Truck/Bus Radial facility.

Vikrant Tyres was put back on dividend list in 1998-99 after a gap of 6 years.

The day to day operations of the company are looked after by Shri Raghupati

Singhania, Vice Chairman and Managing Director.

3.3 Selling & Distribution Network

The company has a well entrenched distribution network encompassing over

4000 dealers; 107 exclusive showrooms-Steel Wheels, 119 stocking/selling

points comprising 31 depots and 83 C& F Agents spread through the length and

breadth of the country.

3.4 Competitiveness

J K Tyres’ competitiveness is evident from the following indicators:

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J K Tyres (incl. VTL) is:

20th Largest producer of tyres in the World

No. 1 in Truck/Bus Radial tyres in India - market Share of 76%

No. 1 exporter of tyres from India; (Rs 4350 Mn in 05-06)

No. 1 producer in the Truck/Bus segment with a share of 25.2%.

No. 2 in commercial tyres (Truck/Bus & LCVs’) - market share of 22.6%

No. 2 in Radials; entire range: MUVs, Pass. Cars, Jeeps, LCVs, Truck &

Bus and Tractors

One of the largest tyre producer in the country in 4 wheeler tyres with 19.5%

share.

JK Tyre is the Radial Leader- as India’s only manufacturer of entire range of

Radials Tyres for Truck/Bus, MUVs, Jeeps, LCVs & Pass. Cars.

JK Tyre has indomitable position in the car Radial Tyre segment being one

of the largest manufacturers in the country.

JK Tyre has been successful in maintaining its market leadership by

continuous improvement in product quality and better customer service with

several innovative marketing strategies.

One of the largest distribution networks in the Tyre Industry in India with

strategic plant locations across the country.

J K Tyre was the first tyre manufacturer in the world to have received ISO

9001 & QS 9000 certifications for its entire operations. All the Tyre Plants

have also received ISO 14001 accreditation for their environment

management systems.

3.5 Exports

We are the no. 1 exporters from India and export tyres under our brands – “JK

TYRE” and “VIKRANT” to 60 countries across six continents. JK Tyre has been

awarded the ‘Capexil’ award for the highest exports in the non-mineral sector. It

is also the first manufacturer in India to have the prestigious 'E' Mark certification

– a pre-requisite for exports to Europe.

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Outsourcing of tyres from China

JK Tyre is now further spreading its wings and has entered into strategic alliance

with a leading Chinese Tyre manufacturing company for outsourcing of Light

Truck Tyres for export markets. JKTIL has also signed collaboration agreement

with the same company for manufacture of bias truck tyres for sales in Chinese

market. Arrangements are also being made with some other manufacturers in

China for outsourcing of Heavy Duty Truck and Farm Tyres for exports.

JK Tyre is currently scouting for more low cost outsourcing production bases in

Latin America, South East Asia and East Europe.

3.6 Research and Development

JK Tyre is the only tyre company in India to set up an independent R & D facility

- ‘HASETRI’ which is engaged in the advancement of tyre technology & polymer

chemistry. This nerve centre helps translate consumer needs and expectations into

reality by suitably developing products and continuously measuring their

performance to provide world class products to the Indian consumers.

It is recognized by the Department of Scientific and Industrial Research (DSIR),

Govt. of India, and is also the first facility in India to get ISO 9002, ISO/IEC

Guide 25 and EN 45001 certification.

The deep commitment of the company to research & development activities not

only ensures the incorporation of latest technology in its products but also helps in

development of new tyres.

HASETRI has contributed significantly to various costs saving initiatives

undertaken by the company and has played a key role in J K Tyre’s success.

3.7 Environment

JK Tyre and Industries Ltd.’s current position and Future Prospects

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JK Tyre and Industries ranks second in the Indian Tyre Industry with 21%

market share, enjoying leadership in the truck and bus tyre segment with 25%

market share. It strong brand ‘JK Tyre’ & ‘Vikrant’ and wide distribution

network gives an edge over peers.

With organic and inorganic growth over the years, the Company has emerged

as a titan in the Indian Tyre Industry with a turnover of near about Rs 3000

crore and globally the 20th largest tyre manufacturer in the World.

The company is well positioned to capture the growth phase of Automobile

sector. The company has chalked out a plan to augment overall capacities.

JKTI has indomitable position in the car Radial Tyre segment being one of the

largest manufacturers in the country.

JK Tyre is leading the revolution in Truck Radials in Truck Radials as well

and continues to be country’s only manufacturer enjoying 90% market share.

JKTI is the largest exporter of tyres from India and a recognized Indian brand

in truck bias tyre market of USA, Africa, Middle East and south East Asia.

The company is well positioned to capture growth opportunities.

The outlook for the company largely depends on the prospects for the auto industry,

especially the commercial vehicle segment, as a whole. JKTI’s competitive position

in the industry is good. With a wide product range, large distribution network and a

renewed retail push, it is expected to retain its market leadership. However, high

prices of raw material inputs like carbon black, nylon tyre cord and natural rubber

will keep pressure on margins. Secondly, its presence in a number of unrelated

industries is also a point of concern.

Earnings sensitivity factors

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Raw material price fluctuations: The prices of natural rubber, an agricultural

commodity. In the last few months, prices have recovered due to increase in

international prices. Other raw materials are mainly petrochemical based and

movements are cyclical. The government’s decision to impose 10% safeguard duty

on carbon black, hiking benchmark prices of natural rubber and hiking import duties

on natural rubber will have adverse impact on the operating margins.

4.0 EXTERNAL COMMERCIAL BORROWINGS (ECB)

Introduction

External Commercial Borrowing (ECBs) is a key component of India’s overall debt.

Policy on External commercial Borrowings (ECB) is framed by the Government of

India in consultation with RBI. For the convenience of investors and borrowers,

Government brings out the consolidated ECB Guidelines in the form of a brochure.

External commercial borrowing is a complicated process. It is not the loan agreement

alone that is sufficient. It involves a number of other documents. The exact kind and

number of documents to be executed in an external commercial borrowing depend on

various factors including the nature of the lenders, that is, whether it is an

international financial institution, a financial institution of a country, an export import

bank, a commercial bank or a syndicate of such banks. The extent and the period for

which the funds are required by the borrower also play an important role in the

process. The purpose of the borrowing is also significant.

The important aspect of ECB policy is to provide flexibility in borrowings by Indian

Corporates, at the same time maintaining prudent limits for total external borrowings.

The guiding principles of ECB policy are to keep borrowing maturities long, costs low,

and encourage infrastructure and export sector financing which are crucial for overall

growth of the economy.

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Government has been streamlining / liberalizing ECB procedures in order to enable

Indian Corporates, to have greater access to international financial markets.

Government has now empowered Reserve Bank of India to give ECB approvals in

accordance with the guidelines brought out by the RBI.

Before we discuss ECB in detail let us look at some of the other sources of raising

foreign currency:

(a) Eurocurrency Loans : Eurocurrency is any freely convertible currency deposited

in banks outside the country of its origin. Eurocurrency loans are made on the

basis of floating interest rates using LIBOR (London interbank offered rate) as

the benchmark. A borrower can borrow in multiple currencies from the

Eurocurrency market and may choose to make payment of interest and

principal in one or more currencies. Usually the size of the Eurocurrency loans

is very large and these loans are syndicated by more than one bank.

(b) Eurobonds : A company can also raise funds by issuing Eurobonds and foreign

bonds to investors in other countries. Eurobonds are bonds sold outside the

country in whose currency they are denominated, for example, a dollar-

denominated bond issued by a U.S. company in Japan. Eurobonds are directly

issued by borrowers to investors. Eurobond market is free from the national

government regulation. Both fixed rate and floating rate bonds are issued by the

borrowers.

(c) Foreign Bonds : It is issued by a company in the domestic capital market of a

foreign country. It is denominated in the currency of the country where it is

issued and is subject to the laws and regulations of that country. A yen

denominated bond issued in Japan by a U.S. company is a foreign bond.

(d) 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. Further, the bonds 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”, and subscribed by a non-resident in

foreign currency and convertible into ordinary shares of the issuing company 13

in any manner, either in whole, or in part, on the basis of any equity related

warrants attached to debt instruments. The policy for ECB is also applicable to

FCCBs. The issue of FCCBs are also required to adhere to the provisions of

Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from

time to time.

(e) Depository Receipts:

It is difficult for companies from developing countries to raise equity capital

from developed markets. The country risk of these companies is high and the

listing and disclosure requirements in developed capital markets like the U.S.

market are very stringent. An indirect method of raising equity capital from

developed markets is to issue depository receipts. For example an Indian

company can issue American Depository Receipts (ADRs) in U.S. The Indian

firms can also issue Global Depository Receipts (GDRs) in many other

countries. A company issues its shares to a depository which will be a reputed

international financial institution. The depository bundles a specified number of

shares as a depository receipt and issues them to investors in the foreign

country. The depository receives dividends from the issuing company and pays

it to the depository receipt holders. Depository receipts can be listed on

international stock exchanges.

These are some of the major sources of raising foreign currency.

Now we will explain ECB in detail. This evolving policy regime was based broadly

on the recommendations of the Rangarajan Committee (1993) which implied;

(i) the continuation of an annual cap, minimum maturity restrictions and

prioritizing the use of ECBs;

(ii) LIBOR based ceilings on interest rates and minimum maturity

requirements on NRI deposits to discourage the volatile component of

such deposits;

(iii) Containment of short term debt together with controls to prevent its undue

increase in future;

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(iv) Retiring/ restructuring/ refinancing of more expensive external debt;

(v) Measures to encourage non-debt creating financial flows such as foreign

direct and portfolio investments;

(vi) incentives and schemes to promote exports and other current receipts; and

(vii) Conscious build-up of foreign exchange reserves to provide effective

insurance against external sector uncertainties.

5.0 Overview of ECB

ECB POLICY:

1. External Commercial Borrowings (ECBs) are defined to include commercial

bank loans, buyers’ credit, suppliers’ credit, securitized 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. It is availed from non-resident lenders

with minimum average maturity of 3 years

2. ECBs are being permitted as an additional source of finance to augment the

resources available domestically to Indian Corporates for financing import of

capital goods, new projects, modernization/expansion of existing production

units in real sector - industrial sector including small and medium enterprises

(SME) and infrastructure sector - in India.

