What is ECB?

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What is ECB?
ECB refers to External Commercial Borrowings, which are actually commercial loans availed by multi-lateral financial organizations or ‘corporate’ in India from lenders which are labelled as “non-resident”. These commercial loans may be in the form of loans from various banks, credit from either suppliers and buyers, secure instruments like fixed rate bonds and floating rate notes, credit from export credit organizations, and even investments made by Foreign Institutional Investors or FII’s.

Average maturity of external commercial borrowings or ECBs is pegged at 3 years at the very minimum. The usual purpose of these commercial loans is to acquire additional funding by corporate organizations in India and the PSUs for expansion and new investments, wherein domestic financial sources may not be able to provide.

Indian ‘corporates’ are allowed by the government to raise ECBs. These ‘corporates’ exclude intermediary companies like banks, housing finance institutions, various financial institutions, non-profit organizations, and trust companies. Those in “Special Economic Zones” may also raise ECBs but these institutions will have different requirements and will not be allowed to make a transfer of funds to sister companies or any other unit within the Domestic Tariff Area.

For a given financial year, ECBs may be raised for only up to 500 million US dollars. Those who raised ECBs of up to only 20 million US dollars have a minimum maturity of 3 years. While those in the bracket from above 20 million US dollars up to 500 US million dollars have a minimum maturity of 5 years.

Though ECBs are allowed by the government for Indian corporates to have more funding for possible new investments, there are also restrictions to the use of the funds. ECB proceeds are not to be used in capital market investments, in real estate, in payment for existing loans, or in the acquisition of a particular company.

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