www.rbi.org.

in, retrieved on 03-11-2013

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Backdrop
Three Routes to Overseas Capital in India
1. Foreign Equity Participation
a. Direct Investment
i.
FDI
ii.
GDRs/ADRs
b. Indirect Investment: FIIs/Portfolio Funds
2. Debt Route:
External Commercial Borrowings (ECBs)
3.Hybrid Route:
Foreign Currency Convertible Bonds (FCCBs)

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Financing Strategies of Indian Companies

via Foreign Markets

Domestic Market

International Market

Equity Share

Preference Share

Private Placement

Syndicate Loan
Convertible Debenture

Rights Issue

Bonus Share
Preferential Allotment
3/12/2014

GDRs (Equity)
ADRs (Equity)
FDIs/FIIs
ECBs (Debt)
FCCBs (Hybrid)
Hedge Funds
Venture Capital
Private Equity

RKS SOM.GBU INDIA

Introduction
Globalisation.. goods/services/capital
Companies, tapping international markets,
enhance their global presence and raise
capital abroad.
Mechanism of cross-border investment-flows
through ADRs/GDRs & ECBs/FCCBs is reengineered.
Investors- geographic diversification to their
portfolios, investing in international securities.
Global exposure to portfolios offer the
cushion.
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Introduction..
Investors demand for DRs is growing faster:
During 1990 and 2001,the volume of ADRs
trading increased exponentially
$75bn to
$1185bn and $4,365bn in 2008 and (2.79 trillion
2012)

Cost-effectiveness, convenience, liquidity and

operational risks are lower than the risk of
purchasing and safekeeping ordinary shares
outside the country.
Demand of ADRs/GDRs, ECBs/FCCBs is driven by
increasing desire of individual and institutional
investors.
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ADR/GDRs
J.P. Morgan-the first DR program in 1927.
A negotiable certificate that represents a nonU.S. companys publicly traded equity.

US $ denominated

equity based instruments

traded freely on a major exchanges

GDRs are listed in London & Luxembourg
ADRs listed and traded in US stock
exchanges.
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Structure of DR Programme

ISSUER COMPANY
From INDIA
Dividend
In INR

Foreign
Capital

Underlying
Equity Shares

CUSTODIAN
(Local Bank in Mumbai)

Inform Deposition of Underlying

Shares to Issues ADRs

DEPOSITARY BANK

Foreign
Listing

(Bank of New York, US)

Dividend
In US $ Issue Investing
Capital
ADRs

Clearing House
Euroclear / Cedel
Depositary Trust Co.

Foreign Investors
US/UK Citizen
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Foreign Stock Ex.

NYSE/LSE/LxSE

RKS SOM.GBU INDIA

ADRs/GDRs
Issued by depositories, mostly International
Banks.
Companies - Depository - Intl. Investors.
Each GDR/ADR entitles the owner a specific no.
of underlying shares.
Issuing Companies pays dividend in Rs.,
Depository converts it to $ and distributes to Intl.
Investors.
GDR/ADR holders have Rights to Dividend, to
Subscribe new shares, to Bonus, Voting Rights
Under the depositarys agreement, a Depositary would, Not to vote
the shares at all, or/and Vote the shares with the majority of the rest
of the shareholders.
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Table - Raising Capital with ADRs/GDRs:

Types of Depositary Receipt Programmes

Particulars

Unsponsored

Sponsored
Level-I

Level-II

Level-III

Rule 144A DRs

GDRs

Description

Not sponsored
by the issuer

Unlisted
programme
in the US

Listed on the
US
exchanges

Shares
offered and
listed on the
US
exchanges

Private
placement to
qualified
institutional
investors (QIB)
in the US market

Global offering of
securities outside
issuers home
country

Purpose

Broaden the
share-holder
base with the
existing shares

Broaden the
shareholder
base with the
existing
shares

Broaden the
shareholder
base with the
existing
shares

Raising the
capital with
fresh issue
of shares

Raising the
capital with
fresh issue of
shares

Raising the
capital with fresh
issue of shares

Trading

OTC

US OTC
market

AMEX, NYSE,
NASDAQ

AMEX,
NYSE,
NASDAQ

US private
placement
market -PORTAL

US exchanges
and non US
exchanges

SEC
registration

Register under
Form F-6

Register
under Form
F-6

Register
under Form
F-6

Register
under
Forms F-1
and F-6

None

Varies depending
on structure of
US offering

US reporting
requirements

Exempt under
Rule 12g3-2(b)

