Discuss the objectives of raising of resources from International Markets. Discuss the procedure for raising External Commercial Borrowings (ECBs).

 Objectives of Raising Resources from International Markets:

Raising resources from international markets refers to the process of borrowing funds from foreign sources by governments, corporations, or financial institutions. This strategy is adopted to meet various financial and developmental objectives. Some of the key objectives of raising resources from international markets are as follows:

1. Diversification of Funding Sources: Raising resources from international markets allows entities to diversify their funding sources beyond domestic markets. By accessing international capital, they can reduce their dependence on local funding, mitigating the risks associated with fluctuations in domestic interest rates and liquidity conditions.

2. Access to Cheaper Capital: International markets often offer access to capital at lower interest rates than domestic markets. Entities with strong credit ratings or creditworthy sovereigns can take advantage of the global investor base and raise funds at favorable terms, leading to reduced borrowing costs.

3. Long-Term Funding: International markets provide opportunities for long-term funding, which can be crucial for infrastructure projects and other capital-intensive ventures. Long-term borrowing options may not always be available in domestic markets, making international funding an attractive option for entities with long-term investment needs.

4. Funding Currency Mismatch: Raising resources from international markets in a foreign currency can help entities hedge against currency mismatches. For example, if a company has significant revenue streams in a foreign currency, borrowing in that currency can act as a natural hedge against currency fluctuations.

5. Meeting Capital Requirements: Financial institutions may raise resources from international markets to meet capital adequacy requirements set by regulatory authorities. This is particularly important for banks operating globally and seeking to comply with Basel III norms.

6. Investment Opportunities: Raising resources from international markets allows entities to access funds for overseas investment opportunities. Multinational corporations often use international borrowing to finance foreign acquisitions and expansion projects.

7. Infrastructure Development: Governments may raise resources from international markets to finance critical infrastructure projects, such as roads, airports, ports, and power plants, to drive economic growth and development.

8. Balance of Payments (BoP) Support: Some countries with balance of payments deficits may raise resources from international markets to bolster their foreign exchange reserves and stabilize their currencies.

9. Technological and Industrial Upgradation: International borrowing can facilitate technological advancements and industrial upgradation by providing the necessary funds for research, development, and capital expenditure.

10. Crisis Management: In times of financial crises or economic downturns, raising resources from international markets can provide a lifeline to entities facing liquidity constraints in domestic markets.

Procedure for Raising External Commercial Borrowings (ECBs):

External Commercial Borrowings (ECBs) refer to commercial loans, credit facilities, and bonds raised by eligible entities in India from non-resident lenders. The Reserve Bank of India (RBI) governs the framework and guidelines for ECBs. The procedure for raising ECBs involves several steps and compliance requirements. Below is a detailed explanation of the procedure for raising External Commercial Borrowings:

1. Eligible Borrowers: Entities eligible to raise ECBs include:

• Corporates: Companies engaged in manufacturing, infrastructure, service sectors, and some other specified sectors are eligible to raise ECBs.
• Non-Government Organizations (NGOs) engaged in microfinance activities.
• Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
• Port Trusts and Companies.
• Limited Liability Partnerships (LLPs).
• Registered Partnership Firms.
• All Non-Banking Financial Companies (NBFCs) are eligible to raise ECBs under the automatic route.
• Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD), and Exim Bank.

2. Purpose and End-Use: Entities can raise ECBs for various permissible purposes, including:

• Import of capital goods, machinery, and equipment.
• Infrastructure projects.
• Working capital requirements of companies in certain sectors.
• General corporate purposes.
• Refinancing of existing Rupee loans taken for the permitted end-use.
• On-lending by NBFCs.

3. Approvals and Limits: Entities planning to raise ECBs need to adhere to certain approval and borrowing limits based on their sector and previous ECB borrowing history. The RBI stipulates sector-wise caps and overall ECB limits for various entities.

4. Recognized Lenders and Currency: ECBs can be raised from recognized lenders, including international banks, financial institutions, export credit agencies, and foreign collaborators. The borrowing can be in any freely convertible currency or in Indian Rupees (INR).

