Ecb Project

EXTERNAL COMMERCIAL BORROWINGS
EXTERNAL COMMERCIAL BORROWING

The commercial borrowings consists of:- Internal Commercial Borrowings AND - External Commercial Borrowings
1.INTERNAL COMMERCIAL BORROWINGS

1.1 INTRODUCTION Internal commercial borrowings are those borrowings, which are borrowed internally and these borrowings may be receive from the same country like any bank or any institution may borrow form same countries institution or bank. Like wise any small institution or any small-scale industry can borrow loan or make the borrowings form same countries bank.
1.2) WORKING CAPITAL FINANCE FROM BANK: -.

Working capital is an essential requirement for any business activity. Banks in India today constitute the major suppliers of working capital credit to any business activity. Recently, however, some term lending financial institution has also announced schemes for working capital financing. Before the TONDON AND CHORE committees, bank were employing different methods for assessing working capital and after the limits sanctioned were either excess of the requirement or short of them. The former led to division or overtrading while the latter to outside borrowings. The two committees have evolved definite guidelines and parameters in working capital financing, which have laid the foundations for development and innovation in the area.
1.3) BANK OVERDRAFT: Short-term borrowings of the kind made available principally by the clearing banks in the forms of overdraft is very flexible. When the borrowed funds are no longer required they can quickly and easily be repaid. It is also comparatively cheap. The banks will impose limits on the amount they can lend. The bank issue overdraft with the right to call them in a short notice. Bank advances are, in fact, legally repayable on demand, through enforcing the letter of the law on this point is often impractical since it would hardly be in the banks interest to drive its client into a dangerous financial position if that looked likely. Normally the bank assures the borrower that he can rely on overdraft not being recalled for a certain period of time, say one year or six month. Any plans that involves an overdraft or short terms loans should, therefore, refer closely to the Companys Cash Flow analysis that it is quite clear how long the funds will be needed and when they can be repaid. When credit conditions are normal, the Clearing Banks are generally prepared to lend to a client whose business sows a healthy state of profitability and liquidity. Usually, the Bank will require fixed or floating charges on assets as security for advances or in the case of private companies, to obtain a personal guarantee from the owners. Banks prefer self-liquidating loans those likely to be repaid automatically and reasonably and quickly. These might include, e.g. cash to finance a specified contract that will eventually result in cash flow for the company. Firm which carry large stocks of material may obtain a loan or an overdraft secured by pledging their stocks. The stocks are held in bond and all movements thereof are reported to the Bank. Banks assist in providing temporary funds to finance production on the assumption that the goods or products will be sold in a later season. The cost to a company of bank borrowing depends on the credit worthiness of the borrower and upon the general interest level in the market.
1.4) BRIDGE LOANS.

Bridge loans are available from the banks and financial institution when the source and timing of the funds to be raised is known with certainty. When there is a time gap for access of funds, then for speeding up of implementation of the projects, bridge loans will be provided, such loans are repaid immediately after the raising of funds. The cost of bridge loans is normally higher than the working capital facilities provided by banks. At present RBI has put a restriction on banks in giving bridge loans to curb the malpractices in capital market dealing.
1.5) PUBLIC DEPOSITS

Deposits from the public are one of the important sources of finance particular for well-established big companies with huge capital base. The period of public deposits is restricted to maximum three year at a time and hence, this source can provide finance only for a short term to medium term, which could be more useful for meeting working capital needs of the company. It is advisable to use the amounts of public deposits for acquiring assets of long-term nature unless its pay back is very short.
1.6) COMMERCIAL PAPER

The commercial paper introduced into financial market, on the recommendation of VAGHUL Committee has become a popular debt instrument of the corporate world. CP is a debt instrument for short-term borrowings, that enables highly rated corporate borrowers to diversify their sources of short-term borrowings, and provides an additional financial instrument to investors with free negotiable interest rate. The maturity period ranges from three months to less than 1 year. Since it is a short-term debt, the issuing company is required to meet dealers fees, rating agency fees and any other relevant charges. Commercial paper is short term unsecured promissory note issued by corporations with high credit rating.
ADVANTAGE OF ISSUE OF COMMERCIAL PAPER

High credit rating fetch a lower cost of capital. Wide range of maturities provided more flexibility. It does not create any lien on asset of the company. Tradability of commercial paper provides investors with exit options.
DIS-ADVANTAGES OF ISSUE OF COMMERCIAL PAPER.

Its usage is limited to only blue chip companies Issuance of commercial paper bring down the bank credit limits. A high degree of regulatory control is exercised on issue of commercial papers Standby credit may become necessary.
1.7) Unit Trust Of India:

Unit trust of India was floated in 1964 in the public sector to harness the saving from and medium income groups with an objective to make investement in equity shares and other securities of corporate sector. UTI makes investement in equity shares and as well as in fixed income bearing securities from UTI is available in the following forms: Subscription to secured long-term privately placed debentures. Underwriting of equity and debentures issue. Participation in project financing.
Participation in project financing by UTI is based on detailed appraisal carried by IDBI, IFCI, and ICICI on the lines as by Life Insurance Corporation Of India.
1.8) National Bank For Agriculture And Rural Development (NABARD)

NABARD was established in 1982 with primary objective of providing credit for promotion of agricultural, small- scale industries, cottage and village industries, handicraft and other allied activities in the rural sector. The bank does not extend any direct assistance to borrower but allows refining however, actively associated with policy formulation for integrated rural development.
1.9) The Industrial Development bank of India: The industrial development Bank Of India was established on July 1, 1964 under the act of parliament as the principal financial institution for industrial development in the country. IDBI caters to the growing and diverse needs of medium and large scale industries wit the main object of providing financial assistance and coordinating the working of institutions engaged in financing, promoting and developing industries. IDBI provides direct finance by way of loans, both in rupees and foreign currencies besides providing support by way of underwriting and direct subscription to shares/debentures and in the forms of deferred payment guarantees. It also refinances term loan given by state level institution or banks to medium scale units and rediscounts or discounts bills of exchange and promissory notes rising out of the sale or purchase of machinery and equipment IDBI extends loans to makes investments in shares and bonds of various intermediaries. In response to the growing needs of various segments of industries and on-going changes in the finance sector, IDBI has taking various steps to re-orient its business strategies and expand the range of its products and services. Instead of this IDBI also provides the Merchant Banking debentures and trusteeship to various clients
1.10) SIDBI (Small Industries Development Bank OF India)

Small Industries Development Bank Of India (SIBDI), a wholly- owned subsidiary of Industrial Development Bank Of India, set up by an Act of parliament, is the principal financial institution for the promotion, financing and development of industry in the small, tiny and cottage sectors and for coordinating the functions of the similar activities. It commenced its operation on April 2, 1990 by taking over the outstanding portfolio and activities of IDBI pertaining to the small tiny and cottage sectors. Given the apex role, the approach of SIDBI has been to supplement the efforts of existing institution, strengthening their capabilities trough financial and support services and instituting suitable co-ordination mechanism while providing assistance for the small-scale sector. While continuing with the schemes operated by IDBI under Small Scale Industries Development Fund (SIDF), the bank look activities by identifying the gaps in existing credit delivery system and divides tailor-made schemes for direct lending to small scale sector as to supplement the efforts of primary lending institutions (PLIs), which includes State Financial Corporation (SFCs) State Industrial Development Corporation (SIDCs) (including twin function IDCs), Scheduled Commercial Banks (SCBs) both in public and private sector, State Co-operative Banks, scheduled urban Co-operative Banks And Regional Rural Banks (RRBs). Under indirect assistance, assistance, assistance to small scale sector is channelised through the large network of PLIs across the country by way of refinance, bills rediscounting and resource support in the form of lines of credit in lieu of refinance etc.
2.EXTERNAL COMMERCIAL BORROWINGS

2.1) INTRODUCTION
In the emerging border-less world, comparative cost of Capital has assumed increased significance. In the Indian context, the recommendations of the Committee on "Capital Account Convertibility [CAC]" (Tarapore Committee) would be highly relevant. While Rupee has been made convertible on the Current Account, the days of Capital Account convertibility may not be far off. One of the avowed objectives of CAC is to make Available Capital at internationally competitive rates. It would, therefore, emerge that non-availability of domestic capital or availability of domestic capital at higher costs owing to the domestic market conditions, need not be a deterrent factor hindering the growth of the economy, once the various controls on cross-border flows are gradually eased. External Commercial Borrowings (ECBs), in a limited sense, seek out to bridge by ensuring availability of cross-border financing vis--vis sourcing of capital locally. ECBs should not be regarded as straightjacket solutions for easing the capital requirements of the industry by providing alternate avenues of financing but should be understood properly together with the attendant risks associated with such types of financing. The recent South East Asian economic crisis can be attributed to the unbridled approach adopted by certain countries in the matter of encouraging external sources of financing forgetting the fundamentals there of. External Commercial borrowings are one of the modes for sourcing of funds for Corporate. The Government of India has come out with guidelines for approval of external commercial borrowings. These guidelines reflect the government's desire of maintaining prudent limits for total external borrowings and at the same time give flexibility to Corporate. The guiding principles of ECB policy are to keep borrowing maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy.
EXTERNAL COMMERCIAL BORROWINGS Therefore, the borrowings raised by the Indian corporate from confirmed banking sources outside India are called "External Commercial Borrowings" (ECBs). The Reserve Bank of India has been empowered to give ECB approvals under the US $ 5 million scheme and to approve ECBs upto US $ 10 million under all other ECB windows. Corporate are now eligible for ECBs even for project related rupee expenditure up to 35% of the total project cost and are permitted to obtain credit enhancements from international banks / international financial institutions / joint venture partners for their domestic rupee denominated structural obligations.
ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment. These ECBs can therefore be raised within the Policy guidelines of Govt. of India/ Reserve Bank of India applicable from time to time.
The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, Oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Development Financial Institutions, through their sub- lending against the ECB approvals are also expected to give priority to the needs of medium and small- scale units. Applicants will be free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. Offers from unrecognized sources will not be entertained.
2.2) INTERNATIONAL MONETORY FUND Introduction: The IMF was conceived in July 1944 at an international conference held at Bretton Woods, New Hampshire, U.S.A., when delegates from 44 governments agreed on a framework for economic cooperation partly designed to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s. The IMF came into existence in December 1945, when the first 29 countries signed its Articles of Agreement. The statutory purposes of the IMF today are the same as when they were formulated in 1944. Since then, the world has experienced unprecedented growth in real incomes. And although the benefits of growth have not flowed equally to alleither within or among nationsmost countries have seen increases in prosperity that contrast starkly with the interwar period, in particular. Part of the explanation lies in improvements in the conduct of economic policy, including policies that have encouraged the growth of international trade and helped smooth the economic cycle of boom and bust. The IMF is proud to have contributed to these developments. The expansion of the IMF's membership, together with the changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively.
Purposes Of International Monitory Fund

i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment 9
EXTERNAL COMMERCIAL BORROWINGS and real income and to the development of the productive resources of all members as primary objectives of economic policy. iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
Who Makes Decisions at the IMF?