3. External Commercial Borrowings are approved within an overall annual

ceiling, 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. Financial Institutions dealing exclusively with infrastructure or export

finance through their sub-lending against the ECB approvals are also expected

to give priority to the needs of medium and small scale units.15

5. Applicants will be free to raise ECB from any internationally recognized

source such as banks, export credit agencies, suppliers of equipment, foreign

collaborators, foreign equity-holders, international capital markets etc. Offers

from Non-recognized sources will not be entertained.

6. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii)

Approval Route

6.0 The major advantages that accrue from availing an ECB are:

a. Lower interest rate - First, the foreign currency loan is offered in the international

markets frequently against the guarantee from a bank. Therefore the borrower

should add against the guarantee fee payable by him to his bank to the cost of

raising the foreign currency loan. The interest rate the guarantee commission and

other incidental costs should aggregate to less than the cost of funds in the

domestic market.

b. The availability of the funds from the International market is huge as compared to

domestic market and corporate can raise large amount of funds depending on the

risk perception of the International market.

c. Non-encumbrance on assets - The third advantage is that since specific assets are

usually not charged for funds raised abroad, the borrowing capacity in the

domestic company is not affected.

d. Freedom from exchange risk - The exchange loss on conversion can be avoided

provided the purpose for which the loan is raised can be paid for in the currency of

the loan and the source of repayment is also in the same currency. For instance,

the loan is raised to pay in dollars for raw materials imported and export proceeds

are also received in US dollars. If the sources of repayment are in a currency other

than the currency of loan, the borrower will be facing exchange risk. Forward

cover may arrange, but this should be added to the cost of borrowing. Further,

hedging exposures for longer periods is costly.

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7.0 The major disadvantages that accrue from availing an ECB are:

1. Interest Rate Risk : As ECB’s are issued for a longer period of time and in this

meanwhile if the interest rate in domestic country goes down, it can convert ECB

in an expensive source of financing.

2. Exchange Rate Risk : If the domestic currency gets depreciated at the time of

payment of ECB, then borrower will have to pay extra rupee because of the

domestic currency depreciation.

3. Leverage : ECB is a debt instrument, and if it is raised beyond a limit, it can

increase the country’s dependence on the Lender’s country. As they will be in a

condition to impose their decision on borrowing county.

8.0 Current Trend

There has been quantum jump in borrowings by Indian companies abroad during

2006-07, which now account for over a quarter of the country’s total debt stock. i.e.

25.2 per cent of India's $ 142.7 billion external debt in December 2006. In the

previous quarter (September 2006), commercial borrowings represented 23.8 per cent

of the total external debt of $136.5 billion. ECBs accounted for $ 9.11 billion of the

total accretion of $ 16.24 billion to the debt stock of the country during the first three

quarters of 2006-07 (Apr 2006-Dec 2006). Lower spreads on external borrowings and

rising financing requirements for capacity expansion domestically has enabled higher

recourse to ECB’s.

The requirements of having a longer maturity for larger borrowing, caps on borrowing

cost and restrictions on end use of ECB have helped in avoiding the difficulties,

which some of the Southeast Asian Countries are currently facing. The guiding

principles for ECB Policy are to keep maturities long, costs low, and encourage

infrastructure and export sector financing which are crucial for overall growth of the

economy. Today, most of the borrowing is from the external commercial borrowing

(ECB) route because there is a clear arbitrage between domestic rates and the offshore

rates to the extent that corporate not affected by rising interest rates

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There have been high recourse to ECBs by Indian corporates which has resulted in

raising the ECB ceiling twice in the last financial year from 14bn to 18 bn and then to

22bn. The dependence of Indian corporates on ECB has almost insulated them from

the rising interest cost in the domestic market as they now have other options to

borrow and this trend is showing that ECB’s inflows will increase in the future.

The RBI to curb ECB issue has not yet allowed banks to go in for ECBs of up to 50%

of their tier-I capital, although the central bank had promised to do so in its October,

2006 monetary policy statement. At present, the banks are allowed ECBs of up to

25% of their unimpaired tier-I capital. This move is consistent with the stand adapted

by government to check inflation.

9.0 Regulations and Policies issued by RBI

ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval

Route

9.1 AUTOMATIC ROUTE

ECB for investment in the real sector - industrial sector, especially infrastructure

sector in India – is under the Automatic Route, i.e. will not require RBI /

Government approval. The maximum amount of ECB which can be raised by an

eligible borrower under the Automatic Route is USD 500 million during a

financial year. However, NGOs engaged in micro-finance activities have been

permitted to raise ECB up to USD 5 million during a financial yearn for

permitted end use.

In case of doubt as regards eligibility to access Automatic Route, applicants

may take recourse to the Approval Route.

ECB under Automatic Route do not require approval of Government of India /

RBI.

i) Eligible borrowers

(a) Corporates (registered under the Companies Act except financial

intermediaries (such as banks, financial institutions (FIs), housing finance

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companies and NBFCs) are eligible to raise ECB. Individuals, Trusts and

Non-Profit making Organisations are not eligible to raise ECB.

(b) Non-Government Organisations (NGOs) engaged in micro finance activities

are eligible to avail ECB. Such NGO (i) should have a satisfactory

borrowing relationship for at least 3 years with a scheduled commercial bank

authorised to deal in foreign exchange and (ii) would require a certificate of

due diligence on `fit and proper’ status of the board/committee of

management of the borrowing entity from the designated Authorised Dealer

(AD) bank.

(c) Individuals, Trusts and non-profit making organizations, [except NGOs

engaged in micro-finance activities as mentioned earlier] are not eligible to

raise ECB.

(d) 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.

ii) Recognised Lenders

(a) Borrowers can raise ECB from internationally recognised sources such as:

(i) International banks,

(ii) International capital markets,

(iii) Multilateral financial institutions (such as IFC, ADB, CDC etc),

(iv) Export credit agencies,

(v) Suppliers of equipment,

(vi) Foreign collaborators and

(vii) Foreign equity holders (other than erstwhile OCBs).

A "foreign equity holder" to be eligible as “recognized lender” under the

automatic route would require minimum holding of equity in the borrower

company as set out below:

(i) For ECB up to USD 5 million - minimum equity of 25 per cent held

directly by the lender,

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(ii) For ECB more than USD 5 million - minimum equity of 25 per cent

held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e.

the proposed ECB not exceeding four times the direct foreign equity

holding).

(b) Overseas organizations and individuals complying with following

safeguards may provide ECB to Non-Government Organisations (NGOs)

engaged in micro finance activities.

(i) Overseas organizations proposing to lend ECB would have to furnish a

certificate of due diligence from an overseas bank which in turn is subject

to regulation of host-country regulator and adheres to Financial Action

Task Force (FATF) guidelines to the AD bank of the borrower. The

certificate of due diligence should comprise the following (i) that the

lender maintains an account with the bank for at least a period of two

years, (ii) that the lending entity is organised as per the local law and held

in good esteem by the business/local community and (iii) that there is no

criminal action pending against it.

(ii) Individual Lender has to obtain a certificate of due diligence from an

overseas bank indicating that the lender maintains an account with the

bank for at least a period of two years. Other evidence /documents such as

audited statement of account and income tax return which the overseas

lender may furnish need to be certified and forwarded by the overseas

bank. Individual lenders from countries wherein banks are not required to

adhere to Know Your Customer (KYC) guidelines are not eligible to

extend ECB.

iii) Amount and Maturity

(a) The maximum amount of ECB which can be raised by a corporate is USD

500 million or equivalent during a financial year.

(b) ECB up to USD 20 million or equivalent in a financial year with

minimum average maturity of three years

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(c) ECB above USD 20 million and up to USD 500 million or equivalent

with minimum average maturity of five years.

(d) NGOs engaged in micro finance activities can raise ECB up to USD 5

million during a financial year. Designated AD bank has to ensure that at

the time of drawdown the forex exposure of the borrower is hedged.

(e) ECB up to USD 20 million can have call/put option provided the

minimum average maturity of 3 years is complied with before exercising

call/put option.

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. Moreover, the payment of withholding tax in Indian Rupees is

excluded for calculating the all-in-cost.

The all-in-cost ceilings for ECB are indicated from time to time. The current

ceilings are as below:

Average Maturity Period All-in-cost Ceilings over 6 month

LIBOR*

Three years and up to five years 150 basis points

More than five years 250 basis points

* For the respective currency of borrowing or applicable benchmark.

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. Moreover, the payment of withholding tax in Indian Rupees is

excluded for calculating the all-in-cost.

v) End-use

(a) Investment e.g. import of capital goods (as classified by DGFT in the

Foreign Trade Policy), implementation of new projects, and

21

modernization/expansion of existing production units in real sector -

industrial sector including small and medium enterprises (SME) and

infrastructure sector - in India. Infrastructure sector is defined as (i)

power, (ii) telecommunication, (iii) railways, (iv) road including bridges,

(v) sea port and airport (vi) industrial parks and (vii) urban infrastructure

(water supply, sanitation and sewage projects)

(b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned

Subsidiaries (WOS) subject to the existing guidelines on Indian Direct

Investment in JV/WOS abroad.

(c) The first stage acquisition of shares in the disinvestment process and also

in the mandatory second stage offer to the public under the Government’s

disinvestment programme of PSU shares.

(d) For lending to self-help groups or for micro-credit or for bonafide micro

finance activity including capacity building by NGOs engaged in micro

finance activities.

(e) Refinancing of an existing ECB

The existing ECB may be refinanced by raising a fresh ECB subject to

the condition that the fresh ECB is raised at a lower all-in-cost and the

outstanding maturity of the original ECB is maintained.

(f) NBFCs can utilise ECB proceeds towards import of infrastructure

equipment for leasing to infrastructure projects.

(g) Housing Finance Companies with strong financials can utilise FCCB

proceeds for meeting their housing finance requirements.

vi) End Uses not permitted

(a) Utilization of ECB proceeds is not permitted for on-lending or investment

in capital market or acquiring a company (or a part thereof) in India by a

corporate.

(b) Utilisation of ECB proceeds is not permitted in real estate. The term ‘real

estate’ excludes development of integrated township as defined by

Ministry of Commerce and Industry, DIPP, SIA (FC Division. Integrated

22

township includes housing, commercial premises, hotels, resorts, city and

regional level urban infrastructure facilities such as roads and bridges,

mass rapid transit systems and manufacture of building materials.

