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BACK TO BASICS

FOREIGN CURRENCY FUNDING OPTIONS

By:
Adarsh Sachdeva,
Chief Manager & Faculty,
State Bank Academy, Gurgaon
FOREIGN CURRENCY FUNDING OPTIONS
Globalisation of economy has resulted in interlinkage of financial markets of different
countries into a common worldwide pool of funds to be accessed by borrowers and
lenders alike. No sector of the economy seems to be more global in its orientation and
operations than finance. To succeed in an increasingly competitive environment,
corporate have widened their operations to produce and sell goods across a wider
spectrum of markets. This has resulted into active trade and economic activity.

As a result of the globalization of Indian economy, cross-border controls on movement of

capital, technology, goods etc., have been liberalised. Consequently, reforms in trade,
industry, and financial and other sectors were initiated. Foreign technology, goods and
capital started flowing into the country posing a serious challenge to the high cost
domestic industry in terms of technology, quality of resources, productivity, and price-
competitiveness. It has become imperative for the domestic companies to achieve
technological and scale of operations parity with global competitors for sheer survival.
The grossly underdeveloped state of our infrastructure facilities like power, transport,
communications etc. could not obviously support this mammoth effort. Corporates need
finance to import capital goods, raw materials, technology and services. They also require
finance at the pre-shipment and post shipment stage of export. These credits need to be
available at very competitive rates of interest to enable the companies to compete in
international markets.

Our domestic financial market is beset with number of problems. First of all the money is
not enough to support large capital-intensive projects. The capital market is rather
shallow. Secondly the cost of capital is very high with real interest (inflation adjusted
nominal interest rate) ruling far above the global levels. Thirdly, the domestic banks have
meager capital base and are plagued by high NPA levels. Domestic banks suffer from
structural deficiencies, poor asset/ liability management etc. Therefore, the cost of their
intermediation is very high which they are able to meet by keeping large spreads on
loans. The domestic market has a limited product range. With a view to give level
playing field to the Corporates, Government of India has come up with the necessary
regulatory measures to help the Indian Corporate to have an easy access to foreign capital
at a much cheaper rate of interest.
Foreign Currency Funding can come in a number of ways. The borrower has many
alternative routes and various options to choose from. Some of the easily accessible
foreign currency funding options are as under:

- EQUITY ROUTE:
- Depository Receipt (ADR or GDR)
- Private Equity
- Alternative Investment Market etc.

- DEBT ROUTE:
- External Commercial Borrowings
- Trade Credits for Imports into India
- Foreign Currency Loans from FCNR (B) Funds (FCNRB Loans)
- Export Credit in Foreign Currency (PCFC, EBR)

- HYBRID ROUTE: Foreign Security (FCCB, FCEB).

The above foreign currency funding options have been discussed in the subsequent
paragraphs:

EQUITY FUNDING

Equity Funding products viz. Depository Receipt (ADR, GDR), Private placement of
equity are governed by Govt. of India’s policy on Foreign Direct Investment (FDI).

Depository Receipt (DR)

Government of India permits Indian companies to issue equity and equity related
instruments to international investors in the form of Depository Receipts (DRs), Foreign
Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds
(FCEBs).

Equity can be raised from foreign market by issue of ‘Depository Receipt’ (DR). DRs
are negotiable securities issued outside India by a Depository Bank, on behalf of Indian
company having local shares as underlying. The DR represent local rupee denominated
equity shares of the Indian company, held as deposit by a custodian bank in India. DRs
are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and
traded in the US market are known as American Depository Receipts (ADRs) and DRs
listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the
Indian context, DRs are treated as FDI and all restrictions applicable to FDI are
applicable to the DRs.

Foreign Currency Convertible Bonds (FCCB) and Foreign Currency Exchangeable

Bonds (FCEB) are also the route to raise equity (and thus treated as FDI) but as these
securities carry an element of debt also, therefore, discussed separately under the heading
of hybrid routes to foreign currency funding options.
ADR means a security issued by a bank or a depository in United States of America
(USA) against underlying rupee shares of a company incorporated in India. It is a
negotiable instrument issued by a Overseas Depository Bank (ODB) representing the
underlying ordinary shares in a non-US company. It is issued to overseas investors.
These are denominated in US $ for trading in US markets. Overseas Depository Bank
located in foreign country issues ADRs against equity shares held by Domestic
Depository (local custodian). Issuing company has to deal only with depository in
foreign country for notices etc.

First Indian company to issue ADR was Infosys. It issued ADR of $ 70 million which
were listed on NASDAQ-AMEX in March 1999.

GDR means a security issued by a bank or a depository outside India and elsewhere than
in USA against underlying rupee shares of a company incorporated in India.

A GDR is a depository receipt (DR) or certificate created by overseas depository bank

outside India and issued to non-resident investors. Such DR is issued against issue of
equity shares or Foreign Currency Convertible Bonds (FCCBs) of the issuing company.
Indian Companies generally issue GDR, which can be traded in many European
countries. GDR is denominated in dollar or some freely convertible currency. One GDR
represents one or more shares or convertible bonds.

The issuing company will deposit bonds or shares to a domestic custodian bank. This is a
bank in India which acts as custodian for the ordinary shares or FCCBs issued by an
Indian company. On such deposit, the domestic custodian bank will inform overseas
depository bank. Overseas depository bank means a bank authorized by the issuing
company to issue GDR against issue of FCCB or equity shares of issuing company.
After confirmation from domestic custodian bank, the overseas depository bank will issue
GDRs. These may be listed in an international stock exchange or ‘over the counter
exchange’ for trading outside in India.