The IMF is accountable to its member countries, and this accountability is essential to its effectiveness. The day-today work of the IMF is carried out by an Executive Board, representing the IMF's 184 members, and an internationally recruited staff under the leadership of a Managing Director and three Deputy Managing Directors each member of this management team being drawn from a different region of the world. The powers of the Executive Board to conduct the business of the IMF are delegated to it by the Board of Governors, which is where ultimate oversight rests. The Board of Governors, on which all member countries are represented, is the highest authority governing the IMF. It usually meets once a year, at the Annual Meetings of the IMF and the World Bank. Each member country appoints a Governorusually the country's minister of finance or the governor of its central
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EXTERNAL COMMERCIAL BORROWINGS bankand an Alternate Governor. The Board of Governors decides on major policy issues but has delegated day-to-day decision-making to the Executive Board. Key policy issues relating to the international monetary system are considered twiceyearly in a committee of Governors called the International Monetary and Financial Committee, or IMFC (until September 1999 known as the Interim Committee). A joint committee of the Boards of Governors of the IMF and World Bank called the Development Committee advises and reports to the Governors on development policy and other matters of concern to developing countries. The Executive Board consists of 24 Executive Directors, with the Managing Director as chairman. The Executive Board usually meets three times a week, in full-day sessions, and more often if needed, at the organization's headquarters in Washington, D.C. The IMF's five largest shareholders the United States, Japan, Germany, France, and the United Kingdomalong with China, Russia, and Saudi Arabia, have their own seats on the Board. The other 16 Executive Directors are elected for twoyear terms by groups of countries, known as constituencies.
Where Does the IMF Get Its Money?

The IMF's resources come mainly from the quota (or capital) subscriptions that countries pay when they join the IMF, or following periodic reviews in which quotas are increased. Countries pay 25 percent of their quota subscriptions in Special Drawing Rights or major currencies, such as U.S. dollars or Japanese yen; the IMF can call on the remainder, payable in the member's own currency, to be made available for lending as needed. Quotas determine not only a country's subscription payments, but also the amount of financing that it can receive from the IMF, and its share in SDR allocations. Quotas also are the main determinant of countries' voting power in the IMF. If necessary, the IMF may borrow to supplement the resources available from its quotas. The IMF has two sets of standing arrangements to borrow if needed to cope with any threat to the international monetary system:
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The New Arrangements to Borrow (NAB), introduced in 1997, with 25 participating countries and institutions. Under the two arrangements combined, the IMF has up to SDR 34 billion (about $50 billion) available to borrow.
What is an SDR?
The SDR, or special drawing right, is an international reserve asset introduced by the IMF in 1969 (under the First Amendment to its Articles of Agreement) out of concern among IMF members that the current stock, and prospective growth, of international reserves might not be sufficient to support the expansion of world trade. The main reserve assets were gold and U.S. dollars, and members did not want global reserves to depend on gold production, with its inherent uncertainties, and continuing U.S. balance of payments deficits, which would be needed to provide continuing growth in U.S. dollar reserves. The SDR was introduced as a supplementary reserve asset, which the IMF could "allocate" periodically to members when the need arose, and cancel, as necessary. The SDR's value is set daily using a basket of four major currencies: the euro, Japanese yen, pound sterling, and U.S. dollar. On July 1, 2004, SDR 1 = US$1.48. The composition of the basket is reviewed every five years to ensure that it is 12
EXTERNAL COMMERCIAL BORROWINGS representative of the currencies used in international transactions, and that the weights assigned to the currencies reflect their relative importance in the world's trading and financial systems.
How Does the IMF Serve Its Members?

The IMF helps its member countries by: Reviewing and monitoring national and global economic and financial developments and advising members on their economic policies; Lending them hard currencies to support adjustment and reform policies designed to correct balance of payments problems and promote sustainable growth; and Offering a wide range of technical assistance, as well as training for government and central bank officials, in its areas of expertise
IMF Operations
The IMF has gone through two distinct phases in its 50-year history. During the first phase, ending in 1973, the IMF oversaw the adoption of general convertibility among the major currencies, supervised a system of fixed exchange rates tied to the value of gold, and provided short-term financing to countries in need of a quick infusion of foreign exchange to keep their currencies at par value or to adjust to changing economic circumstances. How in practice does the IMF assist its members? The key opening the door to IMF assistance is the member's balance of payments, the tally of its payments and receipts with other nations. Foreign payments should be in rough balance: a country ideally should take in just about what it pays out. When financial problems cause the price of a member's currency and the price of its goods to fall out of line, balance of payments
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EXTERNAL COMMERCIAL BORROWINGS difficulties are sure to follow. If this happens, the member country may, by virtue of the Articles of Agreement, apply to the IMF for assistance. To illustrate, let us take the example of a small country whose economy is based on agriculture. For convenience in trade, the government of such a country generally pegs the domestic currency to a convertible currency: so many units of domestic money to a U.S. dollar or French franc. Unless the exchange rate is adjusted from time to time to take account of changes in relative prices, the domestic currency will tend to become overvalued, with an exchange rate, say, of one unit of domestic currency to one U.S. dollar, when relative prices might suggest that two units to one dollar is more realistic. Governments, however, often succumb to the temptation to tolerate overvaluation, because an overvalued currency makes imports cheaper than they would be if the currency were correctly priced.
In addition to assisting its members in this way, the IMF also helps by providing technical assistance in organizing central banks, establishing and reforming tax systems, and setting up agencies to gather and publish economic statistics. The IMF is also authorized to issue a special type of money, called the SDR, to provide its members with additional liquidity. Known technically as a fiduciary asset, the SDR can be retained by members as part of their monetary reserves or be used in place of national currencies in transactions with other members. To date the IMF has issued slightly over 21.4 billion SDRs, presently valued at about U.S. $30 billion.
Over the past few years, in response to an emerging interest by the world community to return to a more stable system of exchange rates that would reduce the present fluctuations in the values of currencies, the IMF has been strengthening its supervision of members' economic policies. Provisions exist in its Articles of Agreement that would allow the IMF to adopt a more active role, should the world community decide on stricter management of flexible exchange rates or even on a return to some system of stable exchange rates.
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Size of International Monitory Fund

The IMF is small (about 2,300 staff members) and, unlike the World Bank, has no affiliates or subsidiaries. Most of its staff members work at headquarters in Washington, D.C., although three small offices are maintained in Paris, Geneva, and at the United Nations in New York. Its professional staff members are for the most part economists and financial experts.
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Prepayment of Indias Debt (2001-02 and 2002-03)

BORROWER Lender Amount of Prepayment USD MILLION Container Corporation of India Housing Development Finance Corporation Mumbai Port Trust ADB 43.42 209.77 Bombay Sub Urban Electric Supply Ltd. Housing Urban Development Corporation Ltd Oil & Natural Gas Corporation Oil & Natural Gas Corporation Tata Power Co. IBRD Tata Power Co. IBRD 68.57 22.31 109.31 336.00 ADB 206.77 1007.18 IBRD 303.09 1562.35 Japan 9.50 46.30 ABD And IBRD 70.07 339.65 ADB 19.66 94.36 IBRD 2.85 13.43 RS. In CRORES
2.3) WORLD BANK OR INTERNATIONAL RECOUNSTRUCTION AND DEVELOPMENT:
BANK FOR
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Introdution
IBRD is commonly referred to as World Bank. The World Banks over-arching objective is to reduce poverty and improve living standards of people in the developing World. The bank provides lending (credits in the cases of IDA and technical assistance) and non lending (policy advice on the basis of economic and sector work and increasing global knowledge and experience sharing) services to its client countries. IBRD rises most of its money from bonds and other debt securities issued in world financial markets, based on the guarantee of share capital subscription from its members.other sources of banks funds are shareholders capital and retained earnings. IBRD loans, though non-concessional, are available at relatively more favorable term than commercial sources. The repayment period for India is at present 20 years, inclusive of 5 years grace period. The bank offers three types of loans presently (1) single currency variables spread loans, single currency fixed spread loans (2) local currency loans. India was earlier borrowing under currency pool loans. Presently India is borrowing under variable spread single currency loans.
The currency rate of interest per annum on World Bank/IBRD loans is depending upon the type of loan, currency mix of loan and year of negotiation.
The World Bank and IDA make loans for high priority projects and programs in member countries to further their development programmes. These loans are made to sovereign governments or to entities enjoying the full faith and credit of sovereign governments.
At the end of 1994 over 180 billion dollars had been subscribed but of this only about 3.36 percent is paid in. the banks lending programmes is financed in part through the
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EXTERNAL COMMERCIAL BORROWINGS paid-in-capital, but mainly through commercial borrowings on the international capital market.
Strength Through Diversity

The World Bank is a specialized agency of the United Nations, devoted to economic and social development in its member countries. It now has 181 member countries, each with different historical experiences, social dynamics, and economic and political systems. The Bank's Articles of Agreement set out its broad scope of activity in economic and social development. They also establish guidelines that limit the range of its activities. In particular, the Articles state that, in all its decisions, "only economic considerations shall be relevant."
World Bank Operations

The World Bank exists to encourage poor countries to develop by providing them with technical assistance and funding for projects and policies that will realize the countries' economic potential. The Bank views development as a long-term, integrated endeavor. During the first two decades of its existence, two thirds of the assistance provided by the Bank went to electric power and transportation projects. Although these so-called infrastructure projects remain important, the Bank has diversified its activities in recent years as it has gained experience with and acquired new insights into the development process.
In transportation projects, greater attention is given to constructing farm-to-market roads. Rather than concentrating exclusively on cities, power projects increasingly provide lighting and power for villages and small farms. Industrial projects place greater emphasis on creating jobs in small enterprises. Labor-intensive construction is used where practical. In addition to electric power, the Bank is supporting development of oil, gas, coal, fuel wood, and biomass as alternative sources of energy. 18
Of the 34 very poor countries that borrowed money from IDA during the earliest years, more than two dozen have made enough progress for them no longer to need IDA money, leaving that money available to other countries that joined the Bank more recently. Similarly, about 20 countries that formerly borrowed money from the IBRD no longer have to do so. An outstanding example is Japan. For a period of 14 years, it borrowed from the IBRD. Now, the IBRD borrows large sums in Japan.
Source of Funding
The World Bank is an investment bank, intermediating between investors and recipients, borrowing from the one and lending to the other. Its owners are the governments of its 180 member nations with equity shares in the Bank, which were valued at about $176 billion in June 1995. The IBRD obtains most of the funds it lends to finance development by market borrowing through the issue of bonds (which carry an AAA rating because repayment is guaranteed by member governments) to individuals and private institutions in more than 100 countries. Its concessional loan associate, IDA, is largely financed by grants from donor nations.
The Bank is a major borrower in the world's capital markets and the largest nonresident borrower in virtually all countries where its issues are sold. It also borrows money by selling bonds and notes directly to governments, their agencies, and central banks. The proceeds of these bond sales are lent in turn to developing countries at affordable rates of interest to help finance projects and policy reform programs that give promise of success.
Although under special and highly restrictive circumstances the IMF borrows from official entities (but not from private markets), it relies principally on its quota subscriptions to finance its operations. The adequacy of these resources is reviewed every five years.
Recipients of Funding
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EXTERNAL COMMERCIAL BORROWINGS Neither wealthy countries nor private individuals borrow from the World Bank, which lends only to creditworthy governments of developing nations. The poorer the country, the more favorable the conditions under which it can borrow from the Bank. Developing countries whose per capita gross national product (GNP) exceeds $1,305 may borrow from the IBRD. (Per capita GNP, a less formidable term than it sounds, is a measure of wealth, obtained by dividing the value of goods and services produced in a country during one year by the number of people in that country.)
Structure of World Bank

