Funds raised by Indian firms from the subsidiary of India Infrastructure Finance Company Ltd (IIFCL) would be counted as external commercial borrowings (ECBs). This would mean that a single Indian company could raise up to $500 million from the proposed overseas subsidiary as these funds would be subjected to ECB caps.
In case a single entity also raises funds from other external sources, then it can raise the remaining of $500-million limit from the subsidiary company.
According to modalities being finalised by the finance ministry and the Reserve Bank of India (RBI), the interest rate charged by the subsidiary would be lower than what companies pay on funds raised through other external sources.
While the present borrowings caps applicable under ECB norms would prevail for funds lent by the subsidiary company, other aspects ? such as interest spreads, eligibility criteria and end-use norms ? could be different, an official familiar with the matter said. The government is considering various options to formalise interest spreads, he said.
The government wants to keep interest rates competitive while generating profits for the subsidiary company. In order to minimise the cost of funds, the finance ministry has suggested the Reserve Bank of India (RBI) to subscribe to the bonds issued by the subsidiary.
The central bank had maintained that provisions in the RBI Act permitted it to offer only a refinance facility. However, after getting opinion of the law ministry, the finance ministry is convinced that it is legally tenable for RBI to subscribe to the bonds. Although the RBI is yet to give its green signal for this proposal, ministry officials are confident it would pass muster with the central bank.
Being a quasi-equity instrument, bonds would be cheaper for the subsidiary than the refinance arrangement. The subsidiary would get $5 billion as its first tranche out of the country?s burgeoning foreign exchange reserves, which touched $228.8 billion for the week ended August 31.
It will finance imports for infrastructure projects as well as co-finance ECBs raised for similar projects. Apart from financing capital imports, it would finance acquisition of infrastructure assets abroad by Indian oil and gas companies. But companies would not be permitted to use these funds in India as that could lead to monetary expansion here, thereby, resulting in related issues such as capital inflows and currency appreciation.
The proposed subsidiary would help the country in meeting its infrastructure funding requirement, which has been revised to $475 billion (at current prices) by the Deepak Parkeh Committee on infrastructure financing from the government?s estimate of $320 billion (at 2005-06 prices).
The government has shortlisted London and Singapore as the locations to set up the overseas subsidiary on the basis of regulatory framework, taxation aspects and ease of operations.