Exempt
under Rule
12g3-2(b)

Form 20-F*

Form 20-F*

Exempt under
Rule 12g3-2(b)

Varies depending
on structure of
US offering

Source: 2004/www.adr.com by J.P.Morgan/10.12.2003 ,

*Financial statements must be partially reconciled to US GAAP
Rule 12g3-2(b) SEC Information Supplying Exemption
PORTAL
Private Offerings Retail Trading AutomatedRKS
Likage,
144A allowed
immediate resale, no holding pd.
3/12/2014
SOM.GBU
INDIA
9

Entry Alternatives
There are five alternative ways to enter US
Securities Market: a)

Public listings of shares on the NYSE, AMEX or

NASDAQ, i.e., listing shares without raising new
funds, through Sponsored ADRs;

b)

Private placements;

c)

Rule 144A offerings, with re-sale exemption for sale

to and among QIBs;

d)

Public offerings where a company goes to the US

public markets to raise funds; and

e)

Level I ADRs, trading on the pink sheets without

registration with the SEC.

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10

GDR/ADR route opted:

Foreign Currency, Low cost, Large volume of capital.
Brand Visibility at global Level
Sustainable Profit sharing with strategic foreign
investors, i.e. Long-term equity partnership,
Inorganic Growth through acquiring companies abroad currency
for M&A transforming themselves into global multinationals

Dividend is paid in INR. i.e., companies are not exposed

to foreign exchange risk.
Building an International Profile
Diversified Investor/shareholder base/revenue base
Gateway to liquid international capital Market and
Corporate governance.
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11

GDR/ADR route opted..

Creating Stock Option for US employeesAttracting & retaining Quality talent to US/Europe
ESOP thru ADRs has helped reducing the attrition rate in IT
companies (Infosys)
Infosys has pioneered the grant of ESOPs to its employees time-totime. First, the company had come out with ESOP plan in 1998 and
1999

Investors gets intl. portfolio diversification, that too in US$

and enjoy all right at par with domestic investors
While faces Costly currency conversion of dividends,
Unreliable custodial services and Poor information flow
Arbitrage Opportunity: encash Premium over the foreign market
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12

Frequency Distribution of Listings of Indian Firms on

Foreign Exchanges
Type
Stock Exchange of
2006
2013
Listing
GDR
LuxSE
52
59
GDR
LSE
26
24
GDR
PORTAL
75
73 Euro MTF
ADR
NYSE
11
09
ADR
NASDAQ
03
02
ADR/ GDR
OTC
03
04
GDR
DFIE
02
-SDR
Singapore
-07
None SE
130
Total
172
308
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13

Reasons for so few ADRs. As; SEC of US

requires a stringent reporting norms Reporting
according to US GAAP and Higher Listing fees
Rule 144 a private placement, and Regulation S offering
to non US person, a non-US tranche of a Rule 144A,
traded outside the US, not registered under US SEC
Traded on 16 designated offshore Securities Market
(DSOM) SEC treats it as an Offshore transaction.

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14

Issue from India, China, UK, Japan and

Australia respectively represents top 5
countries with DRs programs.
Asia Pacific - 1799

W & E Europe -1346

Middle East 242

Latin America - 288

India DRs value traded US $69.8 bn, 2nd to

China, where as volume traded 2.43 bn, 4th
behind China, Taiwan and Japan in Asia
region.
Infosys and ICICI Bank stands among top 5
DRs by value traded and market capitalization
respectively.
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15

2287
396

2130
404

2060
428

1984

1912
485

1858
498

1817
504

1847
537

563

520

501

478

500

1791

1729

1681

1527

1000

570

1500

458

Number

2000

1460

2500

1819

Total Sponsored Vs US Listed DRs

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2013
Year

Total Sponsored DRs

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US Listed DRs

16

Factors
International investors look for companies, which
have the strength on following forms:

Internationally significant capacities and

technology;

Strong fundaments for several years;

A consistent record of profitability;

International presence/involvement and a

global investor appeal, and

Operations
in
industries
with
good
prospects.
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17

Factors..
ADR returns are affected by respective home market
factors rather than by US market movements.

ADR return responds negatively, on the

strengthening of home currency, against US $.
US investors are exposed to incremental risk
from foreign equity market.

