Buyer’s Credit & Supplier’s Credit

Loan for Import & Export

- Supplier’s Credit (Only 2 party – Car company & tier Company). (Ex: Car Company Buy 1000 tier of 1 Crore for Car as loan. The Supplier accept it to receive 1 Cr money as EMI.)

- Buyer’s credit – (Third Party Entry) – (Ex: Car Company Buy 1000 tier of 1 Crore. Car company get loan form Company XYZ to pay 1 Crore to Tier company. Car company pay back loan to Company XYZ. (Ex: Nirva Modi Scam).

(Swift Network is used by bank for Money transaction/ loan/ Permission for Fund transfer)

• Buyer's credit is a short-term loan to an importer by an overseas lender (Third Party Financial Institution or Bank) for the purchase of goods or services.
• An export finance agency guarantees the loan, mitigating the risk for the exporter.
• Buyer's credit allows the buyer, or the importer, to borrow at rates lower than what would be available domestically.
• With buyer's credit, exporters are guaranteed payment(s) on the due date.
• Buyer's credit allows an exporter to execute large orders and allows the importer to obtain financing and flexibility to pay for large orders.
• Supplier’s credit is a financing arrangement involving an exporter and importer under which the exporter extends credit to the importer for the purchases

Foreign Currency Convertible Bond (FCCB)

(If Company buy 100 Cr loan of repayment period of 3 years from Investor. After 3 years Investor get repayment of loan or get shares of the company (Became FPI).

• Is a foreign currency denominated convertible bond issued by an Indian company abroad, which the holder can convert into equity shares. It is a hybrid instrument (debt/ equity) issued to a borrower by corporate to obtain funds. At the termination time, the creditor has the right to convert the debt into equivalent value of equities (shares) at a set conversion rate. The FCCB is treated as a debt flow. A convertible bond is a bond that can be converted into equity at the time of its maturity.

Foreign Currency Exchangeable Bonds (FCEB)

(Company A get loan of 100 Cr from Investor for 3 years.

Company A has 250 Cr worth share of Company B (100 Cr), Company C (75 Cr) Company D (25 Cr), Company E (50 Cr).

After 3 years, The Company repayment of loan or give other company shares (Company B, C, D, E) which they have to the Investor).

Ex: If Facebook want to repay loan, give money or Give Jio Share.

• A Foreign Currency Exchangeable Bond refers to a bond expressed in foreign currency by an Indian company, the principal and interest in respect of which is payable in foreign currency. The key feature of these bonds is that they are issued by an Issuing Company, subscribed by a person who is a resident outside India, and are exchangeable into equity shares of another company which is called the Offered Company.
• Issuing Company and the Offered Company First and foremost, the Issuing Company and the Offered Company of an FCEB need to be a part of the same promoter group.
• The Issuing Company should compulsorily hold the equity shares of the Offered Company at the time of issuance of the FCEB until redemption or exchange of these bonds.
• Prior approval of the Reserve Bank of India (RBI) is required for issuance of FCEBs.
• Meanwhile, the Offered Company has to be a listed company, which is engaged in a sector eligible to receive foreign direct investment (FDI) and eligible to issue or avail of FCCBs or External Commercial Borrowings (ECB).

What is the difference between an FCCB and an FCEB?

• The main difference is that in FCCBs the bonds convert into shares of the company that issued the bonds. Whereas in FCEBs, the bonds are exchangeable for shares of another company, i.e., the Offered Company.
• Secondly, in the case of FCCBs, when the holder exercises the option to convert his/her bonds, the issuer company issues fresh shares. However, in the case of FCEBs, when the exchange option is exercised, there is no issuance of fresh shares by the Offered Company.
• Rather, as mentioned earlier, the Issuing Company has to mandatorily hold shares of the Offered Company, into which the FCEBs are exchanged, until redemption or exchange of these bonds. When an exchange is requested, the Issuing Company just transfers these shares (of the Offered Company) to the holder of the FCEB.
• Foreign Currency Exchangeable Bonds give Indian companies an excellent opportunity to raise money abroad by leveraging a part of their shareholding in listed group entities. On top of it, issuance of FCEBs should have limited effect on the share price of the Offered Company as there is no dilution of shareholding.

The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies

Advantages of ECBs:

• ECBs provide opportunity to borrow large volume of funds.
• The funds are available for relatively long term.
• Interest rate are also lower compared to domestic funds.
• ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.
• Corporate can raise ECBs from internationally recognized sources such as banks, export credit agencies, international capital markets etc. vh

New Framework

• The RBI kept the borrowing limit under the automatic route unchanged at $750 million per financial year but replaced the sector-wise limits.
• RBI has expanded the definition of beneficiaries eligible for external commercial borrowings to include all entities that can receive foreign direct investment.
• Among those now eligible are: port trusts, units in special economic zones, microlenders, not-for-profit companies, registered societies/trusts/cooperatives and non-government organisations.
• The Export-Import Bank (EXIM) and the Small Industries Development Bank of India (SIDBI) has been allowed to borrow overseas from recognised lenders.
• To curb volatility in the forex market arising out of dollar demand for crude oil purchases, the framework provides a special dispensation to public sector oil marketing companies. It allows them to raise ECB, with an overall ceiling of $10 billion,
• The RBI has decided to keep the minimum average maturity period of 5 Years to 3 Years for all ECBs, irrespective of the amount of borrowing, except for borrowers specifically permitted to borrow for a shorter period, like manufacturing companies. Earlier, the minimum average maturity period was five years.
• Further, if the ECB is raised from a foreign equity holder and utilised for working capital, general corporate purposes or repayment of rupee loans, the maturity period will be five years.
• The negative list, for which the ECB proceeds cannot be utilised, would include real estate activities, investment in capital market, equity investment, working capital purposes ( except from foreign equity holder), repayment of Rupee loans (except from foreign equity holder).

Short-Term Debt

• This account is comprised of any debt that is for maturity less than three years.