India has decided to raise the annual limit for external commercial borrowings to $30 billion from $20 billion, a move that would help investors across sectors to reduce cost of funds but would require the central bank to raise the level of caution on the country?s external debt situation.
The decision was taken at a meeting of the high level committee on capital markets (HLCC) here on Friday, a senior government official said on condition of anonymity. A notification is expected shortly.
Currently, there is an interest rate differential of 4 percentage points between ECB and domestic funds, thanks to a series of interest rate hikes by the RBI over the past year in its efforts to contain inflation. The comparatively lower cost of ECB is already reflected on the steeper growth in overseas borrowings vis a vis domestic loans.
ECBs in March 2011 amounted to $5.63 billion, up 30% over the corresponding month last year. Domestic corporate borrowing for the month, on the other hand, fell 14%, as per Sebi data.
?Raising the ECB limit is a right move at this juncture as it would improve infrastructure companies? access to long-maturity funds. Although ECBs are less expensive than domestic funds at present, in case of long-term borrowings, the relative benefit of overseas funds would hinge on the currency and interest rate fluctuations over the course of the repayment period,? said Ashwin Parekh, partner and national leader (financial services) Ernst & Young. He added that the RBI might now need to come out with a fresh set of guidelines for greater oversight of the ECB route. Sectoral ECB limits might have to re-set.
The widening of the ECB window would come in handy for Indian companies for their investments abroad. Companies going in for buying natural resources like coal mines abroad as well as those planning big-ticket acquisitions in sectors like telecom would benefit.
While government is promoting ECB route for infrastrcuture sector, there are specific curbs on real estate companies tapping debt through ECBs. Only realty projects with size of 100-acre or more are allowed to access ECB. There is no restriction, however, on pure equity investment, subject to certain conditions such as minimum capital requirement and a three-year lock-in.
The ECB policy of the government details the modalities for Indian companies to borrow money in overseas markets. ECBs include bank loans, suppliers? and buyers? credits, fixed and floating rate bonds without convertibility and borrowings from private sector windows of multilateral financial institutions. This route is considered more cost-efficient for corporates.
?The differential between the offshore and onshore rates is the key reason why companies are increasingly going for ECB funds. If the RBI continues with aggressive rate hikes, the trend will get accentuated,? said A Prasanna, ICICI Securities.
At Friday?s meeting of the HLCC, the government and financial sector regulators, however, decided not to raise the foreign institutional investor limit in government bonds. Currently, FIIs can invest up to $10 billion in government bonds.
The finance minister Pranab Mukherjee announced in this year’s budget that the FII limit for investment in the corporate bonds, with a residual maturity of over five years and issued by companies in the infrastructure sector, would be increased by an additional limit of $ 20 billion.