The structure of the Bank is somewhat more complex. The World Bank itself comprises two major organizations: the International Bank for Reconstruction and Development and the International Development Association (IDA). Moreover, associated with, but legally and financially separate from the World Bank are the International Finance Corporation, which mobilizes funding for private enterprises in developing countries, the International Center for Settlement of Investment Disputes, and the Multilateral Guarantee Agency. With over 7,000 staff members, the World Bank Group is about three times as large as the IMF, and maintains about 40 offices throughout the world, although 95 percent of its staff work at its Washington, D.C., headquarters. The Bank employs a staff with an astonishing range of expertise: economists, engineers, urban planners, agronomists, statisticians, lawyers, portfolio managers, loan officers, project appraisers, as well as experts in telecommunications, water supply and sewerage, transportation, education, energy, rural development, population and health care, and other disciplines.
The International Monetary Fund and the World Bank at a Glance
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International Monetary World Bank Fund Seeks to promote the Oversees the economic development international monetary of the world's poorer system countries Promotes exchange Assists developing stability and orderly countries through longexchange relations term financing of among its member development projects countries and programs Assists all members- Provides to the poorest both industrial and developing countries developing countries-whose per capita GNP that find themselves in is less than $865 a year temporary balance of special financial payments difficulties assistance through the by providing short- to International medium-term credits Development Supplements the Association (IDA) Encourages private currency reserves of its members through the enterprises in allocation of SDRs developing countries (special drawing through its affiliate, the rights); to date SDR International Finance 21.4 billion has been Corporation (IFC) issued to member Acquires most of its countries in proportion financial resources by to their quotas borrowing on the Draws its financial international bond resources principally market from the quota Has an authorized subscriptions of its capital of $184 billion, member countries of which members pay Has at its disposal fully in about 10 percent paid-in quotas now Has a staff of 7,000 totaling SDR 145 drawn from 180 billion (about $215 member countries billion)
Has a staff of 2,300 drawn from 182 member countries
2.4ASIAN DEVELOPMENT BANK.
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Introdution: The Asian Development Bank (ADB) an International partnership of 59 members countries was established in 1966 with its headquarters in Manila, Philippines. India is its founder member. The bank is engaged in promoting economic and social progress of its developing countries in the Asia and public region with principle functions as follows: To make loans and equity investment for the economic and social advancement of its developing member countries. To provide technical assistance for the preparation and execution of development projects and programmes and advisory services. To response to the requests for assistance in coordinating development policies and plans of developing member countries. ADBs primary operational strategy is to assist government of India in rapid industrlization. ADB provides finances to projects aimed at improving the structure of the industrial sector, increasing its share of GDP, export earnings and employment and making more effective use of productivity capacity. The Bank may also provide the loans for big light energy programmes, transport, communication, industries and non-fuel minerals, social infrastructure and multi-secton.
ADBs Charter requires it to foster economic growth and cooperation in the region and to contribute to the acceleration of the process of economic development of the developing member countries in the region, collectively and individually. The Charter states that the operations of the Bank shall provide principally for the financing of specific projects In its initial years, ADB translated this mandate into the role of a project financing institution. This approach was based on the assumption that growth and development would result from the transfer of capital and technology to ADBs developing member countries (DMCs). For 20 years, under this paradigm, ADB successfully implemented an extensive project finance program in its DMCs. 22
ADB has adopted poverty reduction as its overarching goal, and developed a comprehensive strategy to combat poverty in the region. Building on this strategy as well as other policy initiatives, ADB has recently adopted its LTSF, which commits ADB to supporting the International Development Goals. Recognizing the important role of the private sector in development, ADB has also adopted a wide-ranging private sector development strategy.7 The Medium-Term Strategy (MTS),8 which has been submitted to the Board, provides more detailed guidance on how ADB should work with its DMCs to achieve these goals. With this, the strategic reorientation process has been completed. To remain an effective institution relevant to the changing needs of the region, ADB has continually been adapting its priorities, assistance modalities, and organizational structure, and has transformed itself from what was essentially a project financier to a full-fledged development institution. On the organizational front, major changes have included a) Creating regional vice presidencies, each with one programs and two projects departments (east and west); b) Establishing the Office of Pacific Operations (OPO); c) Merging the Office of Environment and the Social Dimensions Unit into the Office of Environment and Social Development (OESD), reporting to the President; d) Merging the Development Policy Office and Strategic Planning Unit to create the Strategy and Policy Office, (now Strategy and Policy Department [SPD]); and e) Upgrading the Co financing Division into the Office of Co financing perations; and f) Strengthening resident missions (RMs) under a new policy (2000).
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EXTERNAL COMMERCIAL BORROWINGS In response to these imperatives for change, ADB has already started to address organizational issues with the redesign of operational business processes and the RM Policy. These changes must now be carried forward in a more comprehensive way.
Organization
ADB is managed by a Board of Director, a Board of Director a President, four VicePresidents, and the Heads Of Departments And Offices. Each member country nominates one Governor and an Alternate Governor to vote on its behalf. The Board of Governors elects the 12 Directors (each with an alternate)eight representing countries within the Asia-Pacific region and four representing countries outside the region. The Board of Governors also elects the President for a term of five years, with the possibility of reelection. The President chairs the Board of Directors and follows its directions in conducting the business of ADB.
Objective and Principles of Asian development bank:

The overall objective of organizational change is to enhance ADBs development impact by strengthening its capacity to deliver its strategic agenda through a carefully planned, selective, country-focused, and technically excellent program of assistance to its DMCs and subregions. Drawing on the discussion in chapter III, a number of principles have been developed to guide the analysis of options to meet this objective. Mainstream: Governance and Capacity Building, Environmental and Social Development, and Private Sector Development. Operational departments should be responsible for addressing and delivering products for meeting these objectivesa process often known as mainstreaming. Delivery of products and services in these
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EXTERNAL COMMERCIAL BORROWINGS areas should be organizationally separated from policy development and compliance oversight. Balance Country and Sector Considerations: Country considerations and priorities should drive sector and project decisions. However, measures are also needed to ensure that sectoral expertise is preserved. The functional responsibilities of sector units should be realigned with ADBs current strategic priorities. Strengthen ADBs Regional Role and Identity: The country and sector focus should also support ADBs regional role. The organization structure should institutionalize the regional role of ADB and facilitate linkage with regional institutions. Greater Client and Stakeholder Orientation: Whatever organization structure is adopted, ADB should become a more outward-looking, client focused, and collaborative development partner. Maintain Technical Excellence and Skills: Maintenance of technical excellence is essential for effective project design and delivery. Emphasize Effectiveness and Efficiency: Development impact depends on the efficiency and effectiveness of assistance. ADB justifiably takes pride in being the most efficient of the MDBs. It is also important to find means to enhance effectiveness through structural changes that emphasize implementation and outputs that can be monitored for their impact. Maintain Checks and Balances Consistent with Effectiveness: Every organization needs a clear set of checks and balances to ensure compliance with its policies and procedures; maintain the quality of its output, and reduce the impact of conflicts of interest. However, such checks and balances should not stifle initiative or reduce the effectiveness of delivery of services to DMCs. Clarity of responsibility and Value Addition: Each separate unit and position within an organization should be justified on the basis of the value it adds to output 25
EXTERNAL COMMERCIAL BORROWINGS and should be held accountable for a unique set of results. There is great potential to streamline, increase productivity, and improve motivation by the application of the value-added principle to units, positions, and processes, all of which finally contribute to overall organizational effectiveness. Duplication of responsibility should be avoided. Ownership of Change: Organizational change must have the backing and ownership of the staff affected by it, so that staff morale is maintained and the changes can be smoothly and successfully implemented.
Procedural Aspects: 1. In processing a sector loan, the following procedures should be followed:
(i) The borrowing DMC should submit to the Bank (a) an acceptable medium-or long-term sector/subsector development plan or program; (b) a statement on sector policies that affect the development of the sector/subsector concerned; and (c) an assessment of the technical and managerial capabilities of the sector institutions to develop, process, and implement projects. (ii) Subject to general acceptability to the Bank of the sector plan, policies, and institutions, and prima facie justification of Bank assistance, the Bank will send a fact-finding mission to hold preliminary discussions with the borrower; to assess broadly the sector development plan, the financing needs of the sector, and the adequacy of the institutional arrangements available or proposed for implementing the sector loan; and to identify key sector policy issues including cost recovery aspects. (iii) Based on the findings of the mission and after a management review meeting has cleared the loan proposal, an appraisal mission will be dispatched to the field. The mission should determine the scope and amount of the proposed sector loan; examine the availability and types of subprojects for financing; assess the technical and managerial capabilities of the executing agencies, and whether technical assistance is 26
EXTERNAL COMMERCIAL BORROWINGS needed; formulate the relevant technical, financial, and economic criteria for selection and appraisal of subprojects; agree on the threshold for approval of subprojects by the Bank; assess the institutional risks in regard to processing and implementing capabilities; and assess the scope for resolution of key policy issues, including cost recovery aspects, necessary to achieve sectoral objectives.
2. The processing stages applicable for a project loan1 will also apply to sector loans. Supervision and Monitoring
Direct supervision of subproject implementation and monitoring of subproject operation and performance are the primary responsibility of the borrower or its executing agency. Bank staff will, however, review the execution of subprojects on a selective basis. Bank staff will also monitor, at appropriate time intervals, the capability and performance of the executing agency, and any change in circumstances that would have a bearing on the sector development program in general and on the implementation and operation of the sector projects in particular.
Disbursement
The Bank's standard disbursement procedures are normally used. For qualified executing agencies, the Bank may agree to the use of an imprest account for payments of goods and services related to subloans or subprojects, not exceeding six months' estimated expenditures; statement of expenditures procedures up to the free limit for subloans may also be used.
Lending and Re-lending polices: Article 9 of the Bank's Articles of Agreement (the Charter) states that the Bank's lending operations will consist of ordinary operations and special operations; the former are financed from the ordinary capital resources (OCR) and the latter from the
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EXTERNAL COMMERCIAL BORROWINGS Special Funds resources. Articles 19 and 20 of the Charter describe the establishment and utilization of Special Funds resources. The Asian Development Fund (ADF), established in 1974, is a Special Fund under the Charter for carrying out the Bank's concessional lending operations.2
Eligibility for and Allocation of ADF Assistance

