The easing of the ECB (external commercial borrowing) policy for key infrastructure sectors announced in the Budget will come with sectoral caps and time lines. That apart, the Reserve Bank of India will vet the ECB proposals of individual companies on a case-by-case basis, officials said.
The budget proposal was to ease debt constraints of firms in aviation, road construction and power sectors by allowing them to raise cheaper funds through ECBs. A senior government official requesting anonymity said: ?RBI in discussions with finance ministry has decided to put these ECBs on the approval route, as these are capital intensive sectors.?
The new sectors will raise funds within the overall ECB ceiling is $30 billion. The government sees the whole arrangement as a temporary measure to help funds-starved firms to get cheaper funds from overseas till the time the domestic interest rates drop.
Finance minister Pranab Mukherjee in the budget for 2012-13, allowed aviation sector to raise funds through ECB for working capital requirements of the industry for one year, subject to total ceiling of $1 billion. The government has also allowed low cost, affordable housing projects to avail ECB window.
In addition to these two sectors, raising ECB has also been allowed to part finance rupee debt of existing power projects and to road construction sector to meet capital expenditure on the maintenance and operations of toll systems for roads and highways.
The Reserve Bank will issue guidelines for each of these sectors within one month, which might include sectoral caps.
A high-level committee in September last year had proposed increasing the overall limit for overseas borrowings by a company under the ?automatic? route to $750 million from the current $500 million. Such ECBs have a maturity of above five years and can be raised without a specific regulatory approval.
The budget proposal by allowing the power companies to raise ECB will help refinance debt on their books. Many of the Indian power companies who are not able to sustain their operations as prices of raw materials like coal have increased, this will help them reduce their cost of borrowing by replacing their rupee debt.
The tight monetary stance by RBI has made the domestic borrowing rates non-viable for these companies, an ECBs will help these companies raise foreign debt at lower interest cost.
At present, Indian banks have huge exposure towards the power sector and the loan book is heavily under stress. But with this provisioning, they will be able to recover their rupee debt.
In addition to this, the rate of withholding tax on interest payments on ECBs has also been reduced from 20% to 5% for three years. The sectors coming under the purview of the same include power, roads and bridges, airlines, ports and shipyards, affordable housing, fertiliser and dams.
With the aviation industry grappling to come to terms with its working capital shortage and debt issues, Mukherjee has breathed new life to the sector by allowing it to raise working capital loans via the ECB route. This is the first time that ECB has been allowed for raising working capital. Domestic carriers like Kingfisher Airlines, Jet Airways and Indian Airlines will benefit.