Price of an ADR fluctuates based on the variation of

price of underlying shares, dividend payouts, and
stock-splits. Usually, the two, track each other, one-forone.

If, one deviates from the other, provides, an

opportunity for international arbitrage.
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18

Sponsored ADRs
A sponsored American Depositary Share
(ADS) is a mechanism to convert the
existing equity shares listed in India, into
ADS for trading in US market, and realize
the proceeds net of issue expenses.
Companies do not issue new shares.
December 2002, RBI allowed Indian companies
to offer their domestic investors, an option of
converting their domestic share into ADRs that
is listed on the LSE, LxSE, and NYSE etc.
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19

Sponsored ADRs..
Infosys was the first Indian company to take
advantage of the changed procedure and went
to offer more shares to its overseas investors
without actually issuing fresh shares.
On February 18, 2005, Infosys ADR was
trading on NASDAQ at $72.8. Simultaneously,
in India, available at Rs 2,174. Given an
exchange rate of Rs. 43.8 per dollar, the ADR
should have quoted $50 approximately to
eliminate arbitrage.
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20

Fungibility
Interchangeability of any security with in a class prespecified with.

one-way fungibility, investors in ADRs/GDRs could

convert their DRs into underlying domestic shares,
without the freedom to reconvert it back into
ADRs/GDRs.
Once the ADRs/GDRs are converted into domestic
shares, the depository redeems DRs. Only on a
fresh issue, ADRs/GDRs could be reinstateted. That
leads to loss of liquidity in the overseas market, i.e. a
gradual reduction in the availability of ADRs/GDRs in
the overseas market.
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21

Fungibility
In two-way Fungibility, investors (foreign
institutional or domestic) in any company that
had issued ADRs/GDRs can freely convert the
ADRs/GDRs into underlying domestic shares
and reconvert the domestic shares further into
ADRs/GDRs, depending on the market
movement and the direction of price change.

Reverse fungibility allowing reconversion of the cancelled ADRs/GDRs

back into depository receipts.
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22

Case: Infosys Technologies Limited

1. $70.38
million

at 22% premium over BSE price 3201/-March

1999- Listed in NASDAQ.
Offered at 27.88 per ADS, sold @ $ 34 per
ADS Net Proceeds $66.90
Issued 20,70,000 ADSs underlying 10,35,000
Equity share @10/

ADRs traded at a premium of 193% to the domestic shares in year 2000

2.

$294 million

Sponsored secondary offering- Offered 5.22 mn

ADS/2.61 mn equity share. Sold at $49 per ADS, 26
% premium over Rs3593.30 in BSE- July 2003

3.

$ 1.1 billion

Converted 16 million share or 6% of its locally listed

shares. At $ 67 per ADS, 34% premium over 2171.2
in NSE- June 2005.

4.

$ 1.6 billion

3rd Sponsored secondary offering - converted 30

mn shares at $ 53.50 per ADS, at 6% premium - Nov
2006

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23

Case: Infosys Technologies Limited

Objective:
Become under NASDAQ 100 ( require at least 10% float)19.13 %; Increases Liquidity
Encash arbitrage opportunity & Premium in NASDAQ
Enhance Brand equity & Create stock Option
Accelerate sales and Marketing initiatives
Make Strategic Investors through ADR issue- investor gets
good price and company gets a strategic partner without
diluting equity
Acquisition currency to expand in German Market ( Largest
economy and IT spender in Europe), tapped only 2%- Provide
Broad base Revenue.
Struck a deal of $ 300 million with ABN Amro, substantiating
their core-competency.
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24

Infosys Technologies Limited Share Holding Pattern: (in Percent)

Category

2002

2003

2004

2005

2006

2007

2013

Promoters

28.72

28.42

26.50

21.76

19.50

16.54

16.04

Non-promoters

71.28

71.58

73.48

78.24

80.50

73.35

73.96

Institutional
Investors
FIs/Bank
FIIs

9.41
36.59

9.26
39.18

6.77
41.82

4.75
42.87

6.44
37.91

6.27
32.55

17.51
40.52

Others
Indian Public

12.51

10.59

9.02

19.00

15.49

21.83

11.17

3.20

3.26

7.94

8.04

13.95

19.11 12.34

9.57

9.29

7.95

1.95

6.71

100.0
100.00
0

100.00

100.00

100.00

100.00 100.00

40.44

50.46

52.54

56.35

55.36

ADSs
Rest

Total

Total
Foreign
Share holding

43.45

3.70

2.42

55.28

ADSs held in the name of Bankers Trust Company, Depositary to the Companys Sponsored ADR offering.
Source: Infosys Report, 2005-06, 2012-13

