An external commercial borrowing (ECB) is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency. The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.
BENEFITS OF ECB
- The cost of funds is usually cheaper from external sourcesif borrowed from economies with a lower rate of interest. Indian companies can usually borrow at lower rates from the U.S. and the Eurozone as interest rates are lower there compared to the home country, India.
- Availability of larger market can help companies satisfy larger requirements from global players in a better manner as compared to what can be achieved domestically.
- ECB is just a form of a loan and may not be of equity nature or convertible to equity. Hence, it does not dilute stake in the company and can be done without giving away control because debtors do not enjoy voting rights.
- The borrower can diversify the investor base.
- It provides access to international markets for the borrowers and gives good exposure to opportunities globally.
- The economy also enjoys benefits, as the government can direct inflows into the sector, have potential to grow. For example, the government may allow a higher percentage of ECB funding in case of infrastructure and SME sector. This helps in an overall development of the country.
- Avenues of lower cost funds can improve the profitability of the companies and can aid economic growth.