A holder of GDR has an option to convert it into number of shares or bonds subsequently
after allotment. Till it is converted, GDR holder does not have any voting right. Once
the GDRs are converted, the shares issued are listed on any of stock exchange in India.
The GDR holder, in fact, does not hold any shares in his name. Underlying shares /
bonds issued by the Company are in the name of overseas depository bank. The overseas
depository bank also does not physically hold the shares. The shares or bonds are in
physical custody of domestic custodian bank in India as agent of the overseas depository
bank.

GDR came into picture after India decided to open up for investment from abroad.
Reliance was the first company to go to Euro market in May 1992 to raise $ 150 millions.
Later, many other companies flowed. Most of these have been listed in Luxemburg stock
exchange, which is a small bourse (stock exchange) in Europe, where cost of operations
is relatively low.
An Indian company may issue its Rupee denominated shares to a person resident outside
India being a depository for the purpose of issuing Global Depository Receipt (GDR) and
/ or American Depository Receipt (ADR). The Indian company issuing such shares has
to obtain approval from the Ministry of Finance, Government of India to issue such
ADRs and / or GDRs or is eligible to issue ADRs / GDRs in terms of the relevant scheme
in force or notifications issued by the Ministry of Finance. The ADRs / GDRs should be
issued in accordance with the Scheme for issue of Foreign Currency Convertible Bands
and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and
guidelines issued by the Central Government.

Indian companies prefer to go for GDR instead of ADR, as:

a) cost of ADR issue is prohibitive.

b) Listing fees of stock exchanges and registration fees with Securities Exchange
Commission (SEC) (a body in USA to supervise securities market similar to SEBI
in India) are very high.

c) Regulations regarding disclosure and investor protection are stringent and

onerous. Legal liability of directors can be very heavy. Directors are fully liable
to US laws.

d) Initial costs, including printing, registration, legal formalities and legal cost as
also the commission payable are very high in case of ADR against GDR.

In view of these difficulties, Indian companies are choosing indirect route to tap vast
American financial market through private debt placement from GDR listed in London
and Luxembourg. GDRs can be marketed in USA also.
Private Equity (PE)
Private Equity (PE) consists of investors and funds that make investments directly into
private companies or conduct buyouts of public companies that results in a delisting of
public equity. The investments are made by these specially created funds into companies
with good growth potential. PE funds invest at various growth stages of the company
with different parameters. These funds usually invest in unlisted entities and exit the
company either via a trade sale to a strategic buyer or another PE fund or taking the
company public. Initial Public Offer (IPO) remains the most preferred exit route for a PE
investor followed by buy back of shares. From entry to exit, these funds put additional
efforts to prepare the company for IPO, both in terms of their industry relationship as
well as business growth. In case the exit route does not materialize, promoters have to
buy back the investors stake also giving the latter a predetermined return on their
investment. In the case of liquidation of the company, in the meantime, private equity
investor holds preference over common equity shareholders.

Alternative Investment Market (AIM)

AIM is a sub-market of London Stock Exchange, launched in the year 1995. AIM allows
smaller companies to list their shares with more flexible regulatory system than is
applicable to the main market. Due to higher regulatory burden in main exchanges, AIM
is emerging as an international stock exchange.
DEBT FUNDING

Debt Funding products are governed by RBI guidelines relating to ECB, Trade Credits
for Imports (Suppliers’ Credit, Buyers’ Credit), FCNR (B) Loans, Export Credit in
Foreign Currency (PCFC/EBR).

External Commercial Borrowing (ECB)

ECB are commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit,
securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible,
optionally convertible or partially convertible preference shares) with a minimum average
maturity of three years, raised from recognized non-resident lenders like:
- International Banks and Development Financial Institutions
- Multilateral/Regional Financial Institutions (IFC, ADB etc.)
- Export Credit Agencies (ECAs )
- Suppliers of equipment
- Foreign collaborators
- Foreign equity holders

ECB guidelines are also applicable to Foreign Currency Convertible Bonds (FCCBs).

Advantages of ECBs:
- Companies which have significant export earnings take advantage of natural
hedge to reduce interest burden. Though interest rate arbitrage benefit reduces
significantly with hedging of both currency and interest.
- To the extent of the import component of capex being funded by ECB, any
variation in the foreign exchange rate will not effect the quantum of funds
required to be raised as debt.

Comparison between Rupee Debt V/s ECBs:

Parameter Rupee ECBs
Tenor (Door-to-door) Available upto 15 years Difficult beyond 7-10 years
Current Pricing 14 % - 16 % Max. 4.25% - 5.75 %
(unhedged)
Hedging costs Not applicable Interest & currency hedging
cost of 650 – 800 bps
Syndication Fairly easy Relatively difficult for large
amounts
Impact of global events Not much Pricing, risk perception and
availability get impacted
Covenants Compliance is lax Stringent compliance
required
Security Both are similar
Routes for raising ECBs:
ECB can be accessed under two routes, viz. Automatic Route and Approval Route.

Automatic Route:
- Borrower may enter into loan agreement complying with ECB guidelines with
Recognised Lender(s) for raising ECB without prior approval of RBI.
- The borrower must obtain a Loan Registration Number (LRN) from RBI
before drawing down the ECB.

Approval Route:
- Applicants are required to submit an application in form ECB through
designated AD bank to ECB Division of RBI along with necessary
documents.

