IMPACT OF WITHDRAWAL OF WITHHOLDING TAX ON ECBS

Corporates take to FCNR borrowings

Anindita Dey & Ujjal K Basu Roy

Mumbai, June 14: Foreign currency borrowing under the foreign currency non-resident deposits (FCNR) route has caught the fancy of corporates with the withdrawal of the exemption on payment of withholding tax on external commercial borrowings (ECBs).

According to bankers, FCNR(B) has become the favoured route as the ECBs have become expensive with the imposition of the withholding tax which ranges from 10 per cent to 20 per cent, varying from country to country.
FCNR is the deposit made by non-resident Indians with banks in India with a maximum tenor of three years. Interest rate on these deposits are charged under floating interest rates based on the Libor rates internationally.

However, borrowings from these deposits do not require the paying up of withholding tax, thus making them cheaper in comparison to ECBs.

According to bankers, the timing is appropriate for raising funds under the FCNR route, as after swapping the FCNR loans into rupees, the cost works out cheaper as compared to the rupee debt raised in the domestic market, as current Libor rates are lucrative. Besides, by borrowing under FCNR route, corporates enjoy a natural hedge against foreign currency fluctuations.

Moreover, even if the loan is for a shorter tenor than three years, banks with comfortable foreign currency deposits can make the life of the loan longer at the cost of a maturity mismatch, bankers said. According to them, this will make major public sector banks like State Bank of India and Bank of Baroda major players in loan syndication.

Bankers added that even if as per the legal opinion sought by the Indian banks, ECBs raised by them on behalf of their clients through their own branches overseas will not require the payment of withholding tax.
However, this is just an opinion. Therefore, bankers feel that borrowings under FCNR route is a preferred route for raising foreign currency loans.

With the new guidelines on withholding tax coming into effect from June 1, corporates had started securing new forex lines or refinancing existing ones, as the imposition of the withholding tax resulted in sharp hike in pricing of loans by 110-115 basis points (bps), thus making such loans less attractive.