The onset of globalization, focussing on integrating the world into a single state has encouraged the growth in the level of business operations. The increase in the level of international trade has boosted the Indian economy to a great extent. With a view to promote the trading activities with foreign entities, the Government of India has taken numerous steps such as introduction of investor friendly policies, better opportunities, easier availability of resources and labour, etc. One of the modes of investment in India is through External Commercial Borrowing.

External Commercial Borrowings

The External Commercial Borrowings (hereinafter referred to as “ECB”) enables resident entities to borrow from recognized non-resident entities in the forms of loans including bank loans, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures), buyers’ credit, suppliers’ credit, Foreign Currency Convertible Bonds, financial lease and Foreign Currency Exchangeable Bonds.

Monitoring ECBs

ECB are governed under the provisions of the Master Direction - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated May 9, 2018 and policies issued by the Reserve Bank of India (hereinafter referred to as “RBI”) in this regard. These regulations lay down the criteria for eligible borrowers, recognized lenders, individual limits, purpose/ end-use of the ECB raised, parking of the proceeds, refinancing, etc.

ECBs may be raised taking recourse to any of the below stated routes:

  • Automatic Route where the case is examined by Authorized Dealer Category-I Banks

  • Approval Route where the application requesting for ECB is submitted to RBI before borrowing

Liberalization for oil firms

Vide its circular dated October 3, 2018, the RBI has brought forth liberalization in the terms of ECB with respect to oil firms in the country.[1]

The said circular enables public sector Oil Marketing Companies (hereinafter referred to as “OMCs”) to raise ECB for working capital purposes with minimum average maturity period of 3/5 years from all recognized lenders under the automatic route.

Also, the individual limit of USD 750 million or equivalent and mandatory hedging requirements as per the ECB framework have also been waived off. But The overall ceiling for such ECBs shall be USD 10 billion equivalent. However, OMCs should have a Board approved forex mark to market procedure and prudent risk management policy, for such ECBs.

The aforesaid liberalization policy is expected to facilitate the commercial transactions carried out by oil firms in India relieving them from the pressure of repayment of loans and also help in broadening of borrowing resources for working capital in order to meet the stability requirements for fund management.