Development of land and providing allied infrastructure forms an

integrated part of township’s development. The minimum area to be

developed should be 100 acres for which norms and standards are to be

followed as per local bylaws/rules. In the absence of such bylaws/rules, a

minimum of two thousand dwelling units for about ten thousand

population will need to be developed.

(c) Utilisation of ECB is not permitted for working capital, general corporate

purpose and repayment of existing Rupee loans.

vii) Guarantees

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of

comfort by banks, Financial Institutions and Non-Banking Financial

Companies (NBFCs) relating to ECB is not permitted.

viii) Security

The choice of security to be provided to the lender/supplier is left to the

borrower. However, creation of charge over immovable assets and financial

securities, such as shares, in favor of the overseas lender is subject to

Regulation 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 as

amended from time to time, respectively.

ix) Parking of ECB proceeds overseas

ECB proceeds shall be parked overseas until actual requirement in India. 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)  Deposits with overseas branch of an authorised dealer in India; and

23

(c)  Treasury bills and other monetary instruments of one year maturity having

minimum rating as indicated above. 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.

x) Prepayment

Prepayment of ECB has raised up to USD 400 million from USD 300 million

(in the credit policy of 2007-2008) may be allowed by AD banks without prior

approval of RBI subject to compliance with the stipulated minimum average

maturity period as applicable to the loan.

xi) Debt Servicing

The designated Authorised Dealer (AD) bank has the general permission to

make remittances of installments of principal, interest and other charges in

conformity with ECB guidelines issued by Government / Reserve Bank of

India from time to time.

xii) Procedure

Borrowers may enter into loan agreement complying with ECB guidelines

with recognised lender for raising ECB under Automatic Route without prior

approval of RBI. The borrower must obtain a Loan Registration Number

(LRN) from the Reserve Bank of India before drawing down the ECB.

9.2 APPROVAL ROUTE

All cases which fall outside the purview of the automatic route, will be decided

by an Empowered Committee set up by RBI

The following types of proposals for ECB are covered under the Approval

Route

i) Eligible borrowers

24

a) Financial institutions dealing exclusively with infrastructure or export finance

such as IDFC, IL&FS, Power Finance Corporation, Power Trading

Corporation, IRCON and EXIM Bank are considered on a case by case basis.

b) Banks and financial institutions which had participated in the textile or steel

sector restructuring package as approved by the Government are also

permitted to the extent of their investment in the package and assessment by

Reserve Bank based on prudential norms. Any ECB availed for this purpose

so far will be deducted from their entitlement.

c) 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.

d) Foreign Currency Convertible Bonds (FCCB) by housing finance companies

satisfying the following minimum criteria: (i) the minimum net worth of the

financial intermediary during the previous three years shall not be less than

Rs. 500 crore, (ii) a listing on the BSE or NSE, (iii) minimum size of FCCB is

USD 100 million, (iv) the applicant should submit the purpose / plan of

utilization of funds.

e) Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set

up to finance infrastructure companies / projects exclusively, will be treated as

Financial Institutions and ECB by such entities will be considered under the

Approval Route.

f) Multi-State Co-operative Societies engaged in manufacturing activity

satisfying the following criteria i) the Co-operative Society is financially

solvent and ii) the Co-operative Society submits its up-to-date audited balance

sheet.

25

g) Cases falling outside the purview of the automatic route limits and maturity

period indicated at paragraph I (A) (iii).

ii) Recognised Lenders

(a) Borrowers can raise ECB from internationally recognised sources such as (i)

international banks, (ii) international capital markets, (iii) multilateral financial

institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v)

suppliers' of equipment, (vi) foreign collaborators and (vii) foreign equity

holders (other than erstwhile OCBs).

(b) From 'foreign equity holder' where the minimum equity held directly by the

foreign equity lender is 25 per cent but debt-equity ratio exceeds 4:1(i.e. the

proposed ECB exceeds four times the direct foreign equity holding).

iii) 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. Moreover, the payment of withholding tax in Indian Rupees is

excluded for calculating the all-in-cost. The current ceilings are as below:

Average Maturity Period All-in-cost Ceilings over 6 month

LIBOR*

Three years and up to five

years

150 basis points

More than five years 250 basis points

* For the respective currency of borrowing or applicable benchmark.

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. Moreover, the payment of withholding tax in Indian Rupees is

excluded for calculating the all-in-cost.

26

iv) End-use

(a) Investment [such as import of capital goods (as classified by DGFT in the

Foreign Trade Policy), implementation of new projects,

modernization/expansion of existing production units], in real sector

(industrial sector including small and medium enterprises (SME) and

infrastructure sector) in India. Infrastructure sector is defined as (i) power,

(ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea

port and airport, and, (vi) industrial parks and (vii) urban infrastructure

(water supply, sanitation and sewage projects);

(b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned

Subsidiaries (WOS) subject to the existing guidelines on Indian Direct

Investment in JV/WOS abroad.

(c) The first stage acquisition of shares in the disinvestment process and also

in the mandatory second stage offer to the public under the Government’s

disinvestment programme of Public Sector Units shares.

(d) Refinancing of an existing ECB

Existing ECB may be refinanced by raising a fresh ECB subject to the

condition that the fresh ECB is raised at a lower all-in-cost and the

outstanding maturity of the original ECB is maintained

v) End Uses Not Permitted

(d) Utilization of ECB proceeds is not permitted for on-lending or investment

in capital market or acquiring a company (or a part thereof) in India by a

corporate.

(e) Utilisation of ECB proceeds is not permitted in real estate. The term ‘real

estate’ excludes development of integrated township as defined by

Ministry of Commerce and Industry, DIPP, SIA (FC Division), Press Note

27

3 (2002 Series) dated January 4, 2002. Integrated township includes

housing, commercial premises, hotels, resorts, city and regional level

urban infrastructure facilities such as roads and bridges, mass rapid transit

systems and manufacture of building materials. Development of land and

providing allied infrastructure forms an integrated part of township’s

development. The minimum area to be developed should be 100 acres for

which norms and standards are to be followed as per local bylaws/rules. In

the absence of such bylaws/rules, a minimum of two thousand dwelling

units for about ten thousand population will need to be developed.

(f) Utilisation of ECB is not permitted for working capital, general corporate

purpose and repayment of existing Rupee loans.

vi) Guarantee

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of

comfort by banks, financial institutions and NBFCs relating to ECB is not

normally permitted. Applications for providing guarantee/standby letter of

credit or letter of comfort by banks, financial institutions relating to ECB in

the case of SME will be considered on merit subject to prudential norms.

With a view to facilitating capacity expansion and technological upgradation

in Indian Textile industry, issue of guarantees, standby letters of credit, letters

of undertaking and letters of comfort by banks in respect of ECB by textile

companies for modernization or expansion of textile units will be considered

under the Approval Route subject to prudential norms.

vii) Security

The choice of security to be provided to the lender / supplier is left to the

borrower. However, creation of charge over immovable assets and financial

securities, such as shares, in favor of the overseas lender is subject to

Regulation 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 as

amended from time to time, respectively.

28

viii) Parking of ECB proceeds overseas

ECB proceeds shall be parked overseas until actual requirement in India. 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)  Deposits with overseas branch of an authorised dealer in India; and

(c)  Treasury bills and other monetary instruments of one year maturity having

minimum rating as indicated above. 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.

ix) Prepayment

(a) Prepayment of ECB has raised up to USD 400 million from USD 300

million (in the credit policy of 2007-2008) may be allowed by the AD

bank without prior approval of Reserve Bank subject to compliance with

the stipulated minimum average maturity period as applicable to the loan.

(b) Pre-payment of ECB for amounts exceeding USD 200 million would be

considered by the Reserve Bank under the Approval Route.

x) Debt Servicing

The designated AD bank has general permission to make remittances of

installments of principal, interest and other charges in conformity with ECB

guidelines issued by Government / Reserve Bank from time to time.

xi) Procedure

Applicants are required to submit an application in form ECB through

designated AD bank to the Chief General Manager, Foreign Exchange

Department, Reserve Bank of India, Central Office, External Commercial

Borrowings Division, Mumbai – 400 001 along with necessary documents.

29

xii) Empowered Committee

Reserve Bank has set up an Empowered Committee to consider proposals

coming under the Approval Route.

10.0 Pricing

The pricing of the foreign currency loans/ services implies the total cost to the

company comprising –

i. Rate of interest / margin ( it is linked with the risk profile of the intending

borrower)

ii. Arrangement/ upfront fee and other fees.

The arrangement fee / upfront fee is a onetime cost. The pricing depends on various

factors such as the credit rating of the borrower, tenor of the loan, demand/supply

position of the foreign currency available, market conditions etc. The prices keep on

changing as per the market scenario and are normally valid for a period of -30- days.

In addition to the pricing, there are legal/ documentation / out of pocket expenses etc.

These are normally in the range of US$ 15,000 or US$ 20,000, but can be higher in

some cases. Pricing offered is flexible, can be discussed and negotiated.

Effective Interest cost of ECB (3-5 years) [Estimation]:

(a) LIBOR Rate for 5 years…..………………………………………5.01

(b) Spread (maximum)............................................................…...1.50

(c) Other Exp (upfront, arrangement) (assumption)...…………….0.49

(d) Interest before withholding Tax [(a) + (b) + (c)]……………….7.00

(e) Withholding Tax 20% of (d) ……………………………….1.75

1-0.2

(f) Effective Interest Rate [(d) + (e)]...…………………………….8.75

30

Effective Interest cost of ECB (Above 5 years) [Estimation]:

(a) LIBOR Rate for 5 years…..………………………………………5.01

(b) Spread (maximum)……………………………………………….2.50

(c) Other Exp (upfront, arrangement) (assumption)...…………….0.49

(d) Interest before withholding Tax [(a) + (b) + (c)]………………..8.00

(e) Withholding Tax 20% of (d) ………………………………..2.00

1-0.2

(f) Effective Interest Rate [(d) + (e)]...……………………………..10.00

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 unrecognized sources

will not be entertained.

Corporates are now eligible for ECBs even for project related rupee expenditure up to

35% of the total project cost and are permitted to obtain credit enhancements from

international banks / international financial institutions / joint venture partners for

their domestic rupee denominated structural obligations

Prepayment of ECB

(a) Prepayment would be permitted if they are met out of inflow of foreign

equity.