DMCs are classified by the Bank into three Groups (A, B, and C) primarily on considerations of gross national product (GNP) and debt repayment capacity. 3 The eligibility of a DMC for ADF resources is broadly related to the Group to which it belongs. In principle, Group A countries are fully eligible for ADF financing, Group B countries are eligible for limited amounts in particular circumstances, and Group C countries are not eligible. Special consideration is given to certain Pacific island DMCs in determining their eligibility for ADF resources. While ADF eligibility criteria have remained unchanged since the establishment of the ADF, the changing economic environment in certain DMCs, together with the availability of ADF resources, determines the actual allocation of ADF resources from time to time.
Terms of Lending
ADF loans for ADF-only countries have a fixed repayment period of 40 years including a grace period of 10 years. Principal repayment is at the rate of 2 percent of the total amount of principal outstanding each year for the first 10 years after the grace period, and 4 percent a year thereafter. ADF loans to OCR/ADF blend countries have a repayment period of 35 years including a grace period of 10 years; the principal repayment is at the rate of 2.5 percent of the total amount of principal outstanding each year for the first 10 years after the grace period, and 5 percent a year thereafter. There is a service charge of 1 percent for ADF loans, payable on the principal amount disbursed and outstanding from time to time, but no commitment fee.
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EXTERNAL COMMERCIAL BORROWINGS The terms of loans committed from ADF resources may be adjusted to reflect substantial changes in individual countries' economic circumstances. Accordingly, repayments of principal on an outstanding ADF loan to a particular country will be increased by 100 percent of the originally scheduled amount if (i) the per capita GNP of the country has remained above the ADF eligibility benchmark for five consecutive years, and (ii) the country has achieved the capacity to repay debt on OCR terms. In lieu of increasing repayments of some or all remaining principal, the borrower may request the payment of interest at an annual rate agreed upon with the Bank on the loan amount disbursed and outstanding, provided that the resulting grant element would be the same as the one resulting from increasing the remaining principal repayments by 100 percent. In no case will an adjustment of terms be considered during the 10-year grace period. If after such an adjustment a country experiences economic deterioration, the Bank will have the flexibility to allow the country to revert to its original repayment schedule and service charge. The standard ADF terms will apply to all lending modalities, including project and program loans, supplementary loans, and technical assistance loans.
Re-payment of Loan
A borrower can repay all or part of a loan in advance of the maturity specified in the loan agreement by giving notice to the Bank 45 days in advance (this can be reduced or waived by the Bank) and upon payment of all accrued service charges. 12 On the date of prepayment of only a portion of the loan, there should not be outstanding any portion of the loan maturing after the portion to be prepaid.
2.5) FIXED-RATE BORROWINGS INCLUDES:
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1. BUYERS CREDIT 2. SUPPLIERS CREDIT 3. FIXED-RATE LOANS. 1) Buyers Credit

Under Buyers credit arrangements, a specific Long-Term loans is granted by a designated lending agency in the exporters country to the buyer in the importer country against a guarantee by an acceptable bank or financial institution. The supplier receives payment for the exports on his delivering to the lending agency the requisite documents specified in loan agreement and the relative commercial contract. The lending agency realizes the payment from buyer (importer) in installment as and when they fall due. Ordinarily, the period of credit is reckoned as the duration form the date of completion by the supplier of his obligation under the contract to the date of final payment by the buyer under the credit.
Supplier Credit
Suppliers Credit, on the other hand, is extended to the suppliers (exporter) by the financial institutions (in the exporter-country) to finance his deferred receivables. The buyer required to provide the requisite guarantee from an acceptable bank or financial institution in the importer country. Credit may also be extended by the supplier (exporter) directly to his buyer (importer) on the deferred payment terms against his providing guarantee as above. In this case, the supplier will realies the precedes for his exports by the discounting the bills of exchange (Drawn on and accepted by buyer) with his bank or the designated government agency in his country. Such credits, however, are not really suppliers credit in technical sense. Technically both suppliers credit and buyers credit are extended by the lending agency in the exporters country; when it is granted to the supplier (exporter), it is a suppliers credit and when it is granted to the
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EXTERNAL COMMERCIAL BORROWINGS buyer (importer), it is buyer credit. The credit extended by the supplier directly to his buyer is in the nature of trade credit.
Fixed-Rate Loan
In addition to above two methods, fixed-rate loans can also be raised through commercial banks. Such loans are normally arranged for a period upto 8 years and are priced at a specific spread above the going rare is concerned country of the chosen currency.
Comparative Cost Of Advantage.

Of the above three type of credit, suppliers credit may, in many cases, prove to be more expensive as the supplier is likely to add a premium in the price quoted for the goods or in the rate of interest so as to compensate him for the additional cost incurred by him in the process. As against this buyers credit may be relatively as the supplier under this arrangement is paid of immediately and the lender realises the payment from buyer as per agreed terms. The interest rate quoted on the fixed-rate loan by the commercial banks depends upon the comparative edge of the concerned bank in the particular Euro-currency market.
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2.6) INTERNATIONAL DEVELOPMENT ASSOCIATION: What is International Development Association?

The International Development Association (IDA), established in 1960, is the part of the World Bank Group that provides long-term interest-free loans (credits) and grants to the poorest of the developing countries. It does this to support economic growth, reduce poverty and improve living conditions. IDA is now the single largest source of donor funds for basic social services in the poorest countries. In the 12 months to June 30, 2003, IDAs support for projects was targeted at human development such as education, health, social safety nets, water supply and sanitation (44%), infrastructure (26%), and agriculture and rural development (11%). IDA, the Soft-Loan affiliate of the bank, depends almost entirely on contributions made from time to time by the wealthier member governments for its financial resources, repayment for earlier credits and transfer from the net income of IBRD. Being the Soft Loan counterpart of the bank, IDA has concentrated its lending in social sectors consisting of poverty reduction, human development and agricultural/ rural sector, each accounting for about a third of total of IDA commitments in recent years. The other sectors of funding have been infrastructure, economic adjustment and natural resources.
Which countries are eligible to borrow IDA resources?

Following three factors determine whether countries are eligible for IDA assistance: Relative poverty, defined as Gross National Product (income) per person below an established threshold, currently US$865 per year. Lack of creditworthiness to borrow on market terms and therefore a need for concessional resources to finance the country's development program.
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EXTERNAL COMMERCIAL BORROWINGS Good policy performance, defined as the implementation of economic and social policies that promote growth and poverty reduction. Some countries, such as India and Indonesia, are eligible for IDA assistance due to their low per person incomes, but are also creditworthy for some IBRD borrowing. These countries are known as "Blend" borrowers.
Where do IDA resources come from?

The largest source of IDA resources is new contributions from donor countries. This accounts for about $13 billion of approximately $23 billion in resources which will be made available to IDA borrowers during the three year period of IDA13. The second largest source is internal resources, which include repayments from graduated and current IDA borrowers, investment income, and other resources including residual resources from past replenishments. The bulk of internal resources are repayments, which amount to approximately $4 billion in IDA13. An additional source of funds is transfers from IBRD net income, which will total about $900 million in IDA13. The largest pledges to IDA13 were made by the United States, Japan, Germany, United Kingdom, France, Canada and Italy. Combined, these countries account for about 70% of donor contributions to IDA13.
Performance Ratings
Every year World Bank staff assesses the quality of each borrower's policy performance on the following parameters.
Economic Management Structural Policies Policies for Social Inclusion/Equity Public Sector management and Institutions
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EXTERNAL COMMERCIAL BORROWINGS Finally, the performance assessment also takes into account the performance of the country's active project portfolio performance. The combined rating is scaled up or down depending on the strength of the country's performance.
Allocation Process
The allocation of IDA's resources is determined primarily by each borrower's rating in the annual country performance and institutional assessment. In addition, the IDA14 Agreement recommends that because the acceleration of economic and social development in Sub-Saharan Africa remains foremost among IDA's priorities, these countries should receive priority in the allocation process, provided that policy performance warrants it. Finally, for borrowers that are eligible for both IDA and IBRD funds ("Blend countries"), allocations must take into account those countries' creditworthiness for and access to other sources of funds as well as their ability to use IDA resources effectively to tackle poverty. Individual country performance-based allocations serve as an anchor for the formulation of Country Assistance Strategy (CAS) lending programs.
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2.7) International Finance Syndication Of Loans: International finance plays a very important role in financing the cost of capital of projects the corporate sector. International finance in Indian private business has been encouraged by the government in a selective and phased manner. After independence the inflow took shape of collaboration and foreign loans and grant on government basis from different countries as also international agencies like International Bank For Reconstruction and development (IBRD) and International Development Association (IDA) are mainly utilize for financing the public sector projects and meeting the countries deficit. Foreign capital in private company came through investment made by multinational corporation (MNCs) in Indian subsidiaries. In 1973, Govt. of India enacted Foreign Exchange Regulation Act (FERA) with a view to synchronizing the inflow of foreign investment with the changing need of the country. Today, international finance for the development of industry in India is coming through many channels viz., Bilateral arrangement of Government as discussed above, all India financial Institutions, Foreign Banks operating in international markets, Indian Banks operating in international market. All India Financial Institutions raise their resources in foreign currencies to enable the Indian entrepreneurs the import of capital goods, technical know-how and technology in India for accelerating the pace of industrial development. These institutions raised the resources in foreign currencies through prescribed modes. Besides the above, finance in international market is being arranged by private organisations with the permission of Central Govt. through bond issue or syndicated loan arranged through Commercial Banks and Foreign Banks.
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2.8) INTRNATIONAL FINANCE MARKET :

In international financial market, the borrow from one country may seek lenders in other countries in specific currencies which need not be of the participant country. In International Finance market, the availability of foreign currency is assured under four main systems: I. Euro Currency Market; II. Export Credit Facilities; III. Bond Issue, and, IV. Financial Institutions
I. Euro Currency Market

Here funds are made available as loans through syndicated Euro credits or instruments known as floating rate notes (FRNS). Interest rates very every six months based on London-inter bank offered rate (LIBOR). Syndicated Euro currency bank loan has developed into one of the most important instruments for international lending. Syndicated Euro credit is available through instruments viz., Term Loan Revolving Line Facility.
II Export Credit Facility:

Export Credit facilities are made available by several countries through an institutional frame work in which EXIM Banks play a prominent role EXIM of India is playing a significant role in financing export and other off-shore deals.
III.Bond Markets:
International bond market provided facilities to raise long term funds by using different types of instruments. The bond market is generally known as Euro bond market
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IV Financial Institution:
UN Agency Financial Institution Viz. IMF of World Bank and its allied agencies, IFC(W), ADB, etc. provides finance foreign currency.
New International Instruments:

Swap is an international finance market instruments for managing funds. The basic concept involved in Swaps is matching of difference between spot exchange rate for a currency and the forward rate. The Swap rate is the cost of exchange one currency into another for a specified period of time. The Swap will represent an increase in the value of forward exchange rate. The Swap will represent an increase in the value of the forward exchange rate (premium of a decrease discount). There are main three types of Swaps (a) interest Swap (b) currency Swap (c) combination of both. Nonetheless, the amount of foreign direct investment in these has been rising over the past few years. To attract funds from foreign investors, well-functioning domestic financial system must exist and particularly interest rates need to be market determined. Two factors viz. lack of credit worthiness and standards of investor protection on domestic financial market prevent fuller utilization of international financial markets by developing countries. International financial markets offer developing countries the possibilities of attracting the funds they need for their development. The share of development countries utilization of international bonds is negligible.
Syndicated Eurocurrency Loans:

The Eurocurrency market refers to the availability of a particular currency in the international financial market outside the Home country of that currency. For example, the Eurodollar market refers to the financial market for US dollars in England, France, West Germany, Hong Kong and other financial centres outside the
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EXTERNAL COMMERCIAL BORROWINGS US. The Eurodoller borrowing may be evidence by issue of commercial paper in the form of promissory notes, or by subscription to bond/debentures or it may be syndicated loan type.
Main Objectives of Syndication (Borrower point of view)

Large sums is arranged without delay and at least cost. Gets better introduction to enter into international loan market without much difficulty. Funds are made available easily for meeting balance of payment deficit and for financing large industrial projects. The borrower is allowed to select the length of the roll over period and in choosing different currencies to repay or cancel agreement after a short notice period without penalty.
Lenders point of view

