Hi A0s stuck in banking! Your Dalal Street attorney is back.

Thanks for the positive feedback on my last post. Today we are going international. In case you missed my previous post, here’s a link to the same:

https://www.legallyindia.com/convos/topic/277270-Banking-Finance-Oversimplified-Part-1#comments

Today we will talk about ECBs – External Commercial Borrowings.

I remember the first time I was put on an ECB transaction, I was just told – go read up the ‘RBI Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations’. Like a diligent associate I went to the RBI website and downloaded the latest version of this RBI issued law. I mean how difficult could it be? I had to just read the Master Direction, see what law applies to our transaction and then discuss with my senior, right?

WRONG.

Loan Registration Number

Designated Authorised Dealer Category I Bank

FCY denominated ECB

MAMP

Hedging provision

All-in-cost ceiling – “… the swap cost plus spread should not be more than the floating rate plus the applicable spread …”

Wait, what were these technical terms I was reading? I had never come across these before. I was supposed to quickly read through the Master Direction and apply it in the transaction, but I couldn’t make any sense of the document. I couldn’t even understand what the Master Direction was about, let alone ask specific questions. This was a clear case of crash and burn where I had fallen face forward, and I felt completely helpless.

It took me some time to realise that this wasn’t a ‘me’ problem. Without having any background of economics or finance or prior experience, these documents wouldn’t make sense to anyone. At your law firm - as a quick fix - they might probably explain to you a specific item that needs to be inserted in the transaction document, but without understanding the context, that sense of cluelessness will linger on.

Ok Rohit, calm down. Don’t overthink this so much. Deep breaths in. You’ve got this.

So if we can’t figure out ECBs just by reading the Master Direction or a Mondaq article, what’s the solution? Alright, so I have an exercise for you which is going to give you some instant clarity. But you will have to follow the instructions carefully. Ready?

1. Go to your room and close all the doors and windows.

2. Plug in your Amazon electronics

3. Now shout out the following words: “Alexa – play the song ‘Paisa’ from De Dana Dan”

Done? Alright, let’s go:

Here’s the scenario: You have just got your first salary credited after slogging for 14 hours for a month. You have worked harder than ever before and now you deserve a treat. So you go partying at Bastian with your friends and treat yourself to some sushi at Izumi. You somehow manage to save INR 10, 000 from your salary. Now your parents want you to invest this INR 10,000 in a bank. You see that while SBI bank is offering a 4% return, Kotak is offering a 7% interest on fixed deposits. So you go with Kotak.

Now let’s take this one step forward. Banks don’t just make money out of thin air. If they are paying you interest at 7%, that’s because they take your money and lend it someone else at a higher interest rate to make profits. Let’s say the colleague sitting beside you in office had to avail an education loan to complete his college education. When he went to the bank for a INR 10 lakh loan, he noticed SBI offering education loan at 10%, while Kotak offering it at 15%. Obviously, he would choose the SBI loan as at a 10% interest rate on INR 10 lakhs, he would only have to repay just INR 1 lakh as interest, whereas a 15% rate would make the interest INR 1.5 lakh.

ECB works on a similar concept, but with one major difference - instead of shopping which bank to choose while borrowing, you select which country to take a loan from. See, ECB basically means –

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Money is flowing in FROM abroad INTO India.

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Different countries have different borrowing rates. Developed countries like US usually have 1-2% rate, while emerging markets like India have a borrowing rate of 7%. So, let’s say you’re the CEO of Adani Airport Holdings Limited, managing 7 airports across India. You want to now scale up the airport business for which you need almost $200 million. Instead of going to Indian banks, you go to Standard Chartered and Barclays bank in London to avail that loan as interest rates are lower and this will help save $5 million in interest. Since you will be upgrading the 7 airports in phases, you agree to DRAWDOWN/ use only $50 million this year, and avail the rest of the amount later (in TRANCHES). In your negotiations with the bank, you also tell the banks you should have an option to PREPAY the loan, in case something like Covid happens again and all business halts and there are no fliers coming to airports – meaning no revenue to repay the interest/ loan.

