External Commercial Borrowings

Subject to certain terms and conditions, the Government of India permits Indian firms to resort to external commercial borrowings for the import of plant and machinery. The key steps involved in raising such borrowing are as follows:

1. Secure the permission of the Capital Goods Committee / Projects Approval Board.
2. Obtain an offer from a bank
3. Get the approval of the Departmental of Economics Affairs (DEA), Ministry of finance for the other.
4. Arrange for the documentation of the loan
5. Secure the approval of the Reserve Bank of India.
6. Deposit the loan documents with the DEA
7. Draw the loan

Features of Euro currency loans:

A Eurocurrency is simply a deposit of currency in a bank outside the country of the currency. For example, a Eurodollar is a dollar deposit in bank outside the United States. Likewise, a Euroyen is a yen deposit in a bank outside Japan. How do Eurocurrency deposits arise? This may be explained with an example. Suppose an American oil company buys oil from a sheik in the Middle East and pays $10million drawn on the Chase Manhattan bank and the sheik deposits the cheque in his account with a Swiss bank. The dollar deposit placed outside the United States the country of the dollar currency, is a Eurodollar deposit. The Swiss bank can use this deposit for granting Eurodollar loans.

The main features of Eurocurrency loans, which represent the principal form of external commercial borrowings, are as follows:

Syndication: Eurocurrency loans are often syndicated loans wherein a group of lenders particularly banks participates jointly in the process of lending under a single loan agreement. The syndicate of lenders is represented by the lead bank. The borrower is required to pay a syndication fee, which is a front end payment, usually ranging between ½ percent ad 2 per cent to the lead bank. This represents the management fees payable to the lead bank, participation fee to the other banks, and other charges.

Floating Rate: The rate of interest on euro-currency loans is a floating ate. It is usually linked to LIBOR (London Inter Bank Offer Rate) or SIBOR (Singapore Inter-Bank Offer Rate). The spread over the LIBOR or SIBOR ate is mainly a function of the credit worthiness of the borrower and size of the loan. Power Finance Corporation for example, obtained a euro dollar loan of US $ 75 million in 1997, at an interest rate of 50 basis points (0.5 per cent) above the LIBOR. While the rate is determined at the beginning of each interest period, the interest is payable at the end of each period.

Interest period: The interest period may be 3, 6, 9 or 12 months in duration. It is largely left to the option of the borrower.

Currency Option: The borrower often enjoys the multi currency option which enables it to denominate the interest and principal in the new currency opted for. This option is exercisable at the end of each interest period.

Repayment and Prepayment: The euro-currency loans may be repayable in installments or by way of a bullet repayment. The borrower may pre-pay the loan after giving due notice to the lead bank. When pre-payment is done some premium is payable. The lender may also reserve the right to recall the outstanding loan under certain circumstances.

Following the economic liberalization, Indian companies started exploring the market again. Unlike the earlier period when syndicate credit was the predominant form of raising external finance, companies began looking at bonds and euro-equities collectively referred to as “Euro issues”. The two principal mechanisms are called Depository Receipts mechanism and Euro convertible Issues. The former represents indirect equity investment, while the latter is debt with an option to convert it into equity.