The Telegraph
Since 1st March, 1999
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Foreign loan conversion made easier

New Delhi, Dec. 3: The government today announced that it will allow companies to issue equity shares against all foreign commercial loans — also called External Commercial Borrowings (ECBs) — at any point of time.

The announcement made by the finance ministry today, however, clarified that this would exclude those deemed as ECBs and the foreign loans, which were sought to be converted should have been received in convertible foreign currency. It also said that this permission would be subject to meeting all tax liabilities and procedures.

“This basically helps Indian firms, which were to repay or prepay past loans to do so by issuing fresh equity shares instead of spending money in case they are strapped for hard cash,” said K. K. Sengupta, an independent merchant banker.

The government already allows issue of equity against ECBs but only when they come up for payment/repayment or against lumpsum fee and royalty. “The big difference being made is that a firm can issue shares against loans at any stage instead of when these loans come up for repayment. You could do that at present, but only after a lot of paperwork. Now, you can do this at any stage and with fewer hassles,” said finance ministry officials.

The decision to allow loan conversion into the longer term equity liability has been taken keeping in view India’s increasing forex reserves position, which today stands at over $92 billion, said officials.

Major Indian firms in steel, telecom and aviation like Bharti, Essar Steel, Jindal, Ispat, Sahara and Jet could be helped by this decision. Laden with huge foreign exchange debts, some of them have been working out various kinds of deals to roll them over. A few months back, Essar Steel agreed to buy back part of its dollar denominated loans at a massive discounted rate of 76 per cent.

Those who did not agree were asked to take either of two options — roll over for another 15 years at a quarter per cent over Libor or else go in for a rupee conversion of their debt, which too would be paid back after 15 years and carry an 8 per cent rate instead of the current 2.5 per cent over Libor.

“These firms can start negotiating with their lenders deals to convert loans into equity long before they mature. This could help them get better deals,” said Sengupta.

Even more significantly, it could mean a jump in the stock market value of their stocks said equity analysts, despite a fall in earnings per share as their “indebted status would wear off somewhat, reducing risks.”

Last month, the government tightened its policy on foreign loans, stating that the maximum spread allowed on ECBs over the Libor rate for normal projects would be halved to 1.5 per cent from a current 3 per cent.

It had also decided against easing the cap on foreign loans by ruling that ECBs over $50 million would be permitted only for financing equipment imports and infrastructure projects.

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