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25

Price (INR)

20000
15000
10000
5000
0

ADS Price

28/0 31/0 30/0 31/0 31/0 29/0 31/1 30/1 29/1 31/0 28/0 30/0
4
5
6
7
8
9
0
1
2
1
2
3

140
120
100
80
60
40
20
0

% Premium

Infosys' ADS Premium Compared to Price Quoted on NSE

1771 1367 1582 1192 1427 1214 1283 1123 8614 1121 8582 6099

NSE Share Price 8122 6999 8310 6761 8327 7361 7133 7184 5694 6793 6242 4084
% Premium

118 95.4 90.4 76.4 71.4

65

79.9 56.3 51.3 65.1 37.5 49.4

Months 2000-01
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26

Infosys' ADS Premium Compared to Price Quoted on NSE

3,500

8.00%

3,000

6.00%

4.00%
2,000
2.00%
1,500

Premium in %

Price in INR

2,500

0.00%

1,000

-2.00%

500

0
ADR
Equity
Premium

Apr-12
3,028

May-12
2670

Jun-12
2506

Jul-12
2563

Aug-12
2423

Sep-12
2575

Oct-12
2672

Nov-12
2424

Dec-12
2422

Jan-13
2822

Feb-13
2968

Mar-13
2989

2855

2484

2520

2501

2472

2633

2609

2469

2436

2815

2960

3005

6.41%

7.49%

-0.56%

2.48%

-1.98%

-2.20%

2.41%

-1.82%

-0.57%

0.25%

0.27%

-0.53%

-4.00%

2012-13

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27

Infosys
During 2012-13, Infosys Ltd ( Infosys
Tech. Ltd.) shifted from NASDAQ to
NYSE, LSE and Paris Stock Exchange.
The delisting and listing is made to
leverage the NYSE Euro Next
partnership which are closer to Infosyss
investors, clients and employees.

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28

Outcome

Foreign listing of Indian companies on one way have

opened them to follow international capital market
practices and brought frame for efficiency of Indian
market.
The quality of DR programmes in Indian context has
improved to align with the SEC, requirements and the
return to the expectation of US investors.
Adherence of the AS, depict profitability and credit
worthiness of an issuer company across.
Market segmentations on cross-border listing tend to
evaporate on faster inflow of information and on lifting of
information asymmetry
Brought parity in price behaviors in two markets.
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29

FCCBs
A hybrid bond, quasi-debt instrument with an
attached call option, issued to foreign investors
in foreign currency at a spread-over Libor,
convertible into equity shares, either in whole/
part, at the option of the investor, at the
specified strike rate, either on maturity or from
a date.
London Inter-Bank Offered Rate (LIBOR) is a rate at which a
fellow London bank can borrow money from other banks. Rate
calculations incorporate variables such as time, maturity and
currency rates. There are hundreds of LIBOR rates reported each
month in numerous currencies. 6 Month LIBOR is the LIBOR for a
six month deposit in U.S. Dollars.
30

Features:
FCCBs provide low cost funds,
As an alternative to straight ECB to sweeten
debt by adding a conversion privilege that
lowers the coupon rate, even issued at Zero

coupon.
paying YTM of around -1.0 to 4.5% on
five-year convertible bonds, if not
converted into shares.
FCCBs have the call and put options,
FCCBs leads to Price discovery, as an
alternative to common stock when the market
undervalues equity.
31

Advantage to Issuers..
FCCBs facilitate debt swap. Tata Motors, Interest costs
declined by 47%
Prospect of getting a higher conversion premium in
rising market
No interest outgo rather earn interest income till the
FCCBs Proceeds is spent. (US Fed rate moved up from
1.0% during Jan-June 2004, to 2.50% in 2005.)
Upside investment in equity, and debt element protects
the downside.
A investment destination for global investors to
diversify portfolio, in rising stock market.
Market index is on slope, FCCBs a choice and on slide
non- conversion a choice.
32

Start ups & Trends..

