The government and the Reserve Bank of India (RBI) have eased the norms on overseas borrowing for Indian companies to boost inflows and help corporates raise funds for projects.
The revised rules provide for companies to pay a higher interest of upto 500 bps over the six-month libor on external commercial borrowings (ECBs). Companies can bring in the proceeds immediately and can also use dollar borrowings for rupee expenditure.
The easing of norms comes at a time when a number of Indian companies, who are already in the international loan markets, are finding it difficult to raise funds. The turbulence in global financial markets has impacted this market significantly and with banks reluctant to lend to each other, raising foreign currency funds is going to be tough.
Bankers say that liquidity is limited to the shorter end of the borrowing spectrum with global banks loath to lend for the medium and long term. According to the new rules notified by the RBI late on Wednesday, from now on, ECBs up to $500 million per borrower per financial year would be permitted for rupee expenditure or foreign currency expenditure for permissible end-uses under the automatic route.
The norm of a minimum average maturity period of seven years for ECBs of more than $100 million for rupee capital expenditure by borrowers in the infrastructure sector has been dispensed with.
The relaxation may not result in an immediate inflow of funds, given that overseas credit markets are frozen and spreads over libor have been widening. Roiled by the financial turmoil, banks abroad are reluctant to lend to corporates in emerging markets. They are looking at cutting down or are only maintaining their Indian exposure.
However, the new norms could benefit many AAA and AA rated Indian corporates to access the markets as and when the market eases up.
Telecom companies, who had earlier pitched for allowing the proceeds of ECBs for payment of licence/permit for 3G spectrum have been given that facility. At present, ECB proceeds are required to be parked overseas until actual expenditure takes place.
Now, companies can either keep these funds offshore or keep it with the overseas branches or subsidiaries of Indian banks abroad or to remit these funds to India for credit to their rupee accounts with banks in India until it is used.
Given the tight liquidity conditions in the market, RBI has said that banks have been allowed to pay upto 300 bps over six-month libor on ECBS between three and five years as against 200 bps earlier. For longer-term borrowings, corporates have been allowed to pay as much as 500 bps over six-month libor. Given that six-month libor is ruling at 3.7%, lenders will be allowed to pay out up to 8.7% interest on dollar borrowings.
The central bank also said that it will be keeping a close watch on the unhedged foreign exchange exposures of SMEs. A system of monitoring such unhedged exposures by the banks on a regular basis is being put in place.
Other earlier restrictions including the $500-million limit per company per financial year under the automatic route as well as conditions relating to eligible borrower, recognised lender, end-use, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged.
Seshagiri Rao, finance director, JSW said: "This will benefit corporates as one layer of approval, from RBI, has now been removed. Top-rated companies should be able to roll-over existing liabilities within the enhanced spreads now allowed by RBI." He added that JSW group companies would definitely look at the option of raising foreign loans in the wake of this relaxation.
According to Hemant Mishra, MD and head global markets (India), StanChart, "this is in line with the ministry and the RBI's proactive approach of managing the dollar liquidity shortage in the local market. This step will make it easier for India Inc to tap into the overseas capital market and also helps domestic liquidity in the process. There would be incremental appetite for quality India paper at the right price, once the international liquidity situation gets better."
Usually, the credit markets slow down towards the end of the calendar year. This might be accentuated this time because of the ongoing credit crunch. For the fiscal ended March 31,2008 Indian corporates had made overseas borrowings of $30.95 billion. This is as against borrowings of $25.35 billion in the previous fiscal. In the current fiscal, between April and August, corporates had borrowed $8.12 billion.
Said Robin Banerjee, director (finance) Essar Steel: "This will encourage flow of foreign exchange debt into India since they are cheaper than Indian debt if you don't consider rupee depreciation, which can be appropriately hedged. This is a positive step to build confidence and ensure flow of funds in tight market conditions.
"We are yet to study the details, but at first brush, they appear to be very positive for the industry," said a top Vodafone-Essar official. Said Idea Cellular MD Sanjeev Aga, "While Idea is not affected, this may be a useful step for the sector. However, there are several loose ends in the preparation for the 3G auctions and it would be desirable that these are meticulously addressed instead of rushing through."
Highlights
" All in cost ceilings (libor plus spread plus issue expenses) have been relaxed by the RBI. More corporates can use the ECB window
" $500 Mn for rupee expenditure
" Telecom companies can use the ECB for raising money for license/permit for 3G Spectrum
" Corporates can remit these funds to India for credit to their rupee accounts in India, pending utilisation for permissible end-use.
" Monitoring of unhedged exposures of SMEs being put in places
* Corporates unlikely to benefit in the short term as global banks are still not comfortable in lending.
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