External Commercial Borrowings;

External commercial borrowings (ECBs) are loans raised by Indian companies from foreign lenders. They are typically denominated in foreign currency, such as US dollars or euros. ECBs can be used to finance a variety of purposes, such as:

  • Capital expenditure
  • Working capital
  • Mergers and acquisitions
  • Redemption of existing debt

MCQs on external commercial borrowings (ECBs)

  1. Which of the following is not a purpose for which ECBs can be used?
    • Capital expenditure
    • Working capital
    • Mergers and acquisitions
    • Redemption of existing debt
    • Answer: Investments in shares
  2. ECBs are typically denominated in:
    • Indian rupees
    • Foreign currency
    • Both of the above
    • None of the above
    • Answer: Foreign currency
  3. The Reserve Bank of India (RBI) regulates ECBs through the:
    • Foreign Exchange Management (External Commercial Borrowings) Regulations, 2018
    • Foreign Exchange Management (Borrowing and Lending) Regulations, 2000
    • Foreign Exchange Management (Non-Debt Instruments) Regulations, 2019
    • All of the above
    • Answer: Foreign Exchange Management (External Commercial Borrowings) Regulations, 2018
  4. The RBI sets limits on the amount of ECBs that can be raised by Indian companies. These limits are based on the company’s credit rating and the purpose of the borrowing.
    • True
    • False
    • Answer: True
  5. ECBs can be a good way for Indian companies to raise capital at a lower cost than they would from domestic lenders. However, ECBs also carry some risks, such as foreign exchange risk and interest rate risk.
    • True
    • False
    • Answer: True

Conclusion

External commercial borrowings (ECBs) can be a useful tool for Indian companies to raise capital. However, it is important to understand the risks and regulations associated with ECBs before borrowing.

Here are some additional points to keep in mind about ECBs:

  • ECBs are subject to foreign exchange risk. This means that the value of the ECBs can go up or down depending on the exchange rate between the Indian rupee and the currency in which the ECB is denominated.
  • ECBs are also subject to interest rate risk. This means that the interest rate on the ECB can go up or down, which can affect the company’s repayments.
  • ECBs must be approved by the RBI. The RBI will consider the company’s credit rating and the purpose of the borrowing before approving an ECB.

It is important to understand the risks and regulations associated with ECBs before borrowing. Companies should seek the advice of a financial advisor before considering an ECB.