Early 1990s, euro issues were skewed

towards GDRs.
During May 1992 to December 1994:
GDRs - 48 issues- US $ 3950 million
FCCBs-10 issues- US $ 1016 million

Rise in FCCBs issue from $190million in year

2003, to $2.25 billion in 2004 ,continued till
2007 end.
High performance of the stock market during
2003 to 2007, and stronger INR helped to
reduce the cost of borrowing for Indian
companies.
33

Year

Amount in US $ Million

Number of Issue

1992

--

1993

550

1994

533.75

1995

--

1996

337.31

1997

175

1998

--

1999

26.5

2000

--

2001

--

2002

126.6

2003

212

2004

2362.88

23

2005

3731.57

54
34

Dec-06

Nov-06

13786.91

13696.31

12961.9

12454.42

11699.05

10743.88

10609.25

10398.61

11851.93

11279.96

14000

Oct-06

Sep-06

Aug-06

Jul-06

Jun-06

May-06

Apr-06

Mar-06

12000

10370.24

9919.89

10000

Feb-06

Jan-06

Price

Sensex - Monthly Price Trend (2006)

16000

8000

6000

4000

2000

Months
35

Dec-07

Nov-07

20286.99

19363.19

19837.99

17291.1

15318.6

15550.99

14650.51

14544.46

13872.37

13072.1

20000

Oct-07

Sep-07

Aug-07

Jul-07

Jun-07

May-07

Apr-07

Mar-07

10000
12938.09

14090.92

15000

Feb-07

Jan-07

Price

Sensex - Monthly Price Trend (2007)

25000

5000

Months
36

Months
37

Aug-09

Jul-09

Jun-09

May-09

Apr-09

Mar-09

Feb-09

Jan-09

Dec-08

8000
14564.53

14355.75

12860.43

15240.83

15670.31

14493.84

14625.25

11403.25

9708.5

8891.61

9424.24

9647.31

9092.72

9788.06

10000

Nov-08

Oct-08

Sep-08

Aug-08

16415.57

17287.31

13461.6

12000

Jul-08

Jun-08

May-08

17578.72
15644.44

14000

Apr-08

Mar-08

16000
17648.71

18000

Feb-08

Jan-08

Price
20000

Sensex -Monthly Price Trend (Jan 2008 - Aug 09)

6000

4000

2000

Macro Economic Factors:

Growing use of converts by Indian companies
was in line with the international trends. Globally,
579 companies issued more than $150 billion
worth of converts in 2003.
Low interest rate (LIBOR/Federal rate)
Buoyant equity markets,
Liberalised norms ,
Uncertainty in the global capital markets,
Issuer creditability,
Rupee Appreciation against US $,
Attractive YTM.
38

Macro Economic Factors..

Exchange Rate Variation and Interest rate
differential affects market prices of FCCBs.
Foreign investors perception about the
company, equity market and conversion price
offered is another issue.

39

Macro Economic Factors..

Tata Motors FCCB issued , YTM on seven-year
period 3.75% and equity conversion premium
as high as 60% over the market rate on the day
of the issue.
In November 2004, holders of Tata Motors have
converted more than 22% of the $100 million bonds into
equity shares.
At the time of issue (July 2003) conversion price was
of Rs 250.75.
While on November 28, 2004, the scrip closed at Rs
409/-, i.e. the conversion was at a 63% discount.

40

Indian Case: Tata Motors

Accessed international market in July 2003 and April
2004, by two issues of FCC Notes, US $500 mn.
Had outlined a capex program of Rs 6000 crore for the
period 2003-08, via out of several financing options
along with of FCCB.
Its $ 100 million offering in July 2003 was the first
convertible bond offering out side India in over five
years, had received subscription to the tune of
$1billion within two hours of opening, reflected high
confidence of investors in Tata Motors future equity
return. This issue had opened up the market for other
issuer of FCCBs.
Purpose: Proceeds of the bond was to retire companys expensive
borrowings and meeting other capital expenditure.
41

Tata Motors
2nd issue of $400 million, 2004, over-subscribed ten
times and received investor interest to the extent of $ 4
billion. The offer was innovative and had dual-tranche
bull-bear structure.
First ever multi-tranche convertible offering by an
Indian company; with the first tranche being ever
negative yield structure (an aggressive yield structure)
and the second tranche achieving longest tenure of
seven years with the highest conversion premium of
60%.
TML

42

Tata Motors
1. Outcome: with large cash accrual of Rs 8,747 million
in 2003-04 had helped to pre-pay a substantial part of
its outstanding debt.
2. TMLs earlier US $100 million FCCB issue was
converted well, helped the company, to improve its
capital structure. (equity had diluted from 319.9 million
shares in financial year 2003 to 371.1 mn in 2004). Tata
Motors share had gained more than 210% during 200304.
3. Capital cost declined by 47% largely due to swapping
(to retire high cost debt) its high costs debt with fresh
funds from FCCB issues. Profit after Tax (PAT)
increases, largely due to higher savings in interest
costs, more than expectation.
43

Tata Motors Easy Conversion

Helped, to further restructure its debt portfolio.

