An external commercial borrowing (ECB) is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency. The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.
Other such external sources of finance/capital include FCCBs and FCEBs. While foreign currency convertible bonds are issued to raise finance, ECB refers to commercial loans which can be in the form of bank loans, bonds, securitized instruments, buyers’ credit and suppliers credit availed from non-resident lenders with a minimum average maturity of 3 years.
ROUTES FOR ECB
ECB can be availed by either automatic route or by approval route. Under automatic route, the government has permitted some eligibility norms with respect to industry, amounts, end-use etc. If a company passes all the prescribed norms, it can raise money without any prior approval.
For specific pre-specified sectors, the borrowers have to take explicit permission of the government/The Reserve bank of India (RBI) before borrowing through ECB. RBI has issued formal guidelines and circulars specifying these rules for borrowing.
Let us look at the advantages and limitations of ECBs to understand the topic in further detail.