There may soon be a way around the government?s external commercial borrowing (ECB) caps for domestic companies. Loans from the proposed overseas subsidiary of India Infrastructure Finance Corporation Ltd (IIFCL) are likely to be available at rates linked to the London inter-bank offered rate (Libor) without being subject to ECB caps. ?Funds provided by the subsidiary would be like ECBs, but would escape existing caps,? an official familiar with the issue said.
This avenue could help feed the voracious investment appetite of Indian companies, necessary to keep critical sectors like infrastructure nourished. To help companies tap this route instead of going elsewhere, interest spreads finalised by the government could be even lower than other sources of external funding. This would be possible as the subsidiary will leverage the country?s forex reserves to build its corpus, and, thus, will have a lower cost of capital than any overseas lender.
Firms are currently permitted to borrow abroad at 150 bps above Libor for loans between three to five years? maturity and 250 bps above Libor for loans of over five years? maturity.
The government has set an annual ECB cap of $22 billion for the entire economy in a year. That limit has been exhausted. Under the overall cap, each company can borrow funds up to $500 million under the automatic route. An official said the proposal for the subsidiary was ready. RBI was likely to choose either London or Singapore to set up the IIFCL subsidiary.