By March 31, 2004, US $ 75.913 million of
these Notes were converted into the ordinary
shares or GDSs and only US $ 24.09 million
were outstanding.
As on March 31, 2004, the Foreign Currency
Loan of the company stood at US $ 161 million.
The companys borrowing as on March 31,
2004 stood at Rs. 1259.77 crores as compared
to Rs. 1458.31 crores on March 31, 2003.

44

FCCBs and ECBs

All-in-cost for FCCBs is better than the
corresponding debt instruments (ECBs). The
coupon on ECBs is a spread over the ruling
benchmark of Libor, which is a floating rate.
FCCBs, in contrast, carry a fixed coupon.
Instrument has equity conversion built into it,
the coupon on the bonds works out much
cheaper than ECBs and has to be paid at the
end of the tenure.
Well-capitalized, moderate growing company
with no option to dilute equity prefers ECBs,
like public sector corporates.
Rapidly growing companies for wider investor
base prefer FCCBs route.
45

RBI Intervention 2008 -09

RBIs Circular dated December 8, 2008 allowed
buyback of FCCBs upto December 2008
extended further upto December, 2009.
Issuer can buyback FCCBs under automatic
route upto any limit out of existing foreign
resources or by raising fresh ECBs if effected
at minimum discount of 15% on the book
value.
FCCBs up to $ 50 million can be bought back
with prior RBI approval out of Rupee
resources representing internal accrual, if
effected at a minimum discount of 25% on the
book value.
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RBI Intervention 2008 -09

RBI had earlier allowed FCCB buyback March
2003 to Sept. 2003, under the automatic route
up to a limit of $100 million,
if the buy back was made of local resources and
without any limit, or
if the buyback was out of Exchange Earners Foreign
Currency Funds or inward remittances toward the
equity
subject to inter-alia one condition- buy back should
be effected at face value, and not book value.

Book value is the face value of FCCB plus the

interest accrued on the bond till the date of
buyback.
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ECBs :External Commercial Borrowings

ECBs route helped to accelerate forex inflow
at a lower cost debt fund infused
competitiveness.
Warded off threat emerging out of debt crisis
in 1991, converging into an opportunity in
rejuvenating Indian industries.
ECBs includes commercial Loan

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ObjectivesECBs serves six major objectives at Macro/Micro level

1. Raising debt capital and its inflow;

2. Borrowing in Forex, meeting import obligation;
3. Bearing low interest rate and enhancing
product competitiveness globally;
4. Long-term fund without issuing equity shares
and with no future fall of EPS;
5. Adding value to the firm, and for shareholders;
and
6. Inflow of FOREX helps RBI to stabilize INR
conversion value & maintaining adequate
import and investment cover for.
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 Eligible Borrowers are corporates registered

under the Indian Companies Act, except
financial intermediaries. (such as banks,
financial institutions, housing finance companies
and NBFCs)
ECB investments in real sector, industrial sector,
especially the infrastructure are allowed on
automatic route.
Recognized Lenders are International Banks,
International Capital Markets, Multilateral
Financial Institutions e.g. IFC, ADB, CDC;
Export Credit Agencies, Suppliers of Equipment,
Foreign Collaborators.
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ECBs Policy

Relied upon, on two major factors;

i. To Keep maturity for redemption longer and
ii. To Borrow at relatively lower cost.

Provide flexibility in borrowing by Indian

corporates, maintaining a prudent limit for
efficient debt management for infrastructure
development and export financing.
Previous guidelines, 2004 issued by the Ministry
of Finance, Government of India has been
replaced in July 2008 by RBI, towards regulating
inflow of debt from across the boundaries, in a
post sub-prime era.

