The Reserve Bank of India (RBI) has told the government that banks should not be allowed to participate in the auction of overseas loan quotas being planned by the authorities. The central bank is learnt to be of the view that it will be prudent to permit only end-users in the proposed auction mechanism for allocating external commercial borrowings (ECBs) to