(b) In addition to ECB being prepaid out of foreign equity, corporates can

avail either of the two options for prepayment of their ECBs:

(i) On permission by the Govt., prepayment may be undertaken within the

permitted period, of all the ECBs with residual maturity up to one year.

OR

(ii) Prepayment up to 10% of the outstanding ECB to be permitted once

during the life of the loan, subject to the company complying with the

ECB approval terms. Those companies who had already availed

prepayment facility of 20% earlier would not be eligible.

(c) Validity of the permission under the above two options will be as under:

(i) Prepayment permission for ECBs other than the Bonds

/Debentures/FRNs will be valid up to 15 days or period up to the next

interest payment date, which ever is later.31

(ii) In case of Bonds/FRNs, validity of permission will not be more than 2

months from the date of RBI’s approval.

Prepayment will be allowed with the prior permission of ECB sanctioning

authority i.e. Department of Economic Affairs, Government of India / ECD,

RBI.

For providing greater transparency, information with regard to the name of the

borrower, amount, purpose and maturity of ECB under both Automatic Route and

Approval Route are put on the Reserve Bank website on a monthly basis with a lag of

one month to which it relates.

11.0 Reporting requirements , responsibility of compliance with ECB guidelines, and

dissemination of information by RBI will be discussed here

REPORTING ARRANGEMENTS AND DISSEMINATION OF

INFORMATION

(a) With a view to simplify the procedure, submission of copy of loan

agreement is dispensed with.

(b) For allotment of loan registration number, borrowers are required to

submit Form 83, in duplicate, certified by the Company Secretary (CS) or

Chartered Accountant (CA) to the designated AD bank. [Note: copies of

loan agreement, offer documents for FCCB are not required to be

submitted with form 83)

(c) The borrower can draw-down the loan only after obtaining the loan

registration number from DESACS, Reserve Bank.

(d) Borrowers are required to submit ECB-2 Return certified by the

designated AD bank on monthly basis so as to reach DESACS, RBI

within seven working days from the close of month to which it relates.

COMPLIANCE WITH ECB GUIDELINES

The primary responsibility to ensure that ECB raised / utilised are in conformity

with the ECB guidelines and the Reserve Bank regulations / directions is that of

the concerned borrower and any contravention of the ECB guidelines will be 32

viewed seriously and will invite penal action under FEMA 1999 (cf. A. P. (DIR

Series) Circular No. 31 dated February 1, 2005). The designated AD bank is also

required to ensure that raising / utilisation of ECB is in compliance with ECB

guidelines at the time of certification.

Dissemination of Information

For providing greater transparency, information with regard to the name of the

borrower, amount, purpose and maturity of ECB will be put on the RBI website by

the next working day of the approval under Approval Route and on a monthly basis

with a lag of one month to which it relates under Automatic Route.

12.0 Special allowances

Special allowances to exporters/foreign exchange earners, Long term borrowers and

the conditions under which conversion of ECB into equity is permitted and the

various provisions relating to reporting of such conversion

Exporters / Foreign Exchange Earners Scheme

Corporates who have foreign exchange earnings are permitting to raise up to three

times the average amount of annual exports during the previous three years

subject to a maximum of USD 200 million without end-use restrictions, i.e. for

general corporate objectives excluding investment in stock markets or in real

estate. The maximum entitlement in any one year is a cumulative limit and debt

outstanding under earlier approvals (erstwhile USD 15 mio exporter schemes and

thereafter) will be netted out to determine annual eligibility.

Long-Term Borrowers

a) ECB of ten years average maturity and above will outside the ECB ceiling,

though MOF's prior approval for such borrowings would continue to be

applicable. The extent of debt under this window will be reviewed by the

Government periodically.

33

b) Corporate borrowers able to raise long-term resources with an average maturity

of 10 years and 20 years will be allowed to use ECB proceeds without the

normal end-use restrictions upto USD 100 million for issue of 10 years and

above upto 20 years and USD 200 million for issue of 20 years and above.

These amounts will be available for general corporate objectives excluding

investments in stock markets or in real estate.

c) To be eligible for this purpose, the debt instrument should not include any

"put" or "call" options potentially reducing the stated maturities.

CONVERSION OF ECB INTO EQUITY

(i) Conversion of ECB into equity is permitted subject to the following conditions:

(a) The activity of the company is covered under the Automatic Route for

Foreign Direct Investment or Government approval for foreign equity

participation has been obtained by the company,

(b) The foreign equity holding after such conversion of debt into equity is within

the sectoral cap, if any,

(c) Pricing of shares is as per SEBI and erstwhile CCI guidelines/regulations in

the case of listed/unlisted companies as the case may be.

(ii) Conversion of ECB may be reported to the Reserve Bank as follows:

(a) Borrowers are required to report full conversion of outstanding ECB into

equity in the form FC-GPR to the concerned Regional Office of the Reserve

Bank as well as in form ECB-2 submitted to the DESACS, RBI within seven

working days from the close of month to which it relates. The words "ECB

wholly converted to equity" should be clearly indicated on top of the ECB-2

form. Once reported, filing of ECB-2 in the subsequent months is not

necessary.

(b) In case of partial conversion of outstanding ECB into equity, borrowers are

required to report the converted portion in form FC-GPR to the concerned

Regional Office as well as in form ECB-2 clearly differentiating the

converted portion from the unconverted portion. The words "ECB partially

converted to equity" should be indicated on top of the ECB-2 form. In

34

subsequent months, the outstanding portion of ECB should be reported in

ECB-2 form to DESACS.

Infrastructure Projects

Holding Companies/promoters will be permitted to raise ECB upto a maximum of

USD 50 million equivalent to finance equity investment in a subsidiary/joint

venture company implementing infrastructure projects. This flexibility is being

given in order to enable domestic investors in infrastructure projects to meet the

minimum domestic equity requirements.

In case the debt is to be raised by more than one promoter for a single project then

the total quantum of loan by all promoters put together should not exceed USD 50

million.

13.0 Procedure for issuing ECB

Detailed analysis of steps to be taken to obtain RBI approval, here various forms

required to be submitted will be annexed and various documents required will be

mentioned

Procedure for Seeking ECB Approval

Applications may be submitted by the borrowers in the prescribed format (Annex. II)

to the Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance,

North Block, Hyderabad-110 001.The application should contain the following

information:-

An Offer letter from the lender giving the detailed terms and conditions;

Copy of Project Appraisal Report from a recognised Financial

Institution/Bank, if applicable;

Copies of relevant documents and approvals from Central/State Governments,

wherever applicable, such as FIPB, CCEA, and SIA clearances, environmental

clearance, techno-economic clearance from Central Electricity Authority,

valid licenses from Competent Authorities, no objection certificate from

35

Ministry of Surface Transport, evidence of export/foreign exchange earnings

from the statutory auditor based on the bankers realisation certificate,

registration with RBI in case of NBFCs, approval for overseas investment

from RBI etc.

Approval Under FEMA

After receiving the approval from ECB Division, Department of Economic Affairs,

Ministry of Finance, the applicant is required to obtain approval from the Reserve

Bank of India under the Foreign Exchange Management Act, and to submit an

executed copy of the Loan Agreement to this Department for taking the same on

record, before obtaining the clearance from RBI for drawing the loan. Monitoring of

end-use of ECB will continue to be done by RBI.

At present, ECB approvals under US $ 3 million scheme (enhanced to US $ 5 million)

is given by RBI and all other ECB proposals are processed in DEA. As a measure of

further simplification and rationalisation, Government has decided to delegate the

ECB sanctioning power to RBI up to US $ 10 million under all the ECB schemes

except structured obligation which is at present being administered by DEA.

Accordingly, applications for approval upto US $ 10 million will be considered by the

Exchange Control Department of RBI, Mumbai. Accordingly, corporates seeking

ECBs upto US $ 10 million may approach RBI.

Validity of Approval

Approvals are valid for a period of six month. i.e. the executed copy of the loan

agreement is required to be submitted within this period. In the case of FRNs, Bonds

etc., the same are required to be launched within this period. In case of power

projects, the validity of the approval will be for a period of one year. Extension will

not be granted beyond the validity period. However, borrowers are free to submit

fresh application, after a gap of six month, which will be evaluated in the light of the

ECB guidelines applicable at that time.

36

In case of infrastructure projects, however, because financial closure may get delayed

for reasons beyond the investor's control, extension of validity may be considered on

merits.

14.0 Various Indian companies which have gone for ECB recently

1. Essar Steel (ESL)

It has raised Rs 540 crore ($120m) through external commercial borrowings

(ECB) in June 2006, which will be syndicated by Barclays Capital and State Bank

of India (SBI). The funds will be used for expanding ESL’s capacity from 3m

tonne per annum to 4.6m tonne.

The loans will be syndicated at London Inter Bank Offering Rate (Libor) plus 255

bps. Company is also planning to raise another Rs 135 crore ($30m) under the

green shoe option.ESL, however, stands to gain from such borrowings because of

a natural hedge of export earnings that the company has. ESL has foreign currency

revenue of over Rs 2,250 crore ($500m) a years. ESL is India’s largest exporter of

steel.

2. Tata Steel Ltd

Tata Steel signed an external commercial borrowing agreement of US$ 500 million

(Japanese Yen equivalent of US$ 495 million and US$ 5 million) at Singapore for

funding its growth projects and acquisitions through approval route in March

2006.The syndicated term loan facility was for US$ 400 million with a greenshoe

option of further US$ 100 million.

The syndicated term loan facility was for US$ 400 million (or its equivalent in

JPY) with a greenshoe option of further US$ 100 million (or its equivalent in

JPY). Seventeen banks across various geographies participated in the aforesaid

syndicated term loan facility. The issue was oversubscribed and the company

exercised the greenshoe option. The loan has a door-to door maturity of seven

years. The coupon of the loan will be Libor plus 45 basis points.

37

3. POWER Finance Corporation (PFC)

PFC has raised funds from the overseas markets in Feb 2006. The funds will be

utilised to fund power projects, as part of PFC's lending programme. So far, PFC

has borrowed $3.8 billion from the overseas and Indian markets and on lent it to

various power projects.

The power sector specific-financial institution is now planning to take equity

stakes in power projects. This will be done through India Power Fund (IPF), a

venture capital fund, which is being set up PFC. IPF will take up to 10 per cent

equity stakes in power generation, transmission, distribution and trading projects.

