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An Indian enterprise borrowing in foreign exchange has to comply with the external commercial borrowings (ECB) policy announced by the regulator, the Reserve Bank of India (RBI). ECBs encompass commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds, credit from official export credit agencies, foreign currency convertible bonds and commercial borrowings from the private sector lending arms of multilateral financial institutions—for instance, the International Finance Corporation and the Asian Development Bank. The ECB policy is monitored and updated by RBI on a regular basis, according to the macroeconomic conditions and foreign exchange liquidity situation. The Indian economy has seen phenomenal growth over the last few years. The economic boom was initiated by the information technology sector and followed by the resurgence in the manufacturing and services industries. While the boom was accompanied by substantial foreign direct investment, Indian enterprises have also accessed significant amounts of foreign debt. The cost of borrowing being higher in India compared with the international market, Indian companies started using the ECB route frequently. As an anti-inflationary measure, RBI amended the ECB policy, making it more restrictive. Over the course of last year, the subprime crisis in the US has snowballed into an international economic crisis. As the impact of this crisis was gradually felt across the globe, it has also affected India. Bankers globally have adopted a far more cautious approach to lending. The cost of funds has risen globally as more and more financial institutions are grappling with losses and write-offs. Lenders globally have complained that the standard benchmark rates, for example the London Interbank Offered Rate, do not represent the actual cost of funds. In order to address this, lenders have explored the possibility of invoking terms in the loan agreement that allow the interest rate to be increased to reflect the actual cost of funds. Such a change in the interest rate can be initiated using a “market disruption event” clause. While this is a common clause in the standard Loan Market Association standard loan agreements, a market disruption event would typically be invoked when there is an actual disaster, such as a critical breakdown of computer systems, natural disasters, and so on. This clause appears to be the only comfort to many troubled lenders across the globe. A market disruption event would allow the lender to calculate the rate of interest for a specific loan that represents its actual cost of funds. ECBs have suffered in view of the adverse economic conditions coupled with the regulatory hurdles; a quick look at statistics shows that the quantum of ECBs accessed through the automatic route (that is, without prior RBI approval) fell drastically, from $1.104 billion (Rs5,508.96 crore) in October 2007 to $321 million in October 2008. RBI has tried to address the problems faced in the realm of ECBs by announcing a number of steps to liberalize the policy. These steps include increasing the all-in-cost ceiling (the all-in-cost ceiling is the total amount including interest, fees and expenses, except certain specified fees and expenses, per loan) allowing rupee expenditure from ECB proceeds, and so on. The all-in-cost ceiling can now also be dispensed with altogether, with specific RBI approval. The scheme with regard to foreign currency convertible bonds (FCCBs), a type of ECB, has also been liberalized and prepayment has been allowed for FCCBs without RBI approval upon fulfilment of specified conditions. While RBI officials have...