Management of the ECBs

Pre-payment of ECB - liberalised

Entire outstandings may be prepayed from export earnings.

Refinancing of existing foreign currency loans
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.

Note: Reliance Industries Ltd undertook such an excercise at the turn of 1997. With Spreads over Treasury on Indian debt having gone up to alomost 500 bps, Reliance bought back its bonds off the market. It re-issued the debt later when spreads cam down.

"A corporate borrowing overseas for financing its rupee - related expenditure and swapping its external commercial borrowings with another corporate which requires foreign currency funds will not be permitted."
   ---NOW PERMITTED.

Liability Management
Corporates are encouraged to undertake liability management for hedging the interest and/ or exchange rate risk on their underlying foreign currency exposure. Prior approval of this department may be obtained before entering into such transactions. After obtaining the approvals, they would follow the FERA guidelines of RBI for release of foreign exchange.

Credit Enhancement

Following guidelines shall be applicable to rupee denominated structured obligations credit enhanced by international banks/international financial institutions/joint-venture partner.

(i) 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.

(ii) FERA clearance should be obtained from RBI in advance of issuance.

(iii) Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be obtained.

(iv) In the event of default, the default should be foreign exchange equivalent amount equal to the principal and interest outstanding calculated in rupee terms.

(v) The liability of Indian company will always be rupee denominated and the debt servicing may be done in equivalent foreign exchange funds.

(vi) 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.

(vii) In case of the proposals relating to sectors where conditions apply clearances e.g. relating to the assignability of licenses etc., these should be obtained in advance.

(viii) 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.

Procedure

Applications may be submitted by the borrowers in the prescribed format to :

The Joint Secretary (ECB),
Department of Economic Affairs,
Ministry of Finance,
North Block,
New Delhi - 110 001.

The application should contain the following information :

1. An Offer Letter (in original) from the lender giving the detailed terms and conditions
2. Copy of the project appraisal report from a recognised financial institution/ bank, if applicable
3. Copies of relevant documents and approvals from central/ state governments, wherever applicable, such as
   • FIPB, CCEA and SIA clearances,
   • environmental clearances,
   • techno - economic clearance from Central Electricity Authority,
   • valid licences from Director General of Foreign Trade (Ministry of Commerce) or Department of Telecommunications,
   • no - objection certificate from Ministry of Surface Transport,
   • evidence of exports from competent authority,
   • registration with RBI in case of NBFCs etc.

Review
The ECB guidelines and procedures will be periodically reviewed by the government in light of prudent management of external debt, changing market conditions, sectoral requirements etc.