The Telegraph
Since 1st March, 1999
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Most riders out in foreign loan boost

New Delhi, Jan. 19: The Union finance ministry today relaxed external commercial borrowings (ECBs) guidelines, removing end-use restrictions.

The government today said ECBs would be allowed for all corporate investments in industrial sector, especially infrastructure sector. The restrictions on ECBs for investment in capital market or in the real estate will, however, continue.

All ECBs for a period of three to five years up to $20 million or roughly Rs 90 crore will be allowed through the automatic route. Similarly, ECBs up to $500 million (or Rs 2,250 crore) will be allowed for tenures of more than five years through the automatic route.

In the case of loans above these ceilings, companies will have to approach an empowered committee set up by the Reserve Bank of India (RBI).

However, in a bid to put a lid on India’s burgeoning reserves position, it also added a rider: money has to be parked abroad unless actually required.

These amendments to the ECB guidelines will come into force from the date of issue of notification of regulations.

The terse finance ministry statement said all companies, except banks, non-banking financial companies (NBFCs) and financial institutions, shall be eligible to become ECB borrowers.

However, banks and financial institutions having participated in the textile or steel sector restructuring package of the government or the RBI will be permitted to the extent of their investment in the package.

It also said all ECBs shall be subject to revised interest spreads over the London inter bank offered rate (Libor) — the benchmark interest rate.

Those with an average maturity of three to five years, can be plus or minus 200 basis points over the six-month Libor benchmark. Similarly, those with more than five years of average maturity, can be plus or minus 350 basis points over Libor.

Indian banks, financial institutions and NBFCs will, however, not be able to provide guarantees or a letter of comfort for such loans.

The statement also said foreign currency convertible bonds will follow similar norms on end-use restrictions, and procedures.

The decision follows intense round of lobbying by companies who wanted the ECB window to be liberalised.

In October, the Union government had refused permission to the Reliance group to raise an external debt of $500 million and instead advised the Mumbai-based group to approach the domestic debt market as the reasons cited for taking the foreign exchange denominated loan were not considered important enough.

In November, the government had actually tightened the borrowing window following a surge in its forex reserves. It had tightened its policy on foreign loans, stating that the maximum spread allowed on external commercial borrowings over the Libor rate for normal projects would be halved to 1.5 per cent from an earlier 3 per cent.

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

However, analysts said the decision was short sighted. Said K. K. Sengupta, a merchant banker, “Debt in India has become cheap and short term loans can be accessed 4.5-5 per cent by triple A rated companies.”

“When you take exchange fluctuation risks into account, for the triple A rated firms, it may actually work out to be the same whether you borrow abroad or in India,” he added.

In fact, the lower interest regime in India coupled with larger forex reserves has seen the government announcing permission to companies to prepay the existing foreign currency convertible bonds last year.

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