It helps the bank to share large credits with other bank, to finance many borrowers. Different size banks can participate. It provides more profitability to banks as cost are relatively low. Syndicated loans is under-written by a small group banks which resell portions of the commitments to other banks.
Type of Euro-bond market instruments- There are four types of Eurobond instrument Viz.
1. Straight-debt Eurobond carrying a fixed rate of interest. 2. Convertible bonds having a fixed rate of interest with option of conversion into equity of the borrowing company. 3. Currency option bonds, giving the option of buying them into one currency while taking payments of interest and principle in another.
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EXTERNAL COMMERCIAL BORROWINGS 4. Floating rate notes, where rate of return is adjusted at regular intervals to reflect changes in short-term money market rates. During the last more than four decades the syndicated loan market, has developed into a vital source of foreign capital and the major international banks have syndicated to provide billon of dollars worth of foreign capital to finance medium term requirements of five to eight years for all categories of borrowers comprising governments, public and private sectors.
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2.9) INTERNATIONAL FINANCE CORPORATION: INTRODUCTION

The International Finance Corporation (IFC) is a member of the World Bank Group, which also includes the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), and the Multilateral Investment Guarantee Agency (MIGA). IFCs business is investment in private sector projects through loans, equity investment, and other financial instruments. It is IFC policy that all its operations are carried out in an environmentally and socially responsible manner. To this end, IFC projects must comply with applicable IFC environmental, social and disclosure policies. In addition, IFC applies World Bank Group environmental, health and safety guidelines to all projects. In sectors where no appropriate IFC policies or guidelines exist, IFC applies relevant internationally recognized standards. Furthermore, the project sponsor must ensure compliance with host country requirements. IFCs client base and project cycle are different from those of the World Bank. IFCs environmental and social policies, while harmonized with World Bank policies, are adapted to the private sector nature of IFCs business. IFC reviews prospective projects for soundness before it invests, focusing on economic, financial, technical, legal, environmental and social issues during the project appraisal process. This environmental and social review procedure has been prepared for IFC staff and project sponsors for the review of a prospective project. A separate environmental procedure applies to small projects approved under delegated authority to management (e.g., Africa Enterprise Fund).
IFCs Environment and Social Development Department is responsible for the environmental and social review, clearance and supervision of projects in a manner consistent with the requirements contained in this review procedure. The Director of the Environment and Social Development Department reports to IFCs Executive 40
EXTERNAL COMMERCIAL BORROWINGS Vice President. In addition, to achieve better integration of environmental and social considerations within IFC operations and to ensure high performance standards, an IFC Vice President has corporate oversight for environmental and social issues and disclosure matters. The procedure: (a) discusses applicable environmental and social policies; (b) outlines applicable environmental and other guidelines; (c) describes the project cycle which IFC uses in evaluating a prospective project and highlights where in the cycle IFC Environment and Social Development staff are required to provide input; and (d) details the procedures that IFC staff must follow to ensure that projects meet IFCs commitment to environmentally sustainable and socially responsible projects.
Polices Of International Finance Corporation

IFC environmental and social policies are fundamental to the project appraisal, approval and supervision process. Applicable operational policies are: OP 4.01, Environmental Assessment; OP 4.04, Natural Habitats; OP 4.09, Pest Management; OP 4.10, Indigenous Peoples (forthcoming); OP 4.11, Safeguarding Cultural Property in IFC-Financed Projects (forthcoming); OP 4.12, Involuntary Resettlement (forthcoming); OP 4.36, Forestry; OP 4.37, Safety of Dams (forthcoming); and OP 7.50, Projects on International Waterways.
Description of Policies of International Finance Corporation Environmental Assessment: IFC policy on environmental assessment (EA) states that all projects proposed for IFC financing require an EA to ensure that they are environmentally and socially sound and sustainable. EA is a process whose breadth, depth and type of assessment varies according to the type of project. Various instruments are used to perform the EA depending on the complexity of the project. They include: an environmental impact assessment (EIA), an environmental audit, a hazard or risk assessment, and an
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EXTERNAL COMMERCIAL BORROWINGS environmental action plan (EAP). The policy requires that all IFC projects be categorized. Categories are: A, B, C, and FI. Definitions of each of these categories are described later in the procedure. OP 4.01 also sets forth the minimum requirements for public consultation and public disclosure for projects.
Natural Habits: This policy affirms IFCs commitment to promote and support natural habitat conservation and improved land use, and the protection, maintenance, and rehabilitation of natural habitats and their functions in its project financing. IFC does not support projects that involve significant conversion or degradation of critical natural habitats.
Pest Management: IFC supports the use of biological or environmental control methods rather than the use of pesticides where there is a need for pest management. Where pesticides are required, this policy sets forth the criteria for their use.
Indigenous People: [Forthcoming] Pending finalization of this OP, IFC projects must comply with the World Banks OD 4.20, Indigenous Peoples, as appropriate in a private sector context.
Safeguarding Cultural Property in IFC Financed Projects: [Forthcoming] Pending finalization of this OP, IFC projects must comply with the World Banks OPN 11.03, Cultural Property, as appropriate in a private sector context.
Involuntary Restatements: [Forthcoming] This policy is applied wherever land, housing or other resources are taken involuntarily from people. It sets out the objectives to be met and procedures to
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EXTERNAL COMMERCIAL BORROWINGS be followed for carrying out baseline studies, impact analyses, and mitigation plans when affected people must move or lose part or all of their livelihoods. An annex to OP 4.30 presents the outline for a Resettlement Plan, the key document to be prepared by the project sponsor.
Safety Of Dames: This policy sets forth IFCs requirements for projects where dams are to be constructed. The owner of a dam has full responsibility for the safety of the dam. IFC requires that dams be designed and constructed by experienced and competent professionals. For large dams (over 15 meters high) and dams between 10 and 15 meters that present special design complexities, IFC requires reviews by a panel of independent experts, preparation of detailed plans, and periodic safety inspections. The policy covers mine tailings dams and dams containing other material such as ash from power plants, as well as water storage dams.
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Monitoring and Supervision
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IFC uses the term "supervision" differently from the Bank, due to differences in project cycles of the two institutions. Accordingly, the Banks OD 13.05 Project Supervision does not apply to IFC. IFC monitors the environmental and social performance of projects in its investment portfolio. Project monitoring usually occurs in one or more of the following ways: Supervision missions carried out by the Investment Department and the Technical and Environment Department; and/or Project site visits by staff of the Environment Division. The frequency of the site visits depend on the environmental and social complexity of a project. The investment officer, in cooperation with the technical specialist and after consultation with the environmental and social development specialists, is responsible for ensuring that supervision reports include information on the project companys compliance with environmental and social requirements. The investment officer is also responsible for ensuring that annual environmental monitoring reports are provided to the Environment Division as required in the legal documentation for the project. The Environment Division is responsible for reviewing such reports and determining whether the project companys compliance with environmental and social requirements is satisfactory. In the case of non-compliance, the Environment Division discusses an appropriate course of action with the Investment and Legal Departments and specialists in the Technical and Environment Department. The investment officer notifies the project company of this action and any necessary follow-up requirements. The investment officer is responsible for follow-up with both the project company and the Environment Division until the non-compliance situation is resolved. Project Supervision Reports (PSRs), which IFC prepares at least annually, must include a section on environmental and social compliance with regard to covenants in the investment agreement. In addition, the PSR must state whether the Environment Division has received the Annual Monitoring Report (as required in the investment
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EXTERNAL COMMERCIAL BORROWINGS agreement), the date submitted to IFC and the date reviewed by the Environment Division.
Evaluation
During the course of selected projects an Investment Assessment Report (IAR) is prepared which summarizes the evaluations of the actual environmental and social impacts of the project against the impacts anticipated in the EA report, and assesses the effectiveness of the mitigating measures. The Environment Division provides input to the IARs and signs off on the relevant draft text and attendant project performance ratings.
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2.10) AMERICAN DEPOSITORY RECEIPTS (ADRs) AND GLOBEL DEPOSITORY RECEIOTS: INTRODUCTION
American Depository Receipts, more popularly known as ADRs, are US Dollar denominated equity instruments widely traded in US financial markets. While GDRs are technically tradable world over, in reality, it is seen mostly traded only on the Luxembourg Bourse and thus catering to the European markets only. With GDRs only, it is becoming difficult for the corporates to penetrate the US markets. Fl, Irther, US markets are too big and specialised to be ignore. However, the ADR route has a set of procedural formalities to be undertaken. Issuance of ADRs require strict compliance with the guidelines issued by USD Security Exchange Regulation Commission, the counterpart of SEBI in India. Trading on ADRs could be done only by qualified institutional buyers, known as QIBs, as required under Section 144 A of Security Exchange Regulation Commission. Deposit receipts issued by a company in the USA (United States Of America) is known as American depository receipts (ADRs). Such receipts have to be issued in accordance with provision stipulated by the securities and exchange commission of USA (SEC) which are very stringent. An ADR generally created by the deposit of securities of a non-united states company with custodian bank in the country of incorporation of the issuing company. The custodian bank informs the depository in the United States that the ADRs can be issued. ADRs are United Stated Dollars denominated and the traded in the same way as are the securities of United States companies. The ADR holder is entitled to the same rights and advantages as the owners of underlying securities in the home country. Several variations on ADRs have developed over time to meet more specialized demands in different markets. One such variations is the GDR which are
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EXTERNAL COMMERCIAL BORROWINGS identical in structure to an ADR, the only difference being that they can be traded in more than one currency and within as well as outside the United State.
There are two types of ADRs 1. Unsponsored ADRs:

These are issued without any formal agreement between the issuing company and the depository, although the issuing company must consent to the creation of the ADR facility. With Unsponsored ADRs, certain costs, including those associated with disbursement of dividend, are borne by the investor. For the issuing company, they provide a relatively inexpensive methods of accessing the United States capital markets (especially because they are also exempt from most reporting requirements of the securities and Exchange commission).
2. Sponsored ADRs:
These are created by a single depository which is appointed by the issuing company under rules provided in a deposit agreement. There are two board types of sponsored ADRs those they are restricted with respect to the type of buyer which is allowed, and are therefore privately placed. And those that are unrestricted with respect to buyer and are publicly placed and traded. Restricted ADRs are allowed to be placed only among selected accredited investors and exempt from reporting requirement of securities and exchange commission and not even registered with it. Restricted ADR issues are sometime issued by companies that seek to gain some visibility and perhaps experience in the United States capital markets before making an unrestricted issue.
The major advantages and salient features of GDR are as under:

For the issuing company, it does not undertake any foreign exchange risk as the transaction is reflected in its books only on Rupee terms. 49
Issue of GDR enhances the corporate image of the Company in the international financial circles as the Company becomes more visible. GDR issues are a step in the direction of becoming an established global player. With a view to initially attract the potential investors, the pricing of the GDRs is done at a discount to the domestic prices. The discount to domestic prices is also on account of the fact that rupee has been constantly depreciating against the US dollar over a period of time. However, on account of risk-reward perceptions on the Indian papers, Fils have been showing an increased appetite for Indian scrips. This particular phenomenon has resulted in certain GDRissues being quoted at a premium at the time of issue stage itself. GDRs are manifestation of the interest in Indian scrips by overseas investor community. The overseas investors are not normally concerned with the day-to-day running of the company or acquiring management stake. They are more interested in securing pest returns on their investments by way of capital appreciation at the time of redemption. Since GDR holders do not appear in the books of the company as equity-holders, they are not subject to the regulatory control span of authorities like SEBI (Security Exchange Board of India) etc., unlike Plls who make direct investment into Indian papers and thus beer the currency fluctuation risk as well. Despite all the upheavals, be it economic or political, India continues to remain a relatively safe haven in attracting direct/indirect investments. The liquidity of GDRs is as good as the liquidity of the domestic shares of the company concerned. Generally, the market has witnessed linear relationship in the movements of GDR and domestic share prices for a given Company. Of course, any abnormal behaviour between the two markets will give scope to arbitrage opportunities.
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Some of the important guidelines governing GDR issues are summarized as under: TRACK RECORD
The issuing Company should have a consistent track record of good performance, financial or otherwise, for a period of at least the immediately preceding three years. This condition could be considered for relaxation in case of companies engaged in infrastructure projects like power, telecom, petroleum exploration, ports, air-ports, roads etc.
APPROVALS
Euro-Issues [including GDRs and FCCB (Foreign Currency Convertible Bond)] are regarded as direct foreign investment. Wherever such stakes are in excess of 49%, then FIPB (Foreign Investment Promotion Board) approval would be necessary before taking up with the Ministry of Finance.
END-USE Financing capital goods imports:

Capital expenditure including domestic purchase/ installation of plant, equipment, building and investments in software development Pre-payment or scheduled repayment of earlier external borrowings Investment abroad as approved by the competent authorities
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Equity investment in JV (Joint Venture)/WOS (Wholly Owned Subsidiary) .in India It would be incumbent upon the company to submit duly certified copies of the quarterly utilisation statements signed by the Auditors.
Foreign Investment through ADRs/GDRs, Foreign Currency Convertible Bonds (FCCBs) is treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. There is no such restriction because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 per cent/51 per cent/74 per cent as the case may be. There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements. In addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.
GDR end-uses will include:

Financing capital goods imports;
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EXTERNAL COMMERCIAL BORROWINGS Capital expenditure including domestic purchase/installation of plant, equipment and buildings and investments in software development; Prepayment or scheduled repayment of earlier external borrowings; Investments abroad where these have been approved by competent authorities; Equity investment in JVs/WOSs in India. However, investments in stock markets and real estate will not be permitted. Up to a maximum of 25 per cent of the total proceeds may be used for general corporate restructuring, including working capital requirements of the company raising the GDR. Currently, companies are permitted to access foreign capital market through Foreign Currency Convertible Bonds for restructuring of external debt that helps to lengthen maturity and soften terms, and for end-use of funds which conform to the norms prescribed for the Government for External Commercial Borrowings (ECB) from time to time. In addition to these, not more than 25 per cent of FCCB issue proceeds may be used for general corporate restructuring including working capital requirements. FCCBs are available and accessible more freely as compared to external debt, and the expectation of the Government is that FCCBs should have a substantially finer spread than ECBs. Accordingly, the all-in costs for FCCBs should be significantly better than the corresponding debt instruments (ECBs). Companies will not be permitted to issue warrants along with their Euro-issue. The policy and guidelines for Euro-issues will be subject to review periodically.
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Markets of GDRs
GDRs are sold primarily to institutional investors Demand is likely to be dominated by emerging market funds Switching by foreign institutional investors from ordinary shares into GDRs is likely Major demand is also in UK, USA (Qualified Institutional Buyers) South East Asia (Hon Kong, Singapore) and to some extent continental Europe (principally France and Switzerland)
Profile of GDR Investors

The Following parameters have been observed in regard to GDR investors: Dedicated convertible investors Equity investors who wish to add holdings on reduced risk or who require income enhancement. Fixed income investors who wish to enhance returns.
Retail investors: Retail investment money normally managed by continental European banks which on an aggregate basis provide a significant base for Euro convertible issues.
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Global Depository Receipt with Warrant (GDR with Warrant):

These receipts were more attractive than plains GDRs in view of additional value of attached warrants. The government of India has however, prohibited Indian company to issue GDRs with warrant as per the guidelines issued on 28.10.94. The mechanics of a GDR issue may be described with the help of following diagram.
company issues ordinary shares kept with custodian/depository banks against which GDRs are issued to foreign investors
Characteristics:
Holders of GDRs participate in economic benefit of being ordinary shareholders, though they do not have voting rights. GDRs are settled through CEDEL and Euro-clear international book entry system.
55
EXTERNAL COMMERCIAL BORROWINGS GDRs are listed on the Luxemberg stock exchange.
Trading takes place between professional market on an OTC (over the counter) basis.
As for as the case of liquidation of GDRs is concerned, an investor may get the GDR cancelled any time after a cooling off period of 45 days. A non-resident holder of GDRs may ask the overseas bank (depository) to redeem (cancel) the GDRs. In that case overseas depository bank shall request the domestic custodians to cancel the GDR ant to get corresponding underlying shares released in favour of non-resident investor. The price of ordinary shares of the issuing company prevailing in the Bombay stock exchange or the national stock exchange on the date of advice of redemption shall be taken as the cost of acquisitions of the underlying ordinary shares
Advantage of FCCBs
The convertible bonds gives the investor the flexibility to convert the bond into equity at a price or redeem the bond at the end of a specified period, normally three years if the price of the share has not met his expectation. Companies prefer a bond as it leads to delayed dilution of equity and allows company to avoid any current dilution in earnings per share that a further issuance of equity would cause. FCCBs are easily marketable as investor enjoys option of conversion into equity shares of resulting to capital appreciation. Further investor is assured of a minimum fixed interest earnings.
Disadvantage of FCCBs
56
EXTERNAL COMMERCIAL BORROWINGS Exchange risk is more in FCCBs as interest on bonds would be repayable in foreign currency. Thus companies with low debt equity ratios, large forex earnings potential only optional for FCCBs FCCBs mean creation of more debt and a forex outgo in terms of interest which is in foreign exchange. In the case of convertible bonds, the interest rate is now, say more than 4% but there is risk on the interest payment as re-payment if the bonds are not converted into equity shares. The only major advantage would be that where the company has a high rate of growth in earnings and the conversion takes place subsequently the price at which shares can be issued can be higher than the current market price.
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2.11) INTERNATIONAL CAPITAL MARKET

International capital market is well known today that modern organizations including multinationals largely depends upon sizable borrowings in rupees as well as in foreign currencies to finance their projects involving huge outlays. The taxation benefits available on borrowings as against the capital often influence this course as interest payment on borrowed funds in allowable expenditure for tax purposes. In order to cater to the financial needs of such organization international capital markets or financial centers have sprung up whenever international trade centers have developed. Lending and borrowings in foreign currencies to finance the international trade and industry has led to the development of intentional capital market. In domestic capital markets of various countries, international capital transaction also take place. For instance, USA, Japan, UK, Switzerland and West Germany have active domestic capital markets. Foreign borrowers raise money in these capital markets through issue of foreign bonds. In international market, international bond is known as Euro bond. The issue of Euro-bond is managed by a syndicated of international banks and placed with investors and lenders world-wide. The issue may be denominated in any of the currencies for which liquid market exist.
In international capital market, the availability of foreign currency is assured under the four main systems viz. (1) Euro- currency market; (2) Export Credit Facilities; (3) bond issue; and (4) financial institution. Euro currency market was originated with dollar dominated bank deposits and provides loans in Europe particularly, in London. Euro-dollar deposits form the main ingredient of Euro-currency market. Euro doller deposits or dollar denominated time deposits available at foreign braches of US banks and at some foreign banks. These deposits are acquired by these banks from foreign government and various firms and individuals who want to hold dollars 58
EXTERNAL COMMERCIAL BORROWINGS outside USA. Banks based in Europe accept dollar denominated deposits and make spread over various parts of the world. In Euro-currency market, funds are made available as loan through syndicated Euro-credit or instrument know as floating rate notes FRN/FRCDs (certificates of deposits). London has remained as the main center for euro-currency credit. The creditors however insist on banks guaranties. Several multinational banks of Japanese, American, British, German & French origin- operates all over the world, extending financial assistance of trade & projects. Several multinational banks like Citi bank, ANZ Grind lays bank, Standard chartered bank, American Express Bank, Bank of America, etc are aggressive players in India & they issue specific bank guarantees to facilitate the business transactions between various parties, including government agencies, commercial borrowings as well as Exim Bank finance. This however, constitute major cost.
Instruments Of International Finance.

The various financial instrument dealt with in the international market are briefly described below.
Euro Bonds: Euro Bonds are debt instrument denominated in a currency

issued out side the country of that currency e.g. a yen floated in Germany; a yen bond issued in France.
Foreign Bonds: These are debt instruments denominated in a currency

which is foreign to the borrower and is sold in a country of that country. A British firm placing $ denominated bonds in USA is said to be selling foreign bonds.
Fully Hedged Bonds: In foreign bonds, the risk of currency fluctuation

exists. Fully hedged bonds eliminate that risk by selling in forward market the entire stream of interest and principal payment.
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Floating Rate Notes: These are issued upto 7 years maturity. Interest
rates are adjusted to reflect to prevailing exchange rates. They provide cheaper money than foreign loans. Currently they are not popular.
Euro Commercial Paper: Euro Commercial Paper (ECPs) is short-term

money market instrument. They are for maturity for less than a year. They are usually designated in US dollars.
Foreign Currency Options: A Foreign Currency Option is the right to

buy or sell, spot, future or forward, a specified foreign currency. It provides a hedge against financial and economic risk.
Foreign Currency Future: Foreign Currency Future are obligation to

buy or sell a specified currency in the present for settlement at a future date. The most common period for a futures contract is a week, a month or two months
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3.COMPREHENSIVE
REQUIREMENTS
OF
EXTERNAL
COMMERCIAL BORROWINGS. 3.1) Procedure for seeking approval:

Applications may be submitted by the borrowers in the prescribed format to: The Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance, North Block, New Delhi - 110 001. The application should contain the following information: 1. An Offer Letter (in original) from the lender giving the detailed terms and conditions 2. Copy of the project appraisal report from a recognized financial institution/ bank, if applicable 3. Copies of relevant documents and approvals from central/ state governments, wherever applicable, such as
o FIPB, CCEA and SIA clearances, o Environmental clearances, o Techno - economic clearance from Central Electricity Authority,
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EXTERNAL COMMERCIAL BORROWINGS o Valid licences from Director General of Foreign Trade (Ministry of Commerce) or o Department of Telecommunications, o No - objection certificate from Ministry of Surface Transport, o Evidence of exports from competent authority, o Registration with RBI in case of NBFCs etc
3.2) Average Maturities for ECB

