Benefits of ECB

Benefits of ECB

The ECBs route provides an Indian company with the foreign currency funds that may not be available in India; the cost of funds at times works out to be cheaper as compared to the cost of rupee funds and the availability of the funds from the International market is huge compared to the domestic market. Moreover corporates can raise a large amount of funds depending on the risk perception of the International market. Corporates (registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB under the automatic route. However Individuals, Trusts and Non-Profit making Organizations are not eligible to raise ECB. 

The success of Indias debt management policy is reflected in a perceptible improvement in various external debt indicators. The external debt to GDP ratio which is an indicator of an economys debt servicing capability, showed a steady improvement, dropping to 17.4 per cent in March 2005 as compared to 38.7 per cent in end-March, 1992.It is noteworthy to mention that debt owed to the International Monetary Fund (IMF) was fully extinguished by 2000-01.ECBs can be used as a borrowing means for any purpose (rupee-related expenditure as well as imports) except for investment in stock market and speculation in real estate. ECB is a source of finance for Indian corporate, small and medium enterprise, Multi-state cooperative societies and non-governmental organizations for expansion of existing capacity as well as for fresh investment. 

External Commercial Borrowing can be raised only for investments such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units in the industrial sector including small and medium enterprises and infrastructure sector - in India. Infrastructure sector is defined as power, telecommunication, railways, road including bridges, sea port and airport industrial parks and urban infrastructure (water supply, sanitation and sewage projects). ECB proceeds can also be utilized for overseas direct investment in Joint Ventures / Wholly Owned overseas subsidiaries subject to the existing guidelines on Indian Direct Investment. Utilization of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestments process. Small and medium enterprises (SMEs) are increasingly opting for the external commercial borrowings (ECB) route to raise funds, a growing trend, given the current rising interest scenario. Those SMEs that are export-oriented find it economically more viable to raise funds overseas. Also with a view to provide Non-Governmental Organizations (NGOs) an additional channel of resource mobilization and in order to give impetus to the micro-finance movement, the Government has permitted NGOs to raise ECB up to US $ 5 million during a financial year.