ECB Financing under Automatic Route:

Eligible Borrowers:
- Corporates (registered under the Companies Act) and Infrastructure Finance
Companies except financial intermediaries
- Units in SEZ (cannot transfer or on-lend ECB funds to sister concerns or any
unit in the Domestic Tariff Area)
- NGOs engaged in micro finance activities with prescribed track record

Amount & Tenor:

- Min. Average Maturity of 3 years: ECBs up to USD 20 million during a
financial year
- Minimum Average Maturity of 5 years: ECBs above USD 20 million and up
to USD 750 million during a financial year
- Sectoral restrictions under automatic route
o Corporates in services sector viz. hotels, hospitals, software companies
are allowed ECBs up to USD 200 million or its equivalent in a
financial year for meeting foreign currency and/or Rupee capital
expenditure for permissible end-uses
o NGOs engaged in micro finance can avail ECBs up to USD 10 million
in a year

ECB beyond the above amount and tenor to be considered by RBI under
Approval Route.
Permitted End Uses:
- Investment
o Import of capital goods (as classified by DGFT)
o Implementation of new projects
o Modernization/expansion of existing production units in industrial
sector including small and medium enterprises (SME) and specified
service sector companies
o Infrastructure sector (power, telecom, roads, railways, ports, airports,
industrial parks, urban infrastructure, mining, exploration & refining,
cold storages)
o Overseas direct investment in Joint Ventures/Wholly Owned
Subsidiaries
o First stage acquisition of shares in the disinvestment process and also
in the mandatory second stage offer to the public under the
Government’s disinvestment programme of PSU shares

End Uses not Permitted:

- On-lending or investment in capital market or acquiring a company (or a part
thereof) in India by a corporate, real estate, working capital, general corporate
purpose and repayment of existing Rupee loans (except for Infrastructure
Finance Companies which are now allowed to use ECB proceeds to the extent
of 25% for liquidation of their rupee debt).

Pricing (All-in-Cost ceilings):

- RBI prescribes All-in Cost ceilings, which includes rate of interest, other fees
and expenses in foreign currency except for
o Commitment fee
o Pre-payment fee
o Fees payable in Indian Rupees
o Payment of any withholding tax in Indian Rupees
- ECBs with a maturity between 3-5 years – Max. 350 bps above 6 month
LIBOR
- ECBs with a maturity above 5 years – Max. 500 bps above 6 month LIBOR

Guarantee:
- Isssuance of guarantee, standby letter of credit, letter of undertaking or letter
of comfort by banks, Financial Institutions and Non-Banking Financial
Companies (NBFCs) relating to ECB is not permitted

Prepayment:
- ECBs up to USD 500 million may be allowed under automatic route subject to
compliance with the minimum average maturity period stipulations
- ECBs >USD 500 million may be considered by RBI under the approval route
Refinancing of an existing ECB subject to:
- Fresh ECB is raised at a lower all-in-cost and
- The outstanding maturity of the original ECB is maintained

Security:
- The choice of security to be provided to the Lender/ supplier is left to the
Borrower
- However, creation of charge over immovable assets and financial securities,
such as shares, in favor of overseas Lender is subject to FEMA Regulations

Parking of ECB Proceeds Overseas:

- Borrowers are permitted to either keep ECB proceeds abroad or remit to India
(to AD Category I banks) pending utilisation for permissible end-uses
- Proceeds parked overseas can be invested in the following liquid assets
o Deposits or CoD or other products by banks rated not less than AA(-)
by Standard and Poor/Fitch or Aa3 by Moody’s
o Deposits with overseas branch of an AD bank in India; and
o Treasury bills/ other monetary instruments of 1 year maturity having
minimum rating as indicated above.

ECB Financing under Approval Route:

Eliigible Borrowers:
- FIs dealing exclusively with infrastructure or export finance such as IDFC,
IL&FS, PFC, PTC, IRCON and EXIM Bank
- Banks and financial institutions which had participated in textile or steel
sector restructuring package as approved by GoI
- NBFCs permitted to raise ECB with minimum average maturity of 5 years,
from multilateral FIs, reputable regional FIs, official ECAs and International
banks to finance import of infrastructure equipment for leasing to
infrastructure projects
- Housing Finance Companies – only by way of FCCBs
- SEZ Developers (for providing infrastructure facility in SEZ)
- SPVs or any other entity notified by RBI, set up to finance infrastructure
companies / projects exclusively
- Multi-State Co-operative Societies engaged in manufacturing activity
- Cases falling outside the purview of the automatic route limits and maturity
period.

Permitted End Uses:

Same as under automatic route

End Uses not permitted:

Same as under automatic route
Maximum All-in-cost:
Same as under automatic route

Guarantees by banks, FIs and NBFCs:

- Normally not permitted except in the case of SME where it will be considered
by RBI on merit subject to prudential norms
- Issue of guarantees, standby L/C, letters of undertaking and letters of comfort
by banks in respect of ECB by textile companies for modernization or
expansion of textile units can also be considered.