Let’s take another example you might come across deals – ON LENDING. You’re the head of an NBFC in India servicing low income families by extending credit to such people. Usually, such families don’t have any credit score, so the big banks don’t extend loans to them, and they end up taking loans at interest rate of 40% or more from loan sharks (Remember the ban on Chinese fintech apps?). Since the NBFC is anyway working with such low income families, you can’t charge a high rate of interest, but you still need to make a profit. In such a case, you can avail a loan of $200 million from a foreign government owned financial institution which is also involved in increasing credit access amongst masses and which charges interest at 4% per annum. Once you have this $200 million loan, you can use this amount to give multiple INR 50,000 loans to low income families trying to start their business at an interest rate of 5%.

You with me till here? Good.

Now here is where things get interesting. Whenever there is flow of money across Indian borders – be it in the form of FDI or even loans, there’s one entity which keeps a hawk-eye on such transactions – that’s the RBI. RBI and its bunch of minions (aka AD Banks) have created a complicated bunch of laws so they control every aspect of money inflow/outflow. Think of them as the local aunty who’s constantly spying on you:

1. Oh you want to avail a loan? – Go first get a Loan Registration Number (LRN) from us

2. Oh you want to avail a loan from Barclays UK? – we want to know each and every detail – Submit a Form ECB and tell us - who’s the lender, what’s the interest rate, what’s the end use, what’s the repayment period, what charges + processing fees are you paying, what ECB have you availed in the past?

3. Oh you changed your mind and now you want to repay it earlier? – submit another Form ECB (revised)

4. What’s the all-in-cost ceiling? (That’s basically the interest rate, processing and all hidden charges)

5. Which country is the lender/ borrower based in? Does it comply with international financial compliances we have agreed upon (ex – FATF/ IOSCO compliant country)

6. Oh you have been dating this foreigner guy and now you want to get married? You better have dated him for atleast 3 years. Oh wait, did you say he is doctor and has an income of $ 50 million? 1 year of dating is also fine.

Well, the last one isn’t exactly what RBI asks, but that’s MAMP in a nutshell (MAMP: minimum average maturity period) – the minimum amount of time the ECB loan has to be within India. MAMP is usually 3 years for ECBs, but there are carveouts to this general rule – it can be different basis who is the lender/ borrower/ what purpose etc. (Time to pick up that RBI Master Direction and give it a read)

Also, what are the “End use restrictions”? – that’s RBI telling you – you better not take loans to gamble away on betting on the housing market, stock market or some random stock your friend has been telling you about (remember how enthusiastic your friend was about Bitcoin changing the world?)

ROLE AS A LAWYER

As a lawyer, you’re involved in the documentation – let’s say between the Barclays Bank and Adani Airport Holdings. As a lawyer for the Indian borrower, we have to usually review the loan/ facility agreement to ensure all these stringent requirements set down by RBI are met, all necessary forms such as Form ECB are filed, draft security documents if some security is being given in India and obviously ensure that all CP and CS certificates are in place so that our Indian client can avail the loan quickly. ECB transactions also offer you the opportunity to interact with foreign counsels working for the lenders, and speak with the bank officials of the AD Bank. Depending on what the security structure is, and how many lenders are involved, the transaction structure will change, but this is the basics.

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Note: I have used loans to explain ECBs, but it can also involve bonds and other financial instruments.

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That’s ECBs – oversimplified for you. I obviously haven’t (and couldn’t) cover the entire framework. Also, you might have noticed we only covered ECBs, not the ‘Trade Credits and Structured Obligations’ bit of the RBI Master Direction. But I hope this post has given you some amount of clarity about what you’re working on and where your role as a lawyer fits in.

If you want more posts like this, comment “Paisa Paisa” in the comment box, and I will be back with more interesting posts.

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Your Dalal Street attorney,

XOXO

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Kya baat hai kya chiz hai paisa

Kya baat hai kya chiz hai paisa
Ek baat mujhe batala de tu

Uss rab se kyun nahi darti hai

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