Page 68 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 4: Eurocurrency Markets

the cost of such borrowings is extremely high, accessing ECB for amounts beyond USD 15 Notes
million remains a daunting task. Exporters and 100 per cent EOUs are anyway able to obtain
foreign currency funds by way of FCNR(B) loans. Hence, they may not be very enthusiastic
about raising short-term funds under the ECB route.

Task Do you expect the Eurodollar to exist 10 years from now? Why or why not?

Self Assessment

Fill in the blanks:
11. ECBs are supposed to be utilised for meeting foreign exchange …………………… goods
and services and also for project related rupee expenditure up to certain limits.
12. For ECB of minimum maturity of less than 3 years, approval from ……………………
alone is required.

13. The 100% Export Oriented Units (EOUs) are permitted ECB at a minimum average maturity
of …………………… years even for amounts exceeding USD 15 million equivalent.

Caselet External Commercial Borrowing

India’s $18 mn ECB to Fund Expenditure Projects
IAC Co. Ltd. has tied up a Eurodollar loan worth $18 million (nearly ` 63 crores) to fund
its project related rupee expenditure and capital expenditure projects at its various plants.
The syndicated external commercial borrowing (ECB) has been arranged through Citibank
and has a structure with an average tenor of four years and a door-to-door-tenor of five
years. The consortium of banks includes Sakura Bank in Hong Kong, Banque Nationale de
Paris Intercontinental, the Fuji Bank in Singapore, Banca Monte dei Paschi di Siena in
London, the Long-term Credit Bank of Japan in Singapore and the SBI-European Bank.
IAC Ltd will use $15 million as project related rupee expenditure under the scheme for
exporters, and $3 million to finance capital expenditure. According to the recent liberalised
norms, exporters are permitted ECBs up to twice the average amount of annual exports
during the previous three years subject to a maximum of $100 million without end-use
restrictions. The minimum average maturity for three years to raise $15 million worked
out to the advantage of Indal. In 1994-95, the aluminium major had raised $11 million to
expand and upgrade its sheet and foil plants. For this, the company had bought an interest
rate cover. For the latest loan, however, IAC Ltd has not taken an interest cover as it was
secured on a Fixed Rate Agreement (FRA). Foreign debt formed a major part – almost 68
per cent – of the unsecured loans for the last fiscal, which have more than doubled over the
previous year to ` 128.4 crore.
IAC Co’s Fundamentals
Due to its strong fundamentals and a high credit rating, IAC was in a position to tap
borrowings from overseas funding agencies. The company was able to hold its debt to
38 per cent of the capital employed. Leveraging on its high exports, the company accessed
substantial foreign currency funds and contained average borrowing cost to just over
Contd...

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