The preference will be towards quick yielding projects. According to PFC, the

fund will not invest in projects where the IPF sponsors have more than 15 per cent

equity participation. PFC plans to make an initial investment of Rs 200 crore in

the fund. It is currently soliciting investments from the public sector undertakings,

etc, to fill the IPF corpus.

4. Ceat Ltd

Ceat has raised ECB of USD 10 million from ICICI Bank Limited, Bahrain, in

October 2006, to meet the cost of expansion in capacity of Radials and OTR /

niche products and modernisation of mixing facility at Bhandup factory.

The Company has been able to raise the 6-1/2 year ECB at interest rates of 160

basis points above the prevailing six months Libor. The Company has also made

arrangements for hedging to cover the future forex risk on drawdown basis

The Company will utilize part or the proceeds of the ECB to enhance radial

capacity in its Nasik plant from 40,000 tyres to 1,00,000 tyres per month in two

phases. The enhancement will largely be in passenger car and utility vehicle

radials and also some LCV sizes. The rest will be utilized in capacity addition of

its 0TR (0ff The Road) and niche products capacities, as also in modernization of

mixing facilities at its Bhandup plant.

A list of other Indian corporates who has issued ECB is annexed in the report.

38

15.0 Structured Obligations

In order to enable corporates to hedge exchange rate risks and raise resources

domestically, domestic rupee denominated structured obligations would be permitted

to be credit enhanced by international banks/international financial institutions/joint

venture partners subject to following conditions :-

a. In the event of default, foreign banks giving guarantee will make payment of

defaulted amount of principal and interest after bringing in the equivalent

amount of foreign exchange into the country.

b. FEMA clearance should be obtained from RBI in advance of issuance.

c. Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be

obtained.

d. In the event of default, the default should be foreign exchange equivalent

amount equal to the principal and interest outstanding calculated in rupee

terms.

e. The liability of Indian company will always be rupee denominated and the

debt servicing may be done in equivalent foreign exchange funds.

f. The guarantee fee/commission/charges and other incidental expenses to the

Indian company should be in rupee terms only. All-in-cost on this account

should not exceed 3% p.a. in rupee terms.

g. In case of the proposals relating to sectors where conditions apply clearances

e.g. relating to the assignability licenses etc., these should be obtained in

advance.

h. In case of default, the interest rate could be coupon on the Bond/or 250 bps

over prevailing secondary market yield of 5-year GOI security, whichever is

higher.

16.0 Post issues of ECB

The corporate can undertake liability management for hedging the interest and/or

exchange rate risk on their underlying foreign currency exposure. Prior approval of

this Department or RBI has been dispensed with for concluding or winding up of the

following transactions:-

39

Interest rate swaps: IT helps companies to alter their exposure to interest-rate

fluctuations, by swapping fixed-rate obligations for floating rate obligations, or vice

versa. By swapping interest rates, a company is able to alter their interest rate

exposures and bring them in line with management's appetite for interest rate risk.

Currency swaps: A currency swap is a foreign exchange agreement between two

parties to exchange a given amount of one currency for another and, after a spec ified

period of time, to give back the original amounts swapped. It can be negotiated for a

variety of maturities up to at least 10 years

1. Coupon swaps: Purchase of interest rate caps/collars: When interest rate

swap involves the swapping of a stream of payments based on the fixed

interest rate for a stream of floating interest rate, then it is called a coupon

swap.

2. Forward rate agreements : forward rate agreement (FRA) is a forward

contract in which one party pays a fixed interest rate, and receives a

floating interest rate equal to a reference rate (the underlying rate). The

payments are calculated over a notional amount over a certain period, and

netted, i.e. only the differential is paid. It is paid on the termination date.

The reference rate is fixed one or two days before the termination date,

dependent on the market convention for the particular currency

Refinancing the Existing Foreign Currency Loan

Refinancing of outstanding amounts under existing loans by raising fresh loans at

lower costs may also be permitted on a case-to case basis, subject to the condition that

the outstanding maturity of the original loan is maintained. Rolling over of ECB will

not be permitted.

A corporate borrowing overseas for financing its Rupee- related expenditure and

swapping its external commercial borrowings with another corporate which required

foreign currency funds will not be permitted.

40

17.0 Future scenario

There has been steep rise in inflation in recent times which has been partly attributed

to addition in domestic money supply due to Indian company's recourse to ECBs.

Inflow of foreign funds increases liquidity in the domestic market when part of these

borrowings is used to pay back expensive rupee denominated loans. Put simply,

cheaper funds raised abroad are used to pay back high-cost loans from domestic

markets. This increases liquidity in the system. In the light of the current situation

RBI is unlikely to raise the ceiling on external commercial borrowings from the

current level to $22 billion. Also the cap of $500 million per year for the Indian

corporate is unlikely to be raised. Similarly, a number of restrictions are expected to

remain in place on the end-use of ECBs.

Moreover, in the present scenario, rupee appreciation is one of the major discouraging

point for increasing ECB inflows. Rupee is at 9 year high in comparison to Dollar. As

corporate will get less rupee in comparison to dollars as rupee is at new peak, they

may have to pay extra at the time of payment, if rupee depreciate from the current

level. For ex: If a company borrows $ 20 million today, it would be near about Rs 81-

81.5 crore, but if rupee depreciate to the last year level they may have to pay Rs 85-90

crore plus the timely interest. That’s why rupee appreciation can discourage ECB.

The government’s move to retain the ECB cap for FY08 at the current level comes at

a time when cost of borrowing in the domestic market is witnessing a steady rise.

With the latest rate hike from RBI, a high quality Indian company has to pay at least

12% for a rupee loan in India, while a foreign loan, even if fully hedged, works out

close to 10-10.5%. And if the corporate does not hedge the currency risk, then the

company can save over 3%. This though has made recourse to external commercial

borrowing more attractive the ECB cap would come as a dampener to companies,

considering their large investment plans on the back of a high economic growth. In

the financial year just ended, bankers say at least USD 20 billion worth loans were

borrowed in the form of ECBs. Such borrowings were expected to increase by 50%

during the current year. Investment bankers say the ECB rush this year is likely to be

further fuelled by small and medium sized companies, as borrowing costs for them in

India are exceptionally high.41

Central Bank is also discouraging the use of ECB to slow down the domestic demand

in the Indian market, that’s why central bank is even considering to curb ECB issues

through automatic route along with the approval route. Infact the government has

decided against Real Estate sector for easing the ECB norms So, corporates which are

thinking of raising capital through automatic route has to decide whether to issue ECB

or not as soon as possible, as there are chances of RBI taking strict measures

regarding ECB.

18.0 FCCB

18.1 Introduction

The revival of the equity-linked instruments came in May 2004 via FCCBs, which

created a very active market with a lot of issuance. The start of the FCCB market

coincided with a great equity boom, helping foreign investors make a lot of money.

Local firms raised $15.76 billion in foreign borrowings during April-December 2006.

This signals an 80% rise in such borrowings compared to April-December 2005 when

Indian companies borrowed $8.77 billion.

Issue of FCCB is governed by Foreign Exchange Management (Transfer or Issue of

any Foreign Security) Regulations, 2004.

The Regulations define FCCB as 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. A convertible bond is a quasi-debt instrument, which can be

converted into equity shares at the choice of investor either immediately after issue, or

upon maturity, or during a set period, at a predetermined strike rate. It acts like a bond

by making regular interest and principal payments, but these bonds also give the

bondholder the option to convert the bond into stock.

The investor benefits if the conversion price is higher than the traded price and

suffers a loss if the traded price is higher than the conversion price. However, the

investor has the discretion to hold the bond till maturity, receive regular interest

42

payments and principal on maturity, without exercising the option of converting the

debt instruments into equity.

Issue of FCCBs will have to conform to the Foreign Direct Investment (“FDI”) policy

(including sectoral caps and sectors where FDI is permissible) of the Government of

India and the RBI’s regulations/directions issued from time to time.

ECB guidelines are also applicable on FCCB. It is treated on par with ECB, with

automatic clearance upto USD500 mn. Subject to average maturity of 5 years. Its

prepayment guidelines which are amended in 2003 are as follows:

18.2 Guidelines for prepayment of FCCB issues by the Indian Companies.

With a view to further liberalising the scheme, it has been decided by the Government

to allow Indian companies to prepay the existing FCCBs subject to the following

conditions:-

(a) This provision of pre-payment (premature purchase) of existing FCCBs will be

available upto 30th September, 2003. The existing condition of minimum maturity

period for redemption of bonds (i.e. 5 years) is put on hold till 30th September,

2003.

(b) The initiation power/right of prepayment is vested with the issuer of Bonds and

not with the holder of bonds. However, the actual pre-payment is subject to the

consent of the holder of the bond.

(c) The pre-payment should be at most the face value of bonds and not exceeding the

face value (inclusive of all expenses for such buyback).

(d) The bonds purchased from the holders must be cancelled and should not be re-

issued or re-sold.

(e) The funds resources for making such prepayment by the Company shall not be by

resorting to fresh external debt.

43

(f) This prepayment scheme of FCCBs will not have any effect on the bondholders of

Indian Companies not opting this window or on the non-participating bondholders

of Indian companies opting this window.

After completing the transactions, the companies would be required to furnish full

particulars thereof including the number of bonds repurchased (ie. prepaid), the rate of

repurchase (including expenses, if any), the number of residual bonds, source of funds

to the Ministry of Finance, Department of Economic Affairs and the Exchange

Control Department of the Reserve Bank of India, Central Office, Mumbai within 30

days of completion of such transactions.

All transactions under this scheme shall be performed on or before 30 th September,

2003.

18.3 Current Scenario:

Volatility in the stock markets appears to have hit issuance of foreign currency

convertible bonds (FCCBs) by Indian corporates. FCCBs issuances in the first quarter

of this calendar year are almost down 45% from the corresponding period last year.

Also, while interest rates on FCCBs have gone up, the conversion prices are fixed at a

premium of around 30% over current prices against 40-60% last year. With growth,

Indian corporates have more avenues to meet funding needs and can take a decision

based on supply rather than be demand driven. Other than wariness over high

premium deals investors are concerned over a fall in the markets. This has resulted in

the floor price for many of the issues now ruling at below the market prices.