5. Automatic Route and Approval Route: ECBs can be raised under the automatic route or the approval route. Under the automatic route, borrowers do not require prior approval from the RBI, and they can raise ECBs directly from recognized lenders within the prescribed limits. Under the approval route, borrowers need prior approval from the RBI.

6. ECB Framework and All-in-Cost Ceilings: The RBI issues guidelines and frameworks for ECBs periodically, specifying conditions, limits, and reporting requirements. It also sets all-in-cost ceilings for different categories and tenures of ECBs to regulate the cost of borrowing.

7. Formulating the Proposal: Entities planning to raise ECBs need to formulate a detailed proposal outlining the purpose of the borrowing, amount required, repayment terms, tenure, interest rate, and other relevant details. The proposal must comply with the ECB guidelines issued by the RBI.

8. Due Diligence and Selection of Lender: Entities must conduct due diligence on potential lenders, including their creditworthiness, reputation, and track record. Once the lender is selected, the terms and conditions of the borrowing are negotiated between the borrower and the lender.

9. Documentation and Agreement: After the terms are agreed upon, the borrower and lender enter into a formal agreement that specifies the borrowing terms, conditions, covenants, and repayment schedule.

10. Reporting and Compliance: Entities raising ECBs need to comply with reporting requirements prescribed by the RBI. Regular reporting of the borrowing and its utilization is mandatory to ensure transparency and compliance.

11. Utilization of Funds: The funds raised through ECBs can only be utilized for the specific purpose mentioned in the ECB agreement. Any deviation from the stated purpose requires prior approval from the RBI.

12. Repayment and Redemption: Entities must adhere to the repayment schedule mentioned in the ECB agreement. Regular servicing of the loan and timely repayment are essential to maintain a good credit reputation and to ensure future access to international markets.

13. Currency Risk Management: Entities raising ECBs in foreign currencies should implement appropriate currency risk management strategies, such as hedging, to mitigate the impact of exchange rate fluctuations on their debt service obligations.

14. Refinancing of ECBs: Entities may be allowed to refinance existing ECBs, subject to conditions prescribed by the RBI. Refinancing may involve raising a new ECB to repay the old one or extending the maturity of the existing ECB.

15. Prepayment and Early Redemption: Entities may be allowed to prepay or redeem ECBs before their maturity, subject to regulatory conditions and approval from the RBI.

16. Compliance with ECB Guidelines: Entities must ensure compliance with all the guidelines and regulations issued by the RBI regarding ECBs. Non-compliance can lead to penalties and restrictions on future borrowings.

17. Reporting to the RBI: Entities raising ECBs need to submit regular reports and disclosures to the RBI, as per the prescribed formats and timelines.

18. Monitoring and Audit: Entities should establish robust monitoring and internal control systems to ensure proper utilization of the borrowed funds and compliance with ECB guidelines.

19. Consent of Lenders for Additional Borrowing: In certain cases, where a company has already availed ECB under the approval route, it needs to obtain the consent of the existing lender(s) if it plans to raise additional ECBs for the same project or purpose.

20. External Commercial Borrowings (ECB) in INR: In addition to foreign currency ECBs, the RBI has allowed Indian corporates to raise ECBs in INR. These ECBs are known as Masala Bonds. The issuer is exposed to exchange rate risk if it has foreign currency revenues, but the bonds are attractive to investors seeking exposure to the Indian market.

Conclusion:

Raising resources from international markets, especially through External Commercial Borrowings (ECBs), is a significant strategy adopted by governments, corporations, and financial institutions to meet various financial objectives. It offers opportunities for diversification of funding sources, access to cheaper capital, long-term funding, and hedging against currency mismatches. ECBs can be raised under the automatic route or the approval route, subject to compliance with RBI guidelines and reporting requirements.

However, entities must exercise caution while raising resources from international markets, as it exposes them to currency risk, regulatory compliance, and macroeconomic factors that can impact borrowing costs and repayment obligations. Diligent planning, risk management strategies, and adherence to regulatory requirements are essential to maximize the benefits of raising resources from international markets while mitigating potential risks.

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