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Session 24

The Balance of Payments (BOP) Account records a country's economic transactions with the rest of the world, including credits for money received and debits for payments made. It consists of various components such as the Capital Account, which includes Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), and External Commercial Borrowings (ECB). ECBs facilitate access to foreign funds for Indian corporations and come in various forms, including Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs), each with distinct features and regulations.

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2 views12 pages

Session 24

The Balance of Payments (BOP) Account records a country's economic transactions with the rest of the world, including credits for money received and debits for payments made. It consists of various components such as the Capital Account, which includes Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), and External Commercial Borrowings (ECB). ECBs facilitate access to foreign funds for Indian corporations and come in various forms, including Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs), each with distinct features and regulations.

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UPSC CSE

Foundational Course
Indian Economy
Session: 24
External Sector: BOP Account
Adil Baig AM
BOP Account
• BOP Account is a country’s transactions with the outside world
• The balance of payments of a country is a systematic record of all
economic transactions between the residents of a country and
the rest of the world.
• It is a double entry book keeping
• It is composed of all receipts on account of goods exported,
services rendered and capital received by residents and
payments made by them on account of goods imported, services
received and capital transferred to non-residents or foreigners
• If a country has received money, this is known as a credit, and if a
country has paid or given money, the transaction is counted as a
debit.
BOP Account
BOP Account
External Sector / வெளியுறவுத் துறற
Capital Account
• Foreign direct investment (FDI)
• Foreign Portfolio Investment (FPI)
• Public Debt
• External Commercial Borrowings
• Capital Transfers
External Commercial Borrowings
• Supplier’s Credit
• Buyer’s Credit
• Foreign Currency Bonds
• Foreign Currency Convertible Bonds
• Foreign Currency Exchangeable Bonds
(1) External Assistance
 Bilateral Loans: Loans from another country
 Multilateral Loans: Loans from Multilateral agencies like World Bank, IMF

(2) External Commercial Borrowings


 An external commercial borrowing (ECB) is an instrument used in India to facilitate the access
to foreign money by Indian corporations and PSUs (public sector undertakings).
 ECBs cannot be used for investment in stock market or speculation in real estate.
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.
(2) External Commercial Borrowings
 Bonds and other securitized instruments
 Buyer’s credit and Supplier’s Credit
 Foreign Currency Convertible bonds
 Foreign Currency Exchangeable bonds
 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.
 Foreign Currency Convertible Bond (FCCB) 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.
What are Foreign Currency Exchangeable Bonds?
 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.
Buyer’s Credit & Supplier’s Credit
 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.

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