Prepayment:
Same as under automatic route

Security:
Same as under automatic route

Parking of ECB Proceeds Overseas:

Same as under automatic route

ECB Syndication Process:

- Appointment of mandated lead Advisor / Arranger
- Preparation of Project Information Memorandum including broad term sheet
with some market flexibility
- Underwriting /Sanction process
- Road shows for target investors/ Bilateral Arrangement with Lenders
- Approach RBI for approval (submission through an Authorised Dealer
- Appointment of Domestic & International Legal Counsel
- Preparation of Financing Documents
- Allocation of Debt
- Execution of Legal Documents
- Comply with CPs and avail disbursement

ECBs – Procedural Requirements:

- For obtaining Loan Registration Number (LRN), Borrowers are required to
submit Form 83, in duplicate, certified by the Company Secretary (CS) or
Chartered Accountant (CA) to the designated AD bank
- Borrower can draw the ECB only after obtaining LRN from Department of
Statistics and Information Systems, RBI
- ECB Borrowers are required to submit ECB-2 Return certified by the
designated AD bank on monthly basis to RBI within seven days from the
close of month to which it relates
Trade Credits for Imports into India (TC)
Trade Credits (TCs) refer to credits extended for imports directly by the overseas
supplier, bank and financial institution for maturity of less than three years. Depending
on the source of finance, such trade credits include suppliers’ credit or buyers’ credit.
Suppliers’ credit relates to credit for imports into India extended by the overseas supplier,
while buyers’ credit refer to loans for payment of imports into India arranged by the
importer from a bank or financial institution outside India for maturity of less than three
years. It may be noted that buyers’ credit and suppliers’ credit for three years and above
come under the category of ECB which are governed by ECB guidelines.

AD banks are permitted to approve trade credits for imports of non-capital goods into
India up to USD 20 million per import transaction, permissible under the current Foreign
Trade Policy of the DGFT, with a maturity period upto one year (from the date of
shipment). For import of capital goods as classified by DGFT, AD banks may approve
trade credits up to USD 20 million per import transaction with a maturity period of more
than one year and less than three years (from the date of shipment). No roll-over /
extension will be permitted beyond the permissible period.

AD banks shall not approve trade credit exceeding USD 20 million per import transaction

There are all-in-cost ceilings for raising trade credits which at present are as under:
Maturity period All-in-cost ceiling over 6 months
LIBOR*
Up to one year
More than one year but less than three 350 basis points
years
*for the respective currency of credit or applicable benchmark

The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling /
processing charges, out of pocket and legal expenses, if any.

AD banks are permitted to issue Letter of Credit / guarantee / Letter of Undertaking

(LoU) / Letter of Comfort (LoC) in favour of overseas supplier, bank and financial
institution, upto USD 20 million per transaction for a period up to one year for import of
all non-capital goods permissible under Foreign Trade Policy (except gold, palladium,
platinum, Rodium, silver etc.) and up to three years for import of capital goods, subject to
prudential guidelines issued by RBI from time to time. The period of such Letters of
Credit / guarantees / LoU / Loc has to be co-terminus with the period of credit, reckoned
from the date of shipment.

Each trade credit may be given a unique identification number by the AD bank.
Supplier’s Credit

Supplier’s credit is facilitated at our foreign offices, where settlement is done within 180
days from the date of shipment. Salient features of this product are as follows:
- When the supplier is not in a position to provide the trade credit, through this
arrangement the buyer will make him agree for his usance bill to be
discounted at our foreign office, so that the buyer will eventually get the credit
for the usance period. The supplier will also get the principal amount at the
beginning of the usance period
- Importer opens LC in favour of supplier as per contract terms
- Sale contract to provide for drawing of usance bill of exchange (B/E) on
importer
- Supplier extends credit to importer
- Supplier discounts his B/E drawn on / accepted by importer with his bank
- LC to provide for reimbursement only on due date

Buyer’s Credit:

Buyer's credit is the credit availed by an Importer (Buyer) from overseas lenders i.e.
Banks and Financial Institutions for payment of his Imports on due date. The overseas
Banks usually lend the Importer (Buyer) based on the Letter of credit (a Bank Guarantee)
issued by the Importer’s (Buyer's) Bank. Most of the time, the Importer’s Bank brokers
between the Importer and the Overseas lender for arranging buyers credit. The
importer’s bank issues Letter of Comfort in favour of overseas lender, for a fee.

Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates
as against local sources of funding which are costly compared to LIBOR rates.

The proposals of Buyer’s Credit when received from the clients will be processed by the
domestic branch including obtention of the necessary approval from the concerned
authorities etc. The interest rates would be finalized in consultation with the foreign
office from where the Buyer’s Credit will be released. The domestic branch may consult
Credit Wing of IBG at Corporate Centre in the matter.
Formalities at the Indian branches:

The Buyer’s Credit would be in the books of foreign offices. But the exposure in the
rupee leg will be taken by the domestic branch. The following precautions have,
therefore, to be taken while handling such credits.

- The domestic branch has to ensure that sufficient fund based and non-fund
based limits are in place to cover the exposure of Buyer’s Credit.

- Short term Buyer’s Credit up to 6 months can be arranged on the basis of the
LC limits also, but appropriate marking has to be made in the LC limit so that the
borrower is not issued additional LC increasing the exposure.

- Buyer’s Credits for more than 6 months may be arranged either from the fund
based limits or segregating the term loan limits analysing the cash flow

- Care has to be taken to see that sufficient securities have been taken against the
above-said fund based/ non-fund based limits from which Buyer’s Credit has been
apportioned

- Commission for arranging Buyer’s Credit may be collected up front on

annualized basis, like LOU in case of foreign currency loan, depending upon the
relationship with the customer.

Reporting Arrangements:

ADs to submit consolidated monthly statements in form TC (format annexed to RBI

Master Circular on External Commercial Borrowings and Trade Credits dated
01.07.2011) covering details of approvals, drawls, utilisation and repayment of trade
credits granted by all its branches. ADs also to submit quarterly statement of
BG/LOU/LOC issued by them on behalf of import customers (format annexed to RBI
Master Circular on External Commercial Borrowings and Trade Credits dated
01.07.2011).

Note: Short term credit by way of Suppliers’ Credit or Buyers’ Credit, as envisaged
above is not available for merchanting trade or intermediary trade transactions.
Foreign Currency Loans from FCNB Funds (FCNB Loans)
Reserve Bank of India, in 1996 introduced a scheme of financing the Working Capital
and Term Loan requirements of resident customers for productive activities by way of
Foreign Currency Loans through deployment of FCNB funds of the commercial Banks.
In terms of RBI guidelines, the banks are given freedom to fix the interest rates, tenor and
purpose of the loan. These loans, however, should not be given for personal purposes and
acquisition of consumer durables. Loans under this scheme to resident constituents do not
require prior approval from RBI / GOI. Taking into account the FCNB corpus available
with us and the likely demands for loans there against, we have formulated the scheme
for such lending in our Bank and the guidelines for operating the scheme are detailed
below:

Eligible Borrowers:

The FCNB loans may be sanctioned for meeting the Working Capital and Term Loan
requirements of the customers, subject to prudential norms, credit discipline and credit
monitoring guidelines in force.

These loans may be sanctioned to the existing borrowers (manufacturing & trading units)
of the Bank rated as SB-9 and above (as per the new model). End use of funds needs to
be restricted for productive purposes with high priority to be given to manufacturers and
infrastructure projects.

Types of Facilities:

Working Capital:

FCNB loans for Working Capital will be granted by way of Demand Loan (FCNB DL).
The maturity will be the same as that permitted for Working Capital Demand Loan in
Rupees. Also, availment of the loan in broken periods is permitted.

Such loans will be within the MPBF fixed for the borrower and the Fund Based Working
Capital sanctioned by the Bank. All FCNB DLs [either as part of Working Capital
Demand Loan (WCDL) component or Cash Credit component] should be disbursed in
one lump sum and repaid in one lump sum on the due date.

FCNB Demand Loans can be for a maximum period of 12 months.

Branches may permit utilization of proceeds of FCNB DL for prepayment of WCDL

subject to the condition that the total period of WCDL and FCNB DL is the same as that
of WCDL fixed in the beginning.
Term Loan :

As per the scheme, FCNB loan for capital expenditure will be granted as Term Loan
(FCNB TL) for durations of 1 year to 5 years subject to the following (though at present,
tenor of FCNB TL is restricted to maximum of one year):

Since there is a specific limit approved by ALCO for disbursement of loans beyond 3
years which would be monitored by FD, Branch would need to obtain prior clearance
from FD, whenever they are considering such FCNB Term Loans;

In addition to the existing terms and conditions for FCNB Term Loans, the Bank will
retain the option to convert the FCNB Term Loan into a Rupee Term Loan (RTL) any
time after the expiry of 3 years from the date of the first disbursement and this would be
suitably incorporated in the relative loan documents.

The disbursements in the Term Loan may be allowed as and when the machinery /
equipment is purchased subject to other restrictions mentioned herein below.
Repayments to be made in the FCNB TL are to be fixed at quarterly / half yearly
intervals as in the case of Rupee term loans, depending on the cash flows.

Conversion of existing loans:

If an existing borrower having a Rupee Term Loan desires to convert it into an FCNB
TL, it can be permitted subject to fresh sanction / documentation. Branches may also
consider prepayment of existing Rupee Term Loans / Foreign Currency Loans (FCLs)
taken by our customers from outside sources subject to compliance of take-over norms of
the Bank, credit sanction and permission of RBI/GOI, wherever necessary. Branches
may also offer FCNB loans for canvassing business of units not banking with us.

Designated Currencies and Minimum / Maximum amounts: FCNB DL / FCNB TL can

be availed in USD, GBP, EURO and YEN, subject to availability of funds.

The amounts of each FCNB DL / FCNB TL shall now be minimum USD50,000 or

equivalent in other currencies and in multiples of USD or GBP or Euro 10,000 and YEN
1,000,000 thereafter.

To meet the needs of a large spectrum of borrowers and operational convenience the
following condition should be complied with:

- FCNB DLs may be permitted to a borrower so that at any point of time, the
number of FCNB DLs and WCDLs taken together does not exceed seven

- There shall be no restrictions on number of FCNB Term Loans.

Rate of Interest and other charges:

Rate of interest to be charged to FCNB Loan accounts vary as per credit rating of the
customers. At present, for FCNB DL it ranges from LIBOR + 4.25 % p.a. to LIBOR +
6.50 % p.a. and for FCNB TL, it ranges from LIBOR + 4.50 % % p.a. to LIBOR + 6.50
% p.a. These are the minimum and branches should endeavor to negotiate and get higher
mark-up in view of low LIBOR rates.

For FCNB DL, LIBOR shall be 6 months LIBOR in respect of loans for & upto 6 months
and matching period LIBOR for loans of more than 6 months. The base rate for FCNB
TL will be 6 months LIBOR. The interest rate on FCNB TL would be refixed after every
six months from the date of first disbursement of the loan based on prevailing LIBOR on
the material date.

All existing term loans will continue to be priced with revised spreads at the end of 2
years after disbursement as applicable in respect of Rupee term loans.

For FCNB TLs, Fund Angle Clearance are being given for 12 months. These loans shall
be rolled over at the end of 12 months, subject to availability of funds, for a further
period of maximum 12 months.

Group Heads have discretion to give concession upto 100 bps over applicable card rates
in case total requirement is more than USD 10 mn.

Withholding Tax:

As the loan will be given by a branch in India and no interest is being remitted outside
India, no Withholding Tax would be payable.

Processing Fee:

The processing fee as applicable to the Rupee loans is to be recovered in case of FCNB
loans also. In case of Working Capital loans, as the processing fee is already recovered at
the time fixing the limits, no fee is to be recovered for processing the FCNB DL.
However, when a FCNB TL is sanctioned a processing fee as applicable to the rupee term
loan is to be recovered on the rupee equivalent of the FCNB TL.

Transaction cost:

To cover the additional cost involved in arranging / monitoring FCNB loans, a

Transaction Fee of Rs.25,000/- for each FCNB DL and Rs.35,000/- for each FCNB TL
would be charged up-front to the borrower and credited to the ‘Commission Account’ at
the branch.
Funding:

Foreign Department, Kolkata will be the nodal centre for deployment of the funds
available with the Bank under FCNB Deposit scheme, in the FCNB loans to the resident
borrowers. Branches designated to handle FCNB loans will obtain prior funds allocation
from FD, Kolkata in all cases. In no case sanction of FCNB loan should be
communicated to the borrower before funds allocation clearance is obtained from FD,
Kolkata.

Time Limit for Fund Angle Clearance (FAC):

From the date of Fund Angle Clearance (FAC), 3 days are allowed for its disbursement.
If not disbursed within 3 days, the FAC will stand cancelled automatically.

Repayment of the Loans:

The FCNB DL and FCNB TL can be repaid through sale of the Foreign Currency to the
borrower at the appropriate spot or forward rates.

In case of borrowers having no forex-inflows, the exchange risk involved in repayment of

the loans is a very important factor which will affect the borrower’s liabilities and costs.
The FCNB DL and instalments on FCNB TL are to be repaid by the borrower and
remitted to FD, Kolkata on the stipulated due dates. In the event of no funds being
available in the borrower’s account, an overdraft / irregularity is to be created for
remitting the FCNB DL / instalments of FCNB TL on due dates to FD, Kolkata.

Early repayment of loan:

Prepayment of loan will be subject to payment of penalty; Penalty will be leviable, if

loan is prepaid earlier than the contracted period. Penalty will be recovered at a rate of
1.5% p.a. on the amount of loan prepaid, computed for the unexpired period of the loan.

Conduct of the Loan Account

FCNB DL has to be carved out of the MPBF already assessed and WC facilities
sanctioned to a borrower. All the parameters applicable to Working Capital Finance like
Security cover, adequate drawing power, submission of monthly stock statement,
Monthly Select Operational Data etc. should be made applicable to FCNB DL. Similarly
in the case of FCNB TL, the parameters like security cover, margin, cash flows, debt-
equity ratio etc should be made applicable.
For sanction of fresh term loan to borrower by way of FCNB TL, sanction from the
appropriate authority needs to be obtained. For conversion of existing Rupee Term Loan
(RTL) into FCNB TL, instead of approaching the sanctioning authority, following
authorities are now authorized to permit conversion of RTL into FCNB TL:

Original Sanctioning Authority Approving Authority

CCC I / MCCC and below Concerned GM
COCC I and above CGM-CAG/MCG/Circles

The regular monitoring of borrower’s liability is very crucial for orderly and safe conduct
of these FCNB loans. The liability of the borrower is to be revalued in terms of the ruling
TT selling (card) rate / forward contract rate (where applicable) on the last working day
of every month. This will enable the branch to assess whether the borrower’s rupee
liabilities (in case of customers with no forex inflows and open exposures) is beyond the
capacity of the borrower to pay / the total cost of the loan is working out to be more than
the normal Rupee loan cost of the Borrower. In such cases, Branches should convert the
FCNB loans into rupee loans (WCDL wherever applicable) under advice to the
controlling authority. A monthly review of all FCNB loans should be done at operating
branches and put up to the controlling authority. The latter may also direct the branch to
convert FCNB loans into rupee loans, where in their view the rupee liability of the
borrower exceeds borrowers’ capacity to repay.

The monthly revaluation of liability on FCNB loans as above for monitoring purposes
does not involve any accounting entry. This is distinct from the yearly revaluation to be
done at the instance of FD, Kolkata for the purpose of revaluation of General Ledger
balances at the Branch. The revaluation of the liability on a monthly basis should be
recorded in the Periodical Balancing Register at the Branch.

Branches should not allow repayment of PCFC loans, if availed by an Exporter from the
Bank, from the proceeds of the FCNB loans.

The branches should ensure that FCNB loans are on fully hedged basis, or natural hedge
exists in the form of uncovered foreign exchange receivables. In cases where hedging is
waived by the competent authority, proposal should be examined by carrying out
sensitivity analysis taking forex fluctuation into account.
Export Credit in Foreign Currency (PCFC, EBR)
Pre-shipment Credit in Foreign Currency (PCFC):

With a view to making credit available to exporters at internationally competitive rates,

authorised dealers have been permitted to extend pre-shipment Credit in Foreign
Currency (PCFC) to exporters for domestic and imported inputs of exported goods at
LIBOR / EURO LIBOR / EURIBOR related rates of interest as detailed below:

The scheme is an additional window for providing pre-shipment credit to Indian

exporters at internationally competitive rates of interest. The ultimate cost to the exporter
under the product , for upto 180 days, should not exceed 350 basis points above LIBOR /
EURO LIBOR / EURIBOR (in case of our bank, benchmark is 6 months LIBOR / EURO
LIBOR / EURIBOR, irrespective of the tenor of the loan), excluding withholding tax.

PCFC may be extended upto maximum period of 360 days from the date of first
disbursement. Extension of PCFC beyond 180 days will entail interest cost of 2% p.a.
over the original spread above 6 months LIBOR prevailing at the time of extension for
the extended period.

The instructions with regard to Rupee Export Credit apply to export credit in Foreign
Currency also mutatis mutandis, unless otherwise specified.

Rediscounting of Export Bills Abroad Scheme (EBR):

As at the pre-shipment stage, at post shipment stage also the credit can be extended in
foreign currencies, at LIBOR related rate of interest. Post shipment credit in foreign
currency can be extended under Export Bills Rediscounting (EBR). Whether pre
shipment credit has been availed of by the exporter in rupee (EPC) or in foreign currency
(PCFC), EBR can be availed in both the circumstances.

Demand bills as also the usance bills upto 6 months from the date of shipment can be
discounted under the EBR. The rate of interest under the scheme should not exceed 350
basis points above LIBOR / EURO LIBOR / EURIBOR (in case of our bank, benchmark
is 6 months LIBOR / EURO LIBOR / EURIBOR, irrespective of the tenor of the loan),
excluding withholding tax.

No withholding tax is recovered on PCFC / EBR availed by our exporter borrowers

because foreign currency funds are being raised by us through our own branches abroad.
Though PCFC and EBR may be offered in any convertible currency but we are extending
these facilities in US Dollars, Pound Sterling, Japanese Yen and Euro. Cross currency
loans are also permitted means these loans can be extended in a currency other than the
currency of invoice.

The Fund Angle Clearance (FAC) obtained from Global Markets Unit, Kolkata for PCFC
/ EBR is valid for the same day. In case of non disbursal on the very day for any reason
what so ever, branch has to obtain fresh FAC.
HYBRID FUNDING

Under the category of Hybrid Funding products, we shall be discussing Foreign Currency
Convertible Bonds (FCCB) and Foreign Currency Exchangeable Bonds (FCEB). FCCB
is regarded as quasi-equity and governed by ECB guidelines; only if FCCB is fully &
mandatorily convertible into equity within specified time, will it be reckoned as FDI.

An Indian Company or a body corporate can issue FCCB (Foreign Currency Convertible
Bonds) or FCEB (Foreign Currency Exchangeable Bonds). These can be issued and
transferred by a resident of India without approval of RBI only as per the provisions of
RBI regulations. Companies issuing FCCBs should be operating in sectors where FDI is
permitted by Govt. of India and subject to sectoral caps, if any.

Automatic route is available for issue of FCCB on same lines as available to ECB.
However, automatic route is not available for FCEB.

Foreign Currency Convertible Bonds (FCCB)

Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company
expressed in foreign currency, and the principal and interest in respect of which is
repayable in foreign currency. Presumably, date of conversion of FCCB will be
considered as date of repayment if the holder opts to obtain equity shares. Till the
conversion, interest is payable in foreign currency. If the holder does not convert the
bond, the redemption of bond has also to be done in foreign currency.

FCCB is a mix between a debt and equity instrument. It acts like a bond by making
regular coupon payments, till the conversion happens. These bonds give the bondholder
the option to convert the bond into stock at a pre decided price.

Thus, FCCB is a quasi-debt instrument issued to non-residents. Interest rate offered is

usually lower than rate on ECB. It can have ‘call’ and ‘put’ option subject to RBI
approval.

The redemption of FCCB can be made at a premium or at par or even at a discount

depending upon the coupon offered.

FCCB not exceeding US $ 750 million (within the overall limit for ECB available under
Automatic Route) can be issued by Indian company or a body corporate to a person
resident outside India as per conditions prescribed in Schedule I to Foreign Exchange
Management (Transer or Issue of any Foreign Security) Regulations, 2004. Reporting to
RBI will be required. Issue of FCCB above US $ 750 million will require specific
approval of RBI.

RBI considers proposal for buy back of FCCB, subject to certain stipulations.
Foreign Currency Exchangeable Bonds (FCEB)

FCEBs means “a bond expressed in foreign currency, the principal and interest in respect
of which is payable in foreign currency, issued by an Issuing Company and subscribed to
by a person who is a resident outside India in foreign currency and exchangeable into
equity share of another company, to be called the Offered Company, in any manner,
either wholly, or partly or on the basis of any equity related warrants attached to debt
instruments.”

The FCEB scheme has given the Indian corporates an additional avenue for raising funds
from overseas by unlocking the value embedded in the shares they hold in other promoter
group companies, without causing equity dilution. The scheme seeks to help Indian
promoters raise money abroad by issuing foreign currency bonds against the value of
their investments in shares of listed group companies. The bonds are described as
‘exchangeable’ bonds as investors abroad could exchange them into equity shares or
warrants of the listed group company before their redemption. So far, holding companies
were allowed to raise funds through foreign currency convertible bonds (FCCBs), under
which they issue their own shares to subscribers at a predetermined price. However, now
a holding company can raise foreign funds by offering its equity holdings in other group
companies in the international markets through FCEB.

Eligibility conditions for FCEBs:

• The Issuing Company shall be part of the promoter group of the Offered
Company and shall hold the equity share/s being offered at the time of issuance of
FCEB.
• The Offered Company shall be a listed company which is engaged in a sector
eligible to receive Foreign Direct Investment and eligible to issue or avail of
Foreign Currency Convertible Bond or External Commercial Borrowings.
• An Indian Company, which is not eligible to raise funds from the Indian securities
market, including a company which has been restrained from accessing the
securities market by the Securities and Exchange Board of India shall not be
eligible to issue Foreign Currency Exchangeable Bond.
• The subscriber to the Foreign Currency Exchangeable Bond shall comply with the
Foreign Direct Investment policy and adhere to the sectoral caps at the time of
issuance of Foreign Currency Exchangeable Bond. Prior approval of Foreign
Investment Promotion Board, wherever required under the Foreign Direct
Investment policy, should be obtained. Entities prohibited to buy, sell or deal in
securities by Securities and Exchange Board of India will not be eligible to
subscribe to Foreign Currency Exchangeable Bond.
End- Use requirements of FCEBs proceeds:

• Issuing Company:

The proceeds of FCEB may be invested by the issuing company in the promoter group
companies.

The proceeds of FCEB may be invested by the issuing company overseas by way of
direct investment including in Joint Ventures or Wholly Owned Subsidiaries abroad,
subject to the existing guidelines on overseas investment in Joint Ventures / Wholly
Owned Subsidiaries.

• Promoter Group Companies:

Promoter Group Companies receiving investments out of the FCEB proceeds may utilize
the amount in accordance with end-uses prescribed under the ECB policy.

• End-uses not permitted : The promoter group company receiving such

investments will not be permitted to utilise the proceeds for investments in the
capital market or in real estate in India.

Procedure for issuing FCEBs:

• Prior approval of the Reserve Bank of India is required for issuance of FCEBs
under the Approval Route for raising ECB. The Reporting arrangement for FCEB
shall be as per extant ECB policy. The Bonds can be denominated in any freely
convertible foreign currency.
• The Issuing Company shall comply with the provisions of the Companies Act,
1956 (1 of 1956) and obtain necessary approvals of its Board of Directors and
shareholders if applicable. The Offered Company shall also obtain the approval of
its Board of Directors in favour of the Foreign Currency Exchangeable Bond
proposal of the issuing company.
• The Issuing Company intending to offer shares of the offered company under
Foreign Currency Exchangeable Bond shall comply with all the applicable
provisions of the Securities and Exchange Board of India Act, Rules, Regulations
or Guidelines with respect to disclosures of their shareholding in the Offered
Company.

• Restrictions: The Issuing Company shall not transfer, mortgage or offer as

collateral or trade in the offered shares under Foreign Currency Exchangeable
Bond from the date of issuance of the Foreign Currency Exchangeable Bond till
the date of conversion or redemption. Further, the Issuing Company shall keep the
offered shares under Foreign Currency Exchangeable Bond free from all
encumbrances from the date of issuance of the Foreign Currency Exchangeable
Bond till the date of conversion or redemption.
The rate of interest payable on FCEBs and the issue expenses incurred in foreign
currency shall be within the all in cost ceiling as specified by Reserve Bank of India
under the External Commercial Borrowings policy.

Difference between FCCBs and FCEBs:

1. The essential difference between an FCCB and FCEB lies in their convertibility.
Unlike an FCCB, which is convertible into new shares of the issuing company, an FCEB
is convertible into existing shares of the offered company held by the issuing company.

2. The company that issues FCCB and the company that issues shares on conversion are
one and the same whereas the company that issues FCEB and the company whose shares
are issued on conversion are different but should belong to the same promoter group.

3. The shares issued on conversion of FCCB would be issued afresh by the issuing
company on conversion, whereas when the investor in FCEB wants shares in exchange,
he has to approach the issuing company which already holds these shares.
4. FCCBs are issued by a company to non-residents giving them the option to convert
them into shares of the same company at a predetermined price. On the other hand,
FCEBs are issued by the investment or holding company of a group to non-residents
which are exchangeable for the shares of the specified group company at a predetermined
price.
5. Finally, FCCB involves just one company whereas FCEB involves at least two
companies- the bonds are usually of the parent company while the shares are of the
operating company which must be a listed company.

Advantages of FCEBs over FCCBs:

• FCEBs help companies unlock the value of their holdings in other companies.
Simply stated, it allows companies (such as holding companies or investment
companies) that hold shares in other group companies (which are listed on the
stock exchange) to leverage on the value of their investments by borrowing on
their strength.
• It helps companies raise financing without further dilution. For instance, instead
of a listed company issuing further shares to raise capital, one of its promoter
entities may issue FCEBs on the strength of its holding in the listed company and
fund the listed company with the proceeds of the FCEB offering. This way, the
equity in the listed company would not be diluted at all, unlike in the case of
direct capital raising by the listed company.
• From a bondholder’s perspective, FCEBs entitle the bondholders to listed offered
shares which can be easily disposed off on a stock exchange as against unlisted
shares which may not be as marketable.
• FCEBs have been seen to outperform the offered shares in adverse market
situations due to the assured returns (coupon payment) and perform just as good
or even better than the underlying offered shares in an appreciating market.
 Disadvantages of FCEBs:

• The principal disadvantage of FCEB route lies in its scope. It is permissible only
in certain areas and to the extent that ECBs and FCCBs are permitted. Further
proceeds of FCEBs cannot be used for investment in the real estate sector or in
capital markets.

Notwithstanding the above, the unique and flexible nature of FCEBs have generated a lot
of interest among large Indian corporate houses looking to raise funds overseas, for
acquisitions or greenfield projects. The introduction of FCEBs is a very laudable
initiative and provides an additional avenue for Indian promoters to raise funds from
foreign investors to fund new projects or acquisitions.

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