The Telegraph
Since 1st March, 1999
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Stiff ECB rule dashes cheap money hopes

Mumbai, Nov. 16: Companies eyeing cheap funds may find their plans coming unstuck following moves unleashed by regulators and the government, forcing them to approach banks instead of tapping competitive alternative routes.

Corporate analysts feel that the ability of a few companies to successfully bring down their cost of financing may take a hit as a result of the Centre’s decision to tighten norms for raising funds through external commercial borrowings.

The government has recently imposed restrictions on all loans over $50 million, apart from bringing down the interest rate spread from 300-450 points to 150-300 points over the six-month Libor.

“Companies, particularly belonging to the second and third tiers, will not be able to bring down their cost of financing like before. They may have to borrow funds in the range of 8 to 11 per cent,” said Jindal Steel and Power Ltd vice-president (corporate finance) Sushil K. Maroo.

Jindal Steel, which is raising around $30 million through external commercial borrowings as part of a financial restructuring programme, is planning to raise the funds within the ceiling stipulated by the government, Maroo added.

External commercial borrowings were the most preferred route for many players who wanted to borrow at competitive rates. “Few used to take guarantees from Indian banks. Still, they mopped up funds at attractive rates,” a source said.

With the external commercial borrowing route now virtually out of bounds, particularly for smaller companies, it is felt that they could turn to bank finance for their needs. “In such cases, their cost of borrowings may go up,” the source added.

After the Securities and Exchange Board of India (Sebi) stipulated that companies are required to comply for making issue of debt securities on a private placement basis, it is felt that there could be a further delay in mobilising funds at attractive rates.

Sources said the Sebi regulations would give way to unnecessary paperwork, thus taking away the sheen from hitting the markets at an appropriate time.

Another cause of worry is the recent Reserve Bank of India (RBI) guideline that capped banks' investments in unlisted corporate debt securities to 20 per cent of their total investment in such assets.

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