With the stock market having come off sharply, companies, which raised funds

through foreign currency convertible bonds (FCCBs) in 2005 and 2006, suddenly find

that their current stock price is way below the conversion price or the price at which

the bonds can be converted into equity. In some instances, the prevailing market price

is less than half the conversion price.  While in most cases, there is considerable time

—-at least three to four years, during which these bonds can be converted — it

remains to be seen whether the markets will rally hard enough for those prices to be

reached once again.  What is more worrying is that several of these companies have

not made adequate provisions for the debt they have raised.

44

There is also delivery timeframe and associated risks involved which may result in

convertible to trade up to 15% discount to its conversion price. If an investor buys an

FCCB at 100 per cent of par and the stock rises such that the conversion value is 150

per cent of par, investors may wish to convert. The current conversion process means

that it takes four to six weeks for physical delivery of the shares. This leaves the

investor exposed to the risk that the share price drops before delivery. The ability to

sell shares today against the convertible and then take physical delivery of the shares

in a few weeks - to deliver against the short position - effectively locks in the value of

the convertible. Because this mechanism is not available at present, several

convertibles trade at a substantial discount to their conversion value.

Total borrowings for the full fiscal ’06-07 now seem set to top the $22-billion mark.

This record level of foreign borrowings has already prompted policy makers to

consider a proposal to tighten the norms to discourage issuances. Large inflows

through this route create problems in currency and inflation management for the

monetary policy managers especially. Of the $15.76 billion, which local firms raised

during the nine-month period, FCCB issuances accounted for $2.91 billion. The

decline is due to the lukewarm response of overseas investors as almost 80 per cent

non-Sensex stocks posted over 50 per cent negative returns compared to their May 10

levels.  The FCCBs issued in 2005-06 to overseas investors at hefty premiums are

trading at huge discounts.

18.4 Advantages/Disadvantages of issuing FCCB

Issuing FCCB is beneficiary in Bullish market as it will fetch more premiums for the

companies. As the investors will be more optimistic about the future prices of that

particular security. Where as in Bearish Market it will fetch less premium, as the stock

prices fall and it becomes difficult to garner capital.

In a rising stock market, FCCB is preferred means of raising medium to long term

resources. The advantages are:

45

1. The pricing is in favour of the issuers - priced generally at 2 to 3% less than the

non-convertible bonds in Rupee terms (or, about 30% less than normal

coupon, in terms of USD)

2. The company gains higher leverage, as debt is reduced and equity capital is

enhanced upon conversion - subject to favourable stock price.

3. The impact on cash flow is positive, as most companies issue FCCB with a

redemption premium, which is payable on maturity, only if the stock price is

less than the conversion price.

4. FCCB does not dilute ownership immediately, as the holders of ADR /GDR do

not have voting rights.

5. Conversion premium adds to the capital reserves.

6. FCCB carries fewer covenants as compared to a syndicated loan or a debenture,

hence more convenient to raise funds for M & A.

The negative aspects of FCCB are:

1. In a falling stock market, there is no demand for FCCB. In globally listed

companies, prices in other stock exchanges also impact the issue of FCCB.

2. FCCB, when converted into equity, bring down the earnings per share, and

eventually, dilute the ownership.

3. In the long run, equity is costlier than debt, and hence, when interest rates are

falling, FCCB are not preferred.

4. Book value of converted shares depends on prevailing exchange rate.

18.5 Valuation of FCCB

1. The FCCB has a bond component and an equity component.

46

2. The Present Value of the bond component is arrived at by discounting the

future cash flows at LIBOR+ credit premium.

3. The value of call option on equity is arrived at as per Black Sholes model.

4. The values so arrived are mutually exclusive - at any point of time value of

the bond would be higher of the two + accrued interest.

5. The investor also needs to evaluate the currency risk on final redemption

of the investment in addition to a) credit risk, in terms of credit spread

included in the YTM, and, b) earnings risk on the equity

6. There is also impact of capital gains tax - applicable as on the date of

conversion, in contrast to tax on coupon income (if taxable in home

country).

7. For the issuer, the cost of capital would be: post-tax coupon of the bond

and cost of equity. While average cost of capital may be adopted as a

matter of convenience, the average cost post-conversion would be vastly

different from the pre-conversion cost.

8. By providing for conversion option, the issuer of FCCB is dispensing with

a very substantial foreign currency risk inherent in the ECB, though he still

carries some risk in the anticipated Rupee value of the equity upon

conversion. The structure of FCCB of course, can include a pre-

determined exchange rate for arriving at the conversion price, based on

domestic stock price.

18.6 Various companies which have issued FCCB are as follows:

1. HDFC:

Housing Development Finance Corporation Ltd (HDFC) has issued Zero Coupon

Foreign Currency Convertible Bond (FCCB) offering of USD 500 million in Sep

2005.The FCCB issue is having a tenor of 5 years and one day are convertible into

47

equity shares of the Company at any time after August 24, 2006 at price of Rs 1399

per share.

2. 3i Infotech:

3i Infotech issued Foreign Currency Convertible Bonds (FCCB) offering of € 30

million (Rs 174 crore) in Mar 2007. The funds are raised to help the company in

its acquisition plans.

The FCCB issue will be convertible over a five-year period at a conversion price

of Rs 308.63 and will be listed on the Singapore Stock Exchange. The conversion

price of the zero coupon bonds is at 25 per cent premium to the company's closing

share price on BSE as on March 26.

3. Larsen & Toubro:

L&T has issued $100-million foreign currency convertible bonds (FCCB) issue

denominated in Japanese yen. The zero-coupon convertible bonds have a maturity

of five years and are convertible into global depository shares at a premium of 35

per cent over the BSE closing share price of Rs 1,850.70 on January 4, 2005.

18.7 Future Scenario:

Future of the FCCB doesn’t looks well in the present scenario, because of the

volatility and the ever rising interest rate. This has led in the decrease of current price

premium at the time of conversion.

However the low volume is not a function of demand. Demand is very strong for

Indian FCCBs, albeit with some sensitivity to very high premia structures. With

growth, Indian corporates have more avenues to meet funding needs and can take a

decision based on supply rather than be demand driven. Other than wariness over high

premium deals investors are concerned over a fall in the markets. This has resulted in

the floor price for many of the issues now ruling at below the market prices.

Also the premium payable on redemption of FCCB can presently be charged to the

securities premium account and they don’t have to provide for it out of the P&L. 48

whereas the correct practice is to charge it to the profit and loss account over the life

of the instrument. Institute of Chartered Accountants of India, the apex body which

sets accounting standards, has acknowledged the problem and is preparing a draft

standard. The new standard is unlikely to come into force before 2007-08 or even

2008-09.

The conversion price can’t be less than the higher of the previous six month average

or the average for two weeks prior to the EGM or AGM that approved the issue. In a

rising stock market, this limitation is not a problem, but does become relevant in

periods like May to July of this year when the market declined.

Although 50-odd companies have made plans to raise a combined $2 billion through

the FCCB route, they are waiting for the stock markets to revive so the issues can get

attractive premiums in conversion. With the rise in interest rates internationally, the

yield to maturity on FCCBs has increased to 8-9 per cent from 3-5 per cent a year ago.

Therefore various mall and medium companies are planning to delay their FCCB

issues.

The terms may not be so attractive the next time, given that dollar interest rates have

been close to their historic lows and will not drop further.

19.0 GDR/ADR

GDR means a security issued by a bank or a depository outside India against

underlying rupee shares of a company incorporated in India. Security issued by a bank

or depository in USA against underlying rupee shares of a company incorporated in

India is known as American Depository Receipt (“ADR”). Therefore, the difference

between ADR and GDR is only with respect to the location of depository or bank

issuing the shares. FCCB is denominated in dollars or any other currency other than

rupee. This brings about an element of exchange risk in the issue of FCCB due to

currency fluctuations. In contrast, GDR is denominated in dollars with the equity

shares comprised in each GDR denominated in rupees, hence, there is no exchange

risk for the issuer.

49

Issue of shares by Indian companies under ADR / GDR

An Indian corporate can raise foreign currency resources abroad through the issue of

American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). The

Indian company is allowed to issue its Rupee denominated shares to a person resident

outside India being a depository for the purpose of issuing GDRs and / or ADRs,

subject to the conditions that:

the ADRs / GDRs are issued in accordance with the Scheme for issue of

Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the

Central Government there under from time to time

The Indian company issuing such shares has obtained an approval from the

Ministry of Finance, Government of India to issue such ADRs and / or GDRs

or is eligible to issue ADRs / GDRs in terms of the relevant scheme in force or

notification issued by the Ministry of Finance, and

Is not otherwise ineligible to issue shares to person’s resident outside India in

terms of these Regulations.

These instruments are issued by a Depository abroad and listed in the overseas stock

exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually

required in India. There are no end use restrictions except for a ban on deployment /

investment of such funds in Real Estate or the Stock Market. There is no monetary

limit upto which an Indian company can raise ADRs / GDRs. However, the Indian

company has to be otherwise eligible to raise foreign equity under the extant FDI

policy and the foreign shareholding after issue should be in compliance with the FDI

policy.

The ADR / GDR can be issued on the basis of the ratio worked out by the Indian

company in consultation with the Lead Manager to the issue. The Indian company

will issue its rupee denominated shares in the name of the Overseas Depository and

will keep the shares in the custody of a domestic Custodian in India. On the basis of

the ratio worked out and the rupee shares kept with the domestic Custodian, the

Overseas Depository will issue ADRs / GDRs abroad.

50

In order to bring the ADR/GDR guidelines in alignment with SEBI’s guidelines on

domestic capital issues, it has been decided by the Government to incorporate the

following changes to the GDR/ADR guidelines by amending the Foreign Currency

Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism)

Scheme:-

A.       For Listed Companies

a) Eligibility of issuer:  An Indian Company, which is not eligible to raise

funds from the Indian Capital Market including a company which has been

restrained from accessing the securities market by the Securities and

Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign

Currency Convertible Bonds and (ii) Ordinary Shares through Global

Depositary Receipts under the Foreign Currency Convertible Bonds and

Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.

b) Eligibility of subscriber:  Erstwhile Overseas Corporate Bodies (OCBs)

who are not eligible to invest in India through the portfolio route and

entities prohibited to buy, sell or deal in securities by SEBI will not be

eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii)

Ordinary Shares through Global Depositary Receipts under the Foreign

Currency Convertible Bonds and Ordinary Shares (Through Depositary

Receipt Mechanism) Scheme, 1993.

c) Pricing: The pricing of Global Depositary Receipt and Foreign Currency

Convertible Bond issues should be made at a price not less than the higher

of the following two averages: 

(i)  The average of the weekly high and low of the closing prices of the

related shares quoted on the stock exchange during the six months

preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the

related shares quoted on a stock exchange during the two weeks

preceding the relevant date.

