Dollar dream

New Delhi, Feb. 15: The government today allowed firms to issue foreign currency exchangeable bonds that could be used to fund overseas operations.

These bonds can be issued by a company only to foreign investors, but the repayment can be made by offering equity in any firm within its group.

In a statement, the finance ministry said the tax treatment and interest rates on the bonds would be under the existing overseas borrowing rules of the Reserve Bank of India .

The bonds can only be issued by companies in sectors where the government allows foreign direct investment and overseas borrowing.

Proceeds from the bonds can be used to fund the activities of any group company overseas but cannot be invested in the local capital markets and domestic real estate projects.

Companies can also use the funds in joint ventures abroad.

Today’s move allows firms to unlock the value of holdings in group firms.

Besides, foreign exchange can be diverted to these bonds which, some analysts believe, can lead to a softening of the rupee.

The Indian currency has appreciated by over 15 per cent against the dollar that took a toll on exports.

According to Vikram Sahney, an equity analyst and a member of the National Stock Exchange, “It’s a positive signal which should ease the way for raising money from overseas markets. In a sense it is one more step towards rupee convertibility.”

Ashvin Parekh, an analyst with Ernst and Young, said there was little clarity in the finance ministry's move and the issue was subject to the RBI’s clearance.

Last year, the government announced in the budget plans to permit companies to unlock through the issue of exchangeable bonds a part of their holdings in group companies to meet financing requirements.