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Amount and Maturity:

Maximum amount of ECB that can be raised by a
Indian corporate is US $ 500 million during a
financial year.
Minimum Average Maturity:
3 yrs. For loan < US $ 20mn.
5 yrs. For loan > US $ 20mn.
Corporates could avail an additional amount of US
$ 250 million with average maturity of more than 10
years under the approval route, over and above the
existing limit of US $ 500 million under the
automatic route.
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All-in-cost ceiling
-Interest Rate Ceilings: All-in-cost ceiling over 6month LIBOR
1. 6 month LIBOR+ 200 bps for 3-5 yrs.
2. 6 month LIBOR+ 350 bps for > 5 yrs.

(LIBOR+ bps+ Forward cover i.e. Hedging

cost + Arranger Fees + Guarantee fee +
Commission)
Price Ceiling on ECBs

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ECB fund is permitted towards :-

Investment within the Country:

Longer Maturities for Capital Intensive Projects

Import of Capital goods, as classified by DGFT

in the Foreign Trade Policy, by new or existing
production units,
Real sector,
Industrial sector, including small and medium
enterprises (SME) and
Infrastructure
includes
power,
telecommunication, railways, road including
bridges, sea port and airport, industrial parks,
and urban infrastructure (water supply,
sanitation and sewage projects).
End-Use Pattern of ECBs
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ECB fund is permitted towards

Overseas Investment:

Overseas direct investment in JV / Wholly

Owned Subsidiaries, subject to the existing
guidelines on Indian Direct Investment in
JV/WOS abroad.

ECB raised for foreign expenditure for

permissible end-uses shall be parked overseas
and not to be remitted to India. The funds
should be invested in such a way that the
investments can be liquidated as and when
funds are required by the borrower in India.
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End-Use Restriction:
Utilization of ECB proceeds is not permitted for
on-lending or investment in capital market or
acquiring a company (or a part thereof) in India
by a corporate,
in real estates,
for working capital,
general corporate purpose and
repayment of existing Rupee loans.

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Pre-payment: Upto US $ 500 million may be prepaid by

an authorized dealer banks without prior approval of RBI
subject to compliance with the stipulated minimum
average maturity period as is applicable to the loan. (if met
out of inflow of foreign equity capital).

Swapping/Refinancing: The existing ECB may be

refinanced on raising a fresh ECB. But, the fresh ECB
should be raised at a lower all-in-cost, maintaining the
original outstanding maturity period.
Hybrid Debt: Conversion of ECB into Equity is permitted,
covered under the Automatic Route for FDI, or under
sectoral cap. The pricing of shares shall be as per SEBI
and erstwhile CCI guidelines/regulations.
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 flow of funds across boundaries:

Factors are considered important
1. Interest Rate Disparity

During 1993-94 PLR was 19% while LIBOR was

3.391%
By 2003-04 PLR is 11% and LIBOR 1.210%

2. Exchange rate fluctuation

Uncertainty of burden of future debt

redemption, more cost: stable Rupee is a
boosting factor
ECBs Inflow Quarterly

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ECB Policy:
1.
2.
3.
4.

Larger to Small Scale Benefits

Longer Maturities for Capital Intensive Projects
Debt Restructuring
Bearing on Market & Liquidity as
i.
Fuels the liquidity and inflation both
ii. Interest rate increases
iii. Domestic debt market suffered
iv. FOREX swells
5.
Balance of Payment affected as Pressure of outflow on
i.
Current account of BOP ( paying interest and other
service charge as a cost of capital) Current account deficit
decreases Rupee conversion value
ii. Capital account ( can be offset with larger inflow of
capital)

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Indias External Debt Service Payments

Amount that a Country ought to borrow is
governed by two factors,
how much foreign capital the economy can
absorb efficiently and
debt it can service without risking external
payment problem.

Each factor depend on the quality of

economic management.
Gross external debt is to repay principal,
with or without interest, or to pay interest,
with or without principal.
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Indias External Debt Service Payments..

Gross debt is the stock of liabilities, on
which debt service is calculated.
The Government of India has been
prudently slashing its direct external debt
share from 41.6% in 2003 to 23.9% in
2009.
The
corporates
and
other
institutions have directly bearing more in
aggregate external debt enhancing from
58.4% to 76.1% during the period.

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Determining Factors influencing PEDM Policy :-

ECB Inflows- ECBs share in foreign capital inflows

Debt / Service Ratio- In 1990-91 35.3% to 4.6% by 2008-09.
Falling Libor- Lower Interest payment
Rupee Stability
Short term / Total Debt
Balance -of-Payment :
Domestic Interest Rate:
Inflationary Pressure:
Forex Cover:
Payment Schedule:
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