51

The “relevant date” means the date thirty days prior to the date on which

the meeting of the general body of shareholders is held, in terms of

section 81 (IA) of the Companies Act, 1956, to consider the proposed

issue.

d)   Voting rights:  The voting rights shall be as per the provisions of the

Companies Act, 1956 and in a manner in which restrictions on voting

rights imposed on Global Depositary Receipt issues shall be consistent

with the Company Law provisions. RBI regulations regarding voting rights

in the case of banking companies will continue to be applicable to all

shareholders exercising voting rights.

B.       For unlisted companies

Unlisted companies, which have not yet accessed the Global Depositary

Receipt / Foreign Currency Convertible Bond route for raising capital in the

international market would require prior or simultaneous listing in the

domestic market, while seeking to issue (i) Foreign Currency Convertible

Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the

Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depositary Receipt Mechanism) Scheme, 1993.

          It is clarified that unlisted companies, which have already issued

Global Depositary Receipts / Foreign Currency Convertible Bonds in the

international market, would now require to list in the domestic market on

making profit beginning financial year 2005-06 or within three years of such

issue of Global Depositary Receipts / Foreign Currency Convertible Bonds,

whichever is earlier.

A limited Two-way Fungibility scheme has been put in place by the Government of

India for ADRs / GDRs. Under this scheme, a stock broker in India, registered with

SEBI, can purchase the shares from the market for conversion into ADRs /GDRs. Re-

issuance of ADRs /GDRs would be permitted to the extent of ADRs / GDRs which

have been redeemed into underlying shares and sold in the Indian market.

52

An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism,

the company offers its resident shareholders a choice to submit their shares back to

the company so that on the basis of such shares, ADRs / GDRs can be issued abroad.

The proceeds of the ADR / GDR issue is remitted back to India and distributed among

the resident investors who had offered their rupee denominated shares for conversion.

These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in

India by the shareholders who have tendered such shares for conversion into ADR /

GDR.

The ADR / GDR / FCCB proceeds can be utilised for first stage acquisition of shares

in the disinvestment process of Public Sector Undertakings / Enterprises and also in

the mandatory second stage offer to the public in view of their strategic importance.

Reporting of such Issues

The Indian company issuing ADRs / GDRs shall furnish to the Reserve Bank, full

details of such issue in the form specified in Annexure C to Schedule 1 to Notification

No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time, within 30

days from the date of closing of the issue. The company should also furnish a

quarterly return in the form specified in Annexure D, therein, to Reserve Bank within

15 days of the close of the calendar quarter.

20.0 Analysis of ECB issue for JKTI

If JKTI issue ECB it can raise capital at lower rate in comparison to other sources of

foreign capital raising. But the interest rates are bit higher for JKTI In comparison to

its competitors. Analysis of JKTI’s financials vis a vis are not shown in detail as

financial data can’t be revealed, these are only those informations which we can make

out from annual report. These financials in compare with others in the industry reveals

the following:

1. JKTI’s low ranking is basically due to low marks in financials risk parameter.

if we compare JKI with other tyre manufacturing companies such as CEAT,

Apollo and MRF we see that JKI is mainly falling behind them on low current

and interest coverage ratio. 53

2. JKTI interest coverage ratio is very low compared to MRF and APOLLO,

which have a very healthy ratio. This is because JK is mainly debt funded

leading to huge outflow of cash in interest payment.

3. JKTI PAT is also very low around 1%. If we analyze JKTI cost structure we

see that JKTI wages and Raw Material cost is least in the industry. JKTI low

profitability is on account of high administration and selling & distribution

expenses.

21.0 Conclusion

ECB will prove the cheaper source in comparison to others sources like

FCCB.

Interest rates in the market are near about 12-13% whereas for ECB it will be

near about 8-10%.

Other debt fund raising option like foreign bonds, euro bonds, bonds will be

more expensive as it will not come into investment grade.

Issuing ECB will increase leverage. Hence interest rate on future loans will be

higher.

Issuing Equity, ADR/GDR is not feasible as JKTI share price is very low.

Sources of raising funds

ECB 8-10%

FCCB Coupon + Conversion in to Equity

Euro/foreign Bonds Not considered

Bank Loan 12%+

Factors to be considered while issuing ECB

Government taking strict measures against ECB issue and even thinking of taking

some measures for automatic route also. The reasons are:

54

Over utilization of ECB issue

High Inflation

Appreciating rupee

22.0 Recommendations

I would suggest JKTI to raise capital by issuing ECB as it can raise funds at cheaper

rates. But to still reduce the interest rate further, I recommended JKTI to improve its

financial position to get lower rate of interest, by following possible ways.

1. JKTI should reduce its administration and selling & distribution expenses

benchmarking them to the industry average. This will help JKI to increase its

PAT leading to better Interest Coverage Ratio.

2. JKTI should reduce its current liabilities so as to improve its current ratio as

this one of the very important ratio while deciding the interest rate.

3. JKTI should reduce on its debt funding and should meet its cash requirements

from alternate sources such as equity funds so as to reduce the profit outflow

in interest payments. This will help in improving the interest coverage ratio

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56

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2-3.

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News Report. Hyderabad: The Economic Times, 2007.

Bandyopadhyay, Tamal. Rediff Business. 10 June 2004. 2 May

2007<http://www.rediff.com/rss/moneyrss.xml>.

Chaudhary, Gaurav. RBI keeps lid on India Inc's foreign loans. News Report.

Hyderabad: Hindustan Times, 2007.

Dash, Priya Ranjan. DNA - Money. 30 March 2007. 9 April

2007<http://www.dnaindia.com/report.asp?NewsID=1087977>.

Deakin, R. Mallier And A. S. "A GREEN’S FUNCTION FOR A CONVERTIBLE."

(2002): 1-2.

Goyal, Ashima. How should the RBI deal with rising Re? News Article. Hyderabad:

The Economic Times, 2007.

India, Reserve Bank of. "Master Circular on Foreign Investments in India." Master

Circular No. / 02 /2006-07 1 July 2006: 7-9.

Kannan, R. Personal Website of R.Kannan. 30 September 2004. 20 April

2007<www.geocities.com/kstability/content/foreign-investment/ecb4.html>.

Naidu, Rajesh. Hike in CRR, repo rate to have far reaching effects. News Report.

Hyderabad: The Financial Express, 2007.

P.K. Jain, Josette Peyraid and Surendra S. Yadav. International Financial

Management. Hyderabad: Macmillan India, 1998.

Patel, Prayasvin. FCCBs are emerging as better funding options The Financial

Express. 29 April 2007.

57

Pradhan, Dr HK. "External Debt Development and Management: Some Reflections

on India." Regional Workshop on Capacity-building for External Debt Management.

Bangkok: 2004. 19-21.

Reddy, Dr. Y. Venugopal. Reserve Bank of India. 24 April 2007. 25 April

2007<http://rbi.org.in/scripts/NotificationUser.aspx>.

Roy, Dr. Subroto. Independent Indian. 2 April 2007. 24 April

2007<http://independentindian.com/2007/04/02/swindling-india/>.

Ved, Nikita. Raising Foreign Capital through FCCB and ADR/GDR. Hyderabad:

February 2007.

24.0 Annexure

Organisation Chart

Annex I

Form ECB

58

Application for raising External Commercial Borrowings (ECB) under Approval Route

Instructions

The complete application should be submitted by the applicant through the designated authorised dealer to the Chief General Manager-In-Charge, Foreign Exchange Department, Central Office, ECB Division, Reserve Bank of India, Mumbai 400 001.

Documentation:

Following documents, (as relevant) certified by authorised dealer, should be forwarded with the application:(i) A copy of offer letter from the overseas lender/supplier furnishing complete details of theTerms and conditions of proposed ECB.(ii) A copy of the import contract, proforma/commercial invoice/bill of lading.

PART-A- GENERAL INFORMATION ABOUT THE BORROWER

1. Name of the applicant

(BLOCK LETTERS)

Address

_____________________________________________________________________

______

2. Status of the applicant

i) Private Sector

ii) Public Sector

_____________________________________________________________________

______

PART-B-INFORMATION ABOUT THE PROPOSED ECB

_____________________________________________________________________

______

Currency Amount US$

equivalent

1. Details of the ECB

59

(a) Purpose of the ECB

(b) Nature of ECB [Please put (x) in the appropriate box]

(i) Suppliers’ Credit

(ii) Buyers’ Credit

(iii) Syndicated Loan

(iv) Export Credit

(v) Loan from foreign collaborator/equity holder (with

details of amount, percentage equity holding in the

paid-up equity of the borrower company)

(vi) Floating Rate Notes

(vii) Fixed Rate Bonds

(viii) Line of Credit

(ix) Commercial Bank Loan

(x) Others (please specify)

(c) Terms and conditions of the ECB

(i) Rate of interest :

(ii) Up-front fee :

(iii) Management fee :

(iv) Other charges, if any (Please specify) :

(v) All-in-cost :

(vi) Commitment fee :

(vii) Rate of penal interest :

(viii) Period of ECB :

(ix) Details of call/put option, if any. :

(x) Grace / moratorium period :

(xi) Repayment terms (half yearly/annually/bullet) :

(xii) Average maturity :

__________________________________________________________________

2. Details of the lender

60

Name and address of the lender/supplier

__________________________________________________________________

3. Nature of security to be provided, if any.

__________________________________________________________________

PART C – INFORMATION ABOUT DRAW DOWN AND REPAYMENTS

Proposed Schedule

Draw-down Repayment of Principal Interest Payment

Month Year Amount Month Year Amount Month Year Amount

PART D – ADDITIONAL INFORMATION

1. Information about the project

i) Name & location of the project :

ii) Total cost of the project : Rs. USD

iii) Total ECB as a % of project cost :

iv) Nature of the project :

v) Whether Appraised by

Financial institution/bank :

vi) Infrastructure Sector :

61

a) Power

b) Telecommunication

c) Railways

d) Roads including bridges

e) Ports

f) Industrial parks

g) Urban infrastructure - Water supply, Sanitation and sewerage.

vii) Whether requires clearance from any:

Statutory authority? If yes, furnish

The name of authority, clearance no.

and date.