ECBs should have the following minimum average maturities: Minimum average maturity of three years for external commercial borrowings equal to or less than USD 15 million equivalent; Minimum average maturity of seven years for external commercial borrowings greater than USD 15 million equivalent; 100% Export Oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years even for amounts exceeding USD 15 million equivalent; and Indian Development Financial Institutions (DFIs) and corporates engaged in infrastructure projects in Telecommunications and Oil Exploration and Development (excluding refining) will be permitted to raise ECB at a minimum average maturity of five years even for borrowings exceeding USD 15 million equivalent.
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EXTERNAL COMMERCIAL BORROWINGS Bonds and FRNs can be raised in trenches of different maturities as long as the average maturity of the different trenches within the same overall approval taken together satisfies the maturity criteria prescribed in the ECB guidelines. In such cases, it is expected that longer-term borrowings would necessarily precede that of the shorter tenors. The longer the initial tenor the shorter the subsequent trenches can be within the average maturity.
3.3) End-Use Requirements a) External commercial loans are to be utilised for import of capital goods and
services (on FOB or CIF basis). However, in the case of projects in the following infrastructure areas, ECB can be utilised for rupee expenditure: Power
Telecommunications (Licence fee payments would be an approved use of ECB).
Railways
Roads (including bridges)
Ports
Industrial Parks; and
Urban infrastructure (water supply, sanitation and sewerage projects as defined in Section 80 IA of Income Tax Act, 1961).
b) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards.
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EXTERNAL COMMERCIAL BORROWINGS ECB proceeds may also be utilised for project- related rupee expenditure as outlined in paras 7 to 11 above. However, under no circumstances, ECB proceeds will be utilised for1. Investment in stock market; and 2. Speculation in real estate.
3.4) USD 5 Million Scheme

All Corporates and institutions are permitted to raise ECB upto USD 5 million equivalent at a minimum simple maturity of 3 years. Borrowers may utilise the proceeds under this window for general corporate objectives without any end-use restrictions excluding investments in stock-markets or in real estate. The loan amount may be raised in one or more trenches subject to the caveat that the total outstanding loan under this scheme at any point of time should not exceed USD 5 million. Each trench should have a minimum simple maturity of 3 years.
As a measure of simplification and de-regulation for the benefit of corporates and institutions, Government have delegated the sanctioning powers to Reserve bank of India(RBI) under this scheme with effect from 15th December, 1996. Corporates and institution are advised to submit their applications under this scheme to the Exchange Control Department of RBI, Mumbai.
3.5) Exporters
Exporters, 100% EOUs and EPCG licence-holders are permitted to raise ECB upto thrice the average amount of annual exports during the previous three years subject to a maximum of USD 100 Million equivalent without end-use restrictions as long as they conform to the general corporate objectives.
3.6) Exporters/Foreign Exchange Earners
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Corporate who have foreign exchange earnings are permitted to raise ECB upto twice the average amount of annual exports during the previous three years subject to a maximum of USD 100 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate. The minimum average maturity will be three years upto USD 15 million equivalent and seven years for ECBs exceeding USD15 million. The maximum level of entitlement in any one year is a cumulative limit and debt outstanding under the existing USD 15 million exporters scheme will be netted out to determine annual.
3.7) Infrastructure Projects

Holding Companies/promoters will be permitted to raise ECB upto a maximum of USD 50 million equivalent to finance equity investment in a subsidiary/joint venture company implementing infrastructure projects. This flexibility is being given in order to enable domestic investors in infrastructure projects to meet the minimum domestic equity requirements. In case the debt is to be raised by more than one promoter for a single project then the total quantum of loan by all promoters put together should not exceed USD 50 million.
3.8) Long-Term Borrowers

a) These amounts will be available for general corporate objectives excluding investments in stock markets or in real a) ECB of ten years average maturity and above will outside the ECB ceiling, though MOF's prior approval for such borrowings would continue to be applicable. The extent of debt under this window will be reviewed by the Government periodically. b) Corporate borrowers able to raise long-term resources with an average maturity of 10 years and 20 years will be allowed to use ECB proceeds without the normal end-
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EXTERNAL COMMERCIAL BORROWINGS use restrictions upto USD 100 million for issue of 10 years and above upto 20 years and USD 200 million for issue of 20 years and above estate. c) To be eligible for this purpose, the debt instrument should not include any "put" or "call" options potentially reducing the stated maturities
3.9) External Commercial Borrowings (Proceeds From Bonds FRNs & Syndicated Loan)
Corporate borrowers who have raised ECB for import of capital goods and services through Bonds/FRN/Syndicated loans are permitted to remit funds into India. The funds can be utilised for activities as per their business judgement except investment in stock market or in real estate, for upto one year or till the actual import of capital goods and services takes place, whichever is less. In case borrowers decide to deploy the funds abroad till the approved end-use requirement arises, they can do so as per the RBI's extant guidelines. Sanction of additional ECB to the Company would be considered only after the Company has certified, through its statutory auditor, that it has fully utilised the amount for import of the capital equipments and services.
3.10) ECB Entitlement for New Projects

All Infrastructure and Greenfield projects will be permitted to avail ECB to an extent of 35% of the total project cost, as appraised by a recognised Financial Institution/Bank, subject to the fulfillment of other ECB guidelines. However, ECB intended for telecom projects are more flexible and an increase from the present 35% to 50% of the project cost (including the licence fee) will be allowed as a matter of course. Greater flexibility may also be allowed in case of power projects and other infrastructure projects based on merits.
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3.11) Interest Rate for Project Financing

At present, interest rate limits on ECB for project financing (i.e. to say nonrecourse financing) allow interest spreads above LIBOR/US Treasury to be higher than for normal ECB. Ordinarily a spread upto 350 basis points may be allowed. However, keeping market conditions in mind, some flexibility will be permitted in determining the spread on merits. In order to give borrowers greater flexibility in designing a debt strategy, upto 50% of the permissible debt may be allowed in the form of sub-ordinated debt at a higher interest rate, provided the composite spread for senior and sub-ordinated debt taken together comes within the overall project financing limit
3.12) Other Terms and Conditions:

Apart from the maturity and end-use requirements as per paras above, the financial terms and conditions of each ECB proposal are required to be reasonable and marketrelated. The choice of the sourcing of ECB, currency of the loan, and the interest rate basis (i.e. floating or fixed), will be left to the borrowers.
3.13) SECURITY
The choice of security to be provided to the lenders/suppliers will also be left to the borrowers. However, where the security is in the form of a guarantee from an Indian Financial Institution or from an Indian Scheduled Commercial Bank, counterguarantee or confirmation of the guarantee by a Foreign Bank/Foreign Institution will not be permitted.
3.14) Approval Under FEMA:

After receiving the approval from ECB Division, Department of Economic Affairs, Ministry of Finance, the applicant is required to obtain approval from the Reserve Bank of India under the Foreign Exchange Management Act, and to submit an
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EXTERNAL COMMERCIAL BORROWINGS executed copy of the Loan Agreement to this Department for taking the same on record, before obtaining the clearance from RBI for drawing the loan. Monitoring of end-use of ECB will continue to be done by RBI. At present, ECB approvals under US $ 3 million scheme (enhanced to US $ 5 million) is given by RBI and all other ECB proposals are processed in DEA. As a measure of further simplification and rationalisation, Government has decided to delegate the ECB sanctioning power to RBI up to US $ 10 million under all the ECB schemes except structured obligation which is at present being administered by DEA. Accordingly, applications for approval upto US $ 10 million will be considered by the Exchange Control Department of RBI, Mumbai. Accordingly, corporate seeking ECBs utpo US $ 10 million may approach RBI.
3.15) Validity of Approval

Approvals are valid for a period of six month. i.e. the executed copy of the loan agreement is required to be submitted within this period. In the case of FRNs, Bonds etc., the same are required to be launched within this period. In case of power projects, the validity of the approval will be for a period of one year. Extension will not be granted beyond the validity period. However, borrowers are free to submit fresh application, after a gap of six month, which will be evaluated in the light of the ECB guidelines applicable at that time. In case of infrastructure projects, however, because financial closure may get delayed for reasons beyond the investor's control, extension of validity may be considered on merits.
3.16) Structured Obligations

In order to enable corporates to hedge exchange rate risks and raise resources domestically, Domestic Rupee Denominated Structured obligations would be permitted to be Credit enhanced by International Banks/International Financial Institutions/Joint Venture Partners subject to following conditions: 68
In the event of default, foreign banks giving guarantee will make payment of defaulted amount of principal and interest after bringing in the equivalent amount of foreign exchange into the country.
FEMA clearance should be obtained from RBI in advance of issuance.
Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be obtained.
In the event of default, the default should be foreign exchange equivalent amount equal to the principal and interest outstanding calculated in rupee terms.
The liability of Indian company will always be rupee denominated and the debt servicing may be done in equivalent foreign exchange funds.
The guarantee fee/commission/charges and other incidental expenses to the Indian company should be in rupee terms only. All in cost on this account should not exceed 3% p.a. in rupee terms.
In case of the proposals relating to sectors where conditions apply clearances e.g. relating to the assignability licenses etc., these should be obtained in advance.
In case of default, the interest rate could be coupon on the Bond/or 250 bps over prevailing secondary market yield of 5-year GOI security, whichever is higher.
3.17) Guidelines for Accessing ECBs through Automatic Route
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EXTERNAL COMMERCIAL BORROWINGS ECB for investment in real sector -industrial sector, especially infrastructure sector-in India, will be under Automatic Route, i.e. will not require RBI/Government approval. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route.
Eligible borrowers:
Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIIs), housing finance companies and NBFCs) are eligible
Recognised Lenders:
Borrowers can raise ECB from internationally recognised sources such as International banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.,), Export credit agencies and Suppliers of equipment, foreign collaborators and foreign equity holders.
3.18) End-use:
ECB can be raised only for investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in real sector industrial sector including small and medium enterprises
3.19) Amount and Maturity:

ECB up to USD 20 million or equivalent with minimum average maturity of three years. 70
ECB above USD 20 million and up to USD 500 million or equivalent with minimum average maturity of five years
ECB up to USD 20 million can have call/put option provided the minimum average maturity of 3 years is complied before exercising call/put option.
The all-in-cost ceilings for ECB will be indicated from time to time. The following ceilings will have immediate effect and will be valid till reviewed.
3.20) Minimum Average Maturity Period:

All-in-cost Ceilings over six month LIBOR*
Three years and up to five years: 200 basis points
More than five years: 350 basis points
3.21 Credit Encashment.

