The Components of an ECB Transaction

In this era of liberalized foreign exchange policy of the RBI there are many avenues of raising funds from outside the country. An ECB (external commercial borrowing) is a popular one and is governed by the Foreign Exchange Management Act which regulates uses and interest rates amongst other items.

To execute a external commercial borrowing transaction you will first need to have a relationship with an authorized dealer (AD) bank also determined by the RBI. The first step would be to get the best interest rate from the lender by researching the current LIBOR rates. The idea would be to reduce the spread.

Then the process of vetting the agreement attaining the LRN from the RBI through the AD bank would begin. Fixing the repayment schedule and all regulatory compliances will also need to be done.

After managing all this it is also a good idea to hedge the drawdown of the ECB as the exchange rates fluctuate heavily depending on the economic and global situation in both countries and the borrower should also have a currency risk management policy for the repayment of the ECB to the foreign lender. The foreign lender can be an institution or in some cases the parent company of a subsidiary in India