2. ECB availed in the current & previous three financial years-(not applicable for the first

time borrower)

Year Registration

No.

Currency Loan Amount Amount

disbursed

Amount outstanding*

* Net of repayments, if any, on the date of application.

PART E – CERTIFICATIONS

1. By the applicant

We hereby certify that (i) the particulars given above are true and correct to the best

of our knowledge and belief and (ii) the ECB to be raised will be utilised for

permitted purposes.

________________________________________

(Signature of Authorised Official of the applicant)

62

Place_______________

Name:_________________________________

Date________________ Stamp

Designation_____________________________

Phone No. ______________________________

Fax ________________________________

E-mail _________________________________

_____________________________________________________________________

2. By the authorised dealer –

We hereby certify that (i) the applicant is our customer and (ii) we have

scrutinized the application and the original letter of offer from the lender/supplier and

documents relating to proposed borrowing and found the same to be in order.

________________________________

(Signature of Authorised Official)

Place ________________ Name

_________________________________

Date_________________ Stamp Name of the

Bank/branch__________________

A.D.Code______________________________

_____________________________________________________________________

63

Annex II

Form 83

Reporting of loan agreement details under Foreign Exchange Management Act, 1999

(for all categories and any amount of ECB)

Instructions:

1. The borrower is required to submit completed Form 83, in duplicate, certified by

the Company Secretary (CS) or Chartered Accountant (CA) to the designated

Authorised Dealer (AD). One copy is to be forwarded by the designated AD to

the Director, Balance of Payments Statistics Division, Department of Statistical

Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-

Kurla Complex, Mumbai – 400 051 within 7 days from the date of signing loan

agreement between borrower and lender for allotment of loan registration number.

2. Do not leave any column blank. Furnish complete particulars against each item.

Where any particular item is not applicable write “N.A.” against it.

3. All dates should be in format YYYY/MM/DD, such as 2004/01/21 for January 21,

2004.

4. Before forwarding Form 83 to the Reserve Bank, the Authorised Dealer must

scrutinise all the related original documents and ensure that the form is complete

in all respects and in order.

5. If space is not sufficient for giving full information/particulars against any item, a

separate sheet may be attached to the form and serially numbered as Annex.

6. Firms/companies obtaining sub-loans through DFIs/FIs/banks/NBFCs etc. should

not complete this form but approach the concerned financial institution directly

for reporting.

For rbi (desacs) use only Loan_key:

64

Cs-drms team Received on Action taken on Loan classification

Part A: Basic Details

ECB Title / Project

Registration Number

No. and Date of RBI approval (if applicable)

Loan Key Number (allotted by RBI/ Govt.)

Agreement Date (YYYY/MM/DD) / /

Currency Name Currency Code (SWIFT)

Amount (in FC) (For RBI Use)

Guarantee Status Guarantor (Name,

Address, contact number

etc. )

(Use code as per Box 1) ↑ Multi Currency Type

Name and address of the Borrower (Block Letters)

Contact Person's Name:

Designation:

Phone No. :

Fax no. :

E-mail ID :

Name and address of lender / foreign supplier /

lesser (Block Letters)

Country:

E-mail ID :

(For RBI DESACS use) (For RBI DESACS use)

Agreement Details (To be filled by borrowers of External Commercial Borrowings)

65

Annex III

ECB - 2

Reporting of actual transactions of External Commercial Borrowings (ECB)

Under Foreign Exchange Management Act, 1999

(For all categories and any amount of loan)

Return for the Month of .

1. This return should be filled in for all categories of ECB. It should be submitted

within 7 working days from the close of the month through the designated

Authorised Dealer to the Director, Department of Statistical Analysis and

Computer Services (DESACS), Balance of Payments Statistics Division, Reserve

Bank of India, C-8/9, Bandra-Kurla Complex, Bandra (East), Mumbai-400 051. If

there is no transaction during a particular period, a Nil return should be

submitted.

2. Please do not leave any column blank. Furnish complete particulars against each

item. Where any particular item is not applicable write “N.A.” against it.

3. All dates should be in format YYYY/MM/DD, such as 2004/01/21 for January 21,

2004.

4. Borrowers obtaining sub-loans through DFIs/Banks/NBFCs etc. should not

complete this form as the concerned financial institution would directly submit

ECB-2.

5. Before forwarding the return to Reserve Bank (DESACS), the Company Secretary

/ Chartered Accountant must scrutinise related original documents and ensure that

the return is complete and in order as per ECB guidelines issued by

Government/RBI.

66

6. The unique Loan Identification Number (LIN)/RBI Registration Number (in case

of loan approved prior to February 01, 2004) must be specified as allotted by RBI.

Similarly, the Loan Registration Number (since February 01, 2004) has to be

specified.

7. If space is not sufficient for giving full information against any item, a separate

sheet may be attached to the return and serially numbered as Annex.

8. For purpose of utilization of drawdowns, following codes may be used.

BOX 1: Purpose of Utilisation Code

No. CodeDescription

No CodeDescription

1 IC Import of capital goods 12 TL Telecommunication

2 IN Import of non-capital goods 13 RW Railways

3 RL Local sourcing of capital

goods (Rupee expenditure)

14 RD Roads

4 RC Working capital

(Rupee expenditure)

15 PT Ports

5 SL On-lending or sub-lending 16 IS Industrial parks

6 RP Repayment of earlier ECB 17 UI Urban infrastructure

7 IP Interest payments 18 OI Overseas investment in

JV/WOS

8 HA Amount held abroad 19 IT Development of Integrated

Townships

9 NP New project 20 DI PSU Disinvestment

10 ME Modernisation /expansion

of existing units

21 TS Textile/steel Restructuring

Package

11 PW Power 22 MF Micro finance activity

23 OT Others (Pl. specify)

9. For source of funds for remittances, following codes are to be used.

67

BOX 2: Source of Funds for remittance

No. CodeDescription

1 A Remittance from India

2 B Account held abroad

3 CExports proceeds held abroad

4 DConversion of equity capital

5 E Others (Specify)

FOR RBI (DESACS) Use only Loan_key

CS-DRMS

Team

Received on Action Taken

on

Loan Classification

Tranch

e No.

Date

(YYYY/MM/D

D)

(Please see note

below)

CurrencyAmount

Amount of loan committed but not yet

drawn at the end of the month (in loan

currency)

Currency Amount

Note: 1. In the case of import of goods or services, date of import may be furnished against

date of draw-down.

2.In the case of financial lease date of acquisition of the goods is to be mentioned as date

of draw-down.

3. In the case of securitised instruments, date of issue may be shown as date of draw-down

68

Part A: Loan Identification Particulars

Loan Registration Number (LRN)

Loan Amount Borrower Particulars

Currency Amount Name and address of the Borrower (Block

Letters)

Contact Person's Name:

Designation:

Phone No. :

Fax no. :

E-mail ID :

As per

Agreement

Revised

Part B: Actual Transaction Details

1. Draw-down during the month :

2. Schedule of balance amount of loan to be drawn in future:

Tranche

No

Expected

Date

(YY/MM/DD

)

of drawdown

Currency Amount If more than one equal installment

Total number

of drawals

No. of drawals in a

calendar year

3. Details of utilisation of draw-downs during the month:

69

Tranch

e No.

Date

(YY/MM/DD)

Purpose codes

(See BOX 1 )

Countr

y

Currency Amount Fresh Disbursement/

From A/c held

abroad

4. Amount parked abroad outstanding as on beginning of the month _____:

Date

(YY/MM/DD)

Name of bank and

branch

Account No. Currency Amount

5. Utilisation of amount parked abroad.

Date

(YYYY/MM/DD

)

Name of bank

and branch

Account

No.

Currency Amount Purpose

Tranch

e No.

Purpose Date of

Remittance

Currency Amount Source of

remittance

(See Box

2)

Prepaymen

t

of Principal

(Y/N) *

Principal

Interest @ rate

Others (Specify)

6. Debt Servicing during the month -

* In case of prepayment please provide details: Automatic Route / Approval No.

Date: Amount:

Type of Swap Swap Dealer Counter party Implementation Date

Name Country Name Country

70

Interest Rate

swap

Currency swap

Others (specify)

7. Derivative transactions (Interest rate, Currency swap) during the month (if any) -

Tranche

No.

New Currency Interest Rate on

the

New Currency

New Interest Rate

on the Loan Currency

Maturity Date

of the swap deal

8. Revised Principal Repayment Schedule (if revised / entered into Interest rate swap)

Date

(YY/MM/DD)

(First repayment

date)

Currency Amount in

Foreign

Currency in

each

transactions

If more than one equal

installments

Annuity

Rate

(if annuity

payment)

Total

Number of

installments

No. of payments in

a calendar year

(1, 2, 3, 4, 6, 12)

9. Amount of outstanding loan at the end of the month :

Currency Amount:

(For RBI Use)

71

We hereby certify that the particulars given above are true and correct to the best of

our knowledge and belief. No material information has been withheld and / or

misrepresented.

Place : ___________

Date : ___________

Stamp ___________________________________

(Signature of Authorised Official)

Name : ______________________________

Designation : _________________________

(For Borrower’s use)

Certificate from Company Secretary / Chartered Accountant

We hereby certify that the ECB availed in terms of approval granted by

Government or RBI or under approval route / automatic route is duly

accounted in the books of accounts. Further, ECB proceeds have been utilised

by the borrower for the purpose of

______________________________________________. We have verified

all the related documents and records connected with the utilisation of ECB

proceeds and found these to be in order and in accordance with the terms and

conditions of the loan agreement and with the approval granted by GoI(MoF)

or RBI or under approval route / automatic route and is in conformity with the

ECB Guidelines issued by the Government.

Authorised Signatory

Name & Address72

Place : Registration No.

Date : [Stamp]

Certificate by an Authorised Dealer

We hereby certify that the information furnished above with regard to debt

servicing, outstandings and repayment schedule is true and correct as per our

record. The drawal, utilisation and repayment of the ECB have been

scrutinised and it is certified that such drawal, utilisation and repayments of

ECB are in compliance with ECB guidelines.

_________________________________

_

[Stamp] Signature of Authorised Dealer

Place : ______________

Name:________________________________________

Date : ______________

Designation :_____________________________________

Name & Address of

Authorised Dealer

Uniform Code

No.__________________________

73