1. Make hedging only tool to regulate ECBs: Finmin panel

Make hedging only tool to regulate ECBs: Finmin panel

In what could lend support to the government's plan to improve the ease of doing business, a panel set up by the finance ministry...

By: | New Delhi | Published: April 11, 2015 1:30 AM

In what could lend support to the government’s plan to improve the ease of doing business, a panel set up by the finance ministry has recommended the removal of an array of restrictions on external commercial borrowings (ECB) and making mandatory hedging of currency as the sole regulatory tool.

Seeking immediate dismantling of the extant regulatory framework and implementation of the revised framework, the panel recommended the restrictions on borrower, lender, amount, end-use, maturity and all-in-cost prescribed in the extant framework must be dismantled as they do not serve any purpose or address any market failure.

However, to mitigate the volatility and uncertainty in ECB inflows, the panel recommended continuation of the informal cap on ECBs in a year (which as per an understanding between the RBI and government is $40 billion as of now). Annual ECB inflows to the country have been around $30 billion in the recent years.

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If the authorities decide for any reason that very high value transactions need approval, the approval process must be objective, time-bound and transparent, the panel said.

The recommendations of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets were put up in the finance ministry website on Friday inviting comments till May 10, when the government and RBI take a decision on implementation.

“Just as trade reforms has given Indian firms an ability to buy the cheapest goods available globally, financial reforms should give Indian firms the ability to obtain the cheapest capital available on a global scale,” the committee said seeking a sector or end-use neutral ECB framework.

The panel headed by MS Sahoo, now a member of Competition Commission of India and a former whole-time member of Sebi, said it was conscious of the fact that hedging may make foreign currency debt a bit costlier. It recommended that measures should be taken to develop a liquid and deeper onshore derivatives market to increase access to the hedging tool.

Keeping in mind the shallow and underdeveloped domestic derivatives market, it said the level of compulsory hedging could be calibrated in sync with the requirements of the economy at a time and with the underlying theme of averting a market failure.

The panel recommended that the ECB access could be denied only to sectors where FDI is banned, such as gambling, lottery, chit funds, real estate or construction of farm houses and manufacturing of tobacco products.

In the revised framework, companies in other sectors irrespective of their sizes, profitability or whether the sector concerned was on the policy radar, will be free to access ECBs.

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