Following guidelines shall be applicable to rupee denominated structured obligations credit enhanced by international banks/international financial institutions/jointventure partner. In the event of default, foreign banks giving guarantee will make payment of defaulted amount of principal and interest after bringing in the equivalent amount of foreign exchange into the country. FERA clearance should be obtained from RBI in advance of issuance.
Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be obtained. 71
In the event of default, the default should be foreign exchange equivalent amount equal to the principal and interest outstanding calculated in rupee terms.
The liability of Indian company will always be rupee denominated and the debt servicing may be done in equivalent foreign exchange funds.
The guarantee fee/commission/charges and other incidental expenses to the Indian company should be in rupee terms only. All-in-cost on this account should not exceed 3% p.a. in rupee terms.
In case of the proposals relating to sectors where conditions apply clearances e.g. relating to the assignability of licenses etc., these should be obtained in advance.
In case of default, the interest rate could be coupon on the Bond/or 250 bps over prevailing secondary market yield of 5-year GOI security, whichever is higher.
3.22) Prepayment of External Commercial Borrowings:

Reserve Bank of India has been delegated powers to grant all approvals for prepayments as per the prevailing guidelines, even in the cases where ECBs had been approved earlier by the Ministry of Finance. Provisions of pre-payments under ECB guidelines read that (a) pre-payment facility would be permitted if these are met out of inflow of foreign equity (b) in addition to ECB being pre-paidout of foreign equity, corporate can avail either of the following two options for pre-payment of their ECBs:
72
On permission by the government, pre-payment may be undertaken within the permitted period of all ECBs with residual maturity upto one year.
Pre-payment upto 10 per cent of outstanding ECB to be permitted once during the life of the loan, subject to company complying with the ECB approval terms. Those companies who had already availed pre-payment facility of 20% earlier would not be eligible.
At present, pre-payment of ECBs upto 100 per cent is permissible where the source of funds is from exchange earners foreign currency amount or pre-payment is effected from foreign equity inflow or when the residual maturity of such debt is upto one year.
3.23) Policy on External Commercial Borrowings (ECB)

Currently1, ECB can be accessed under two routes (i) the Automatic Route - No approval of Reserve Bank of India (RBI)/Government required and (ii) the Approval Route - Approval to be obtained from the Empowered Committee of RBI. 1) The salient features of the revisions/amendments now made to the ECB policy are: a) Non Banking Financial Companies (NBFCs) - permitted to raise ECB from multilateral Financial institutions, reputed regional financial institutions, official export agencies and International banks towards import of infrastructure equipment for leasing to Infrastructure projects with a minimum average maturity of 5 years. b) Housing Finance Companies with strong financials satisfying certain criteria2 permitted to issue Foreign Currency Convertible Bonds (FCCBs).
73
EXTERNAL COMMERCIAL BORROWINGS c) Individuals, Trusts and non-profit making organisations (except NonGovernmental Organisations (NGOs) engaged in micro-finance) will not be eligible to raise ECB.
3.24) Eligibility of Borrowers

The Eligible class Borrowers under the Approval Route has been expanded to include a) Non Banking Financial Companies (NBFCs) - permitted to raise ECB from multilateral financial institutions, reputed regional financial institutions, official export agencies and international banks towards import of infrastructure equipment for leasing to infrastructure projects with a minimum average maturity of 5 years. b) Housing Finance Companies with strong financials satisfying certain criteria2 permitted to issue Foreign Currency Convertible Bonds (FCCBs). Individuals, Trusts and non-profit making organisations (except Non-Governmental Organisations (NGOs) engaged in micro-finance) will not be eligible to raise ECB.
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REFERENCES
I had visited Bank of Indias, Mumbai (Main) Branch, Foreign Exchange Department, located at 70-80, M.G. Road, Mumbai 400 023 and met the Officials who were kind enough to provide the necessary information to the under-mentioned questions put to them : 1. What is the ECB ? ECBs are made available to Govt. bodies and very large borrowers in consortium with the Indian nationalized Banks. 2. What are the purposes of ECB ? The purpose of ECB is to finance and medernise the gigantic projects undertaken for the socio-economic development of the developing nations. 3. Which financial institutions provide ECB facilities ?
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International Financial Institutions viz., International Monetary Fund, World Bank, Asian Development Bank etc., are some of the major global financial institutions which provide ECB facilities. 4. Which sectors are financed by the ECB ? ECB is usually made available for major infrastructural projects like constructions of bridges, roads and transportation, electricity, irrigation facilities etc. 5. Is there any concession offered in the rate of interest and what is the repayment period ? Yes, ECB finance is provided at a very concessional rate of interest and the repayment period varies in accordance with the requirements of the borrowing countries. 7. Whether your Bank also assists your borrowers by providing them ECB? Yes. Bank of India has got network of foreign Branches spread over in several nations and hence is in a better position to assist its clientele by way of ECBs.
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BIBLIOGRAPHY
PRIMARY DATA:
1. INTRVIEWS FROM BANKERS, LIKE BANK OF INDIA 2. OTHER INTERVEIWS FROM non-Banking financial INSTITUTION
SECONDARY DATA:
1. BOOKS LIKE MANAGEMENT ACCOUNTING AND FINANCIAL SERVECES BY:( PUBLISHED BY THE INSTITUTE OF CHARTWERED ACCOUNTANTS OF INDIA)
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2. FINANCIAL MANAGEMENT BY (RAVI KISHORE) 3. NEWSPAPERS, PERIODICALS, MAZAJINES AND JOURNALS
WEB SITES
WWW.MINISTRYOF FINANCE.COM
WWW.RBI.ORG.IN
APPENDEX 1 (ECONOMICS TIMES DATED: 20/03/2005)

Yes bank promoters borrow from Robobank to fund equity contribution
THE promoters of YES Bank have borrowed from Rabobank International Holding to chip in a part of their equity contribution in the newly formed private bank. The borrowings were in foreign currency by investment companies owned by the promoters Ashok Kapur and Rana Kapoor and their family members.
In the event of a default, Rabobank International will get control over the shares. This was disclosed in the draft red herring prospectus filed by YES Bank for its forthcoming IPO. Rabo the Dutch financial services group which owns a non-banking finance company in India, is also a 20% equity partner in YES Bank. Rabo is likely to increase its shareholding in the bank by purchasing shares during the IPO or post-IPO from the market so as to maintain its current holding of 20%. 78
The private equity investors in the bankCiticorp, ChrysCapital and AIF Capital can increase their stake in the bank if there is any fresh issuance of shares other than through an IPO. Initially, the RBI had given an "in-principle" approval for the bank to Ashok Kapur and two other banking professionals Rana Kapoor and Harikirat Singh. Subsequently, Mr Singh had walked out of the project due to difference of views. This caused a shortfall in the initial paid-up capital of the bank. Rabobank International Holdings agreed to provide a loan to the promoters to bridge the gap in the paid-up capital, the draft prospectus stated.
(Companies of Ashok Kapur and Rana Kapoor) was financed through a loan of Rs 17 crore each from Rabobank International Holdings. The loan has to be repaid within three years of the disbursement. These loans were disbursed on March 10, '04. Mags and Morgan have a 8.55% stake each in the bank.
According to the agreement, the promoters cannot dispose of their shareholding in Mags and Morgan during the tenure of the loan. Also in the event of a default, Rabobank "has a right to purchase such number of shares that are obtained by dividing the outstanding amount under the agreement by the fair market value of the shares as on date of such breach that are held by Ashok Kapur in Mags and Rana Kapoor in Morgan, respectively, at nil considerations," stated the prospectus. According to the terms of licence, 49% of the pre-issue share capital held by promoters has a 5-year lock-in from May 24, '04. This stake includes 29% equity owned by Ashok Kapur and Rana Kapoor, and 20% by Rabo. Rabo's post-issue stake in the bank will fall to 14.8%. However, Rabo has indicated its intention to the bank to maintain the shareholding at 20% subject to regulatory approval and consent of the YES Bank. Rabo can increase its stake through market purchases.
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APPENDEX 2 (ECONOMICS TIMES DATED: 4/09/2005

Asian development bank upgraded Indias economic growth forecast for 2006 by .7 percent to 6.8 percent while that of china by merely 01 percent to 8.8 percent report AFP. The bank Asian development outlook report released today however, kept Indias earlier growth forecast of 6.9% for 2005 unchanged. But it is upgraded the growth forecast for china by .7 percent to 9.2 percent for this year. The Philippines-based ADB said china and India will carry the region over the next two years with international trade and financial conditions expected to remain favorable for Asian exports as well as investments into the region. For development Asia as a whole the report upgraded its 2005 GDP forecast this year, while maintaining its 6.6 forecast for 2006. The report, an update of an edition released in April, kept its GDP growth forecast for the major industrialized economics unchanged at 2.5 percent, a full percentage point below last years pace but slightly better than the five-year average of 2.4 percent.
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EXTERNAL COMMERCIAL BORROWINGS However, the overall outlook for developing Asia is more uncertain than earlier in the year:. It said, citing the more accentured risk the rising oil prices and US interest rates. Meanwhile the Reserve Bank of India said its assessment on inflation made during the review of annually policy has not changed on account of increase in international crude oil prices, report PTI. Our expectations during the review were made after taking into account the increase in international crude oil prices and pass through of it to domestic market. RBI deputy Rakesh Mohan told reporters, here Mohan, who did not make any comments on the stock market rally, said that the stock market and the valuations of companies were doing well since past 18 months.
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EXTERNAL COMMERCIAL BORROWINGS

EXTERNAL COMMERCIAL BORROWING

1.INTERNAL COMMERCIAL BORROWINGS

1.2) WORKING CAPITAL FINANCE FROM BANK: -.

EXTERNAL COMMERCIAL BORROWINGS

EXTERNAL COMMERCIAL BORROWINGS

1.4) BRIDGE LOANS.

1.5) PUBLIC DEPOSITS

1.6) COMMERCIAL PAPER

EXTERNAL COMMERCIAL BORROWINGS

ADVANTAGE OF ISSUE OF COMMERCIAL PAPER

DIS-ADVANTAGES OF ISSUE OF COMMERCIAL PAPER.

1.7) Unit Trust Of India:

EXTERNAL COMMERCIAL BORROWINGS

1.8) National Bank For Agriculture And Rural Development (NABARD)

EXTERNAL COMMERCIAL BORROWINGS

1.10) SIDBI (Small Industries Development Bank OF India)

EXTERNAL COMMERCIAL BORROWINGS

2.EXTERNAL COMMERCIAL BORROWINGS

EXTERNAL COMMERCIAL BORROWINGS

Purposes Of International Monitory Fund

Who Makes Decisions at the IMF?

Where Does the IMF Get Its Money?

EXTERNAL COMMERCIAL BORROWINGS

How Does the IMF Serve Its Members?

EXTERNAL COMMERCIAL BORROWINGS

Size of International Monitory Fund

EXTERNAL COMMERCIAL BORROWINGS

Prepayment of Indias Debt (2001-02 and 2002-03)

2.3) WORLD BANK OR INTERNATIONAL RECOUNSTRUCTION AND DEVELOPMENT:

EXTERNAL COMMERCIAL BORROWINGS

Strength Through Diversity

World Bank Operations

EXTERNAL COMMERCIAL BORROWINGS

Structure of World Bank

The International Monetary Fund and the World Bank at a Glance

EXTERNAL COMMERCIAL BORROWINGS

Has a staff of 2,300 drawn from 182 member countries

2.4ASIAN DEVELOPMENT BANK.

EXTERNAL COMMERCIAL BORROWINGS

EXTERNAL COMMERCIAL BORROWINGS

Objective and Principles of Asian development bank:

Eligibility for and Allocation of ADF Assistance

2.5) FIXED-RATE BORROWINGS INCLUDES:

EXTERNAL COMMERCIAL BORROWINGS

1. BUYERS CREDIT 2. SUPPLIERS CREDIT 3. FIXED-RATE LOANS. 1) Buyers Credit

Comparative Cost Of Advantage.

EXTERNAL COMMERCIAL BORROWINGS

2.6) INTERNATIONAL DEVELOPMENT ASSOCIATION: What is International Development Association?

Which countries are eligible to borrow IDA resources?

Where do IDA resources come from?

EXTERNAL COMMERCIAL BORROWINGS

EXTERNAL COMMERCIAL BORROWINGS

2.8) INTRNATIONAL FINANCE MARKET :

I. Euro Currency Market

II Export Credit Facility:

EXTERNAL COMMERCIAL BORROWINGS

New International Instruments:

Syndicated Eurocurrency Loans:

Main Objectives of Syndication (Borrower point of view)

Lenders point of view

EXTERNAL COMMERCIAL BORROWINGS

2.9) INTERNATIONAL FINANCE CORPORATION: INTRODUCTION

Polices Of International Finance Corporation