The Telegraph
Since 1st March, 1999
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Borrowing prop for buyouts

New Delhi, Feb. 6: The spate of recent overseas acquisitions, led by the landmark Tata bid for Corus, has egged on the government to provide greater incentives to India Inc on foreign investments.

“The government will look at further liberalisation of rules governing external commercial borrowings (ECB) ... we will talk to RBI and decide how this is to be done,” top finance ministry officials said. India Inc has shelled out around $18 billion in cross border acquisitions this financial year compared with $2.7 billion in 2005-06.

The officials indicated that though it will not be in the budget proposals, the new norms on ECBs may get a mention in the finance minister's budget speech if they are ready by the end of the month.

They said they have shed their inhibitions against ECBs on account of their impact on inflation and were now ready to encourage greater borrowings through special purpose vehicles, overseas subsidiaries and through subsidiaries that have been earmarked for overseas acquisitions.

Though the limit on ECBs was recently raised to $22 billion from $18 billion, the government will not refrain from increasing it further in the coming year if industry needed to raise more debt to fund their overseas acquisitions.

Even the latest rise was done to accommodate the interest of India Inc which was hungry for external loans to fund acquisitions in India and abroad.

Officials said the provision for next year should be equal to or higher than the allocation for 2007, though actual offtake may differ.

“The ceiling can be changed even in the middle of the year as and when required. We look at the kind of proposals that are there and then decide,” they said. For instance, in December it was decided to raise the limit from $18 billion as borrowings till then were $14 billion and there were proposals before the government for another $6-7 billion of loans.

A company can now borrow up to $500 million in a given year through the automatic approval route and another $250 million through the approval route. This, too, may be relaxed in the specific case of borrowing for a foreign acquisition.

However, the government may tighten stipulations for certain financial parameters, such as the debt to equity ratio or the debt to net worth ratio. This will protect the country’s credit rating.

“We want India to invest abroad but these investments must be wise… We cannot allow Indian corporate houses to create the kind of debt mess they did in the 1990s when loans to many core sector companies went bad,” the officials said.

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