ECB: The Cost effective way of raising funds.

The project aims to take the overview of external commercial borrowings in India and its relevant RBI guidelines. It also aims to gauge the reasons for the corporates opting for ECBs instead of domestic borrowings and the recent events where the ECBs have been raised.

Cost effective way of raising money

Tapping the vast Indian rural market through disruptive ideas The FMCG way Unleashing the inherent potential of the rural market- The FMCG way Maneuvering the Indian Rural Landscape- The FMCG Way The project aims to study the various initiatives adopted by FMCG companies in India to tap the rural markets. Further it aims to study the various business models like e-choupal and Project Shakti and their commercial and social impact on the stakeholders.

What is the impact of the changes in the ECB guidelines?

Our Banking Bureau / Mumbai November 24, 2003

Borrowing cost kicked up SURENDRA ROSHA Head of Sales, HSBC Treasury & Capital Markets The recent changes in the external commercial borrowing (ECB) guidelines issued by the ministry of finance seem aimed at restricting the inflow of foreign currency through this route and the resultant impact on foreign currency reserves and domestic liquidity. With the rupee appreciating approximately 5 per cent since the start of this year and US interest rates remaining low, foreign currency has been the preferred choice of funding for some corporates. The shortage of onshore dollars made ECBs attractive both in terms of availability and pricing. In a number of cases the foreign currency funding was left unhedged, resulting in an accretion to the RBI reserves and an increase in the domestic money supply. Apart from the reduction in the automatic route cap to $50 million, the key parts of the guidelines, which will reduce the attractiveness of the ECBs, are the revision in the maximum spread payable over Libor, the requirement on hedging and the disbarring of financial intermediaries from accessing the ECB route. The requirement to compulsorily hedge the ECB unless matched by uncovered FX receivables restricts the flexibility currently available to corporates.

In recent times corporate treasurers have been required to pro-actively manage market risks and use funding/hedging strategies in a manner that not only address the companies financial risks but also economic/business risks. For example, companies with significant export earnings can currently hedge contracted and a part of future exports forward. However, when it projects a business plan out to 3 years and sees the rupee continuing to appreciate, it may want to convert a portion of its liabilities into foreign currency as a balance sheet hedge. A manufacturer competing with imports in the domestic market may want to fund a portion of its liabilities in foreign currency to have funding costs similar to its competitor. The requirement to hedge in these and other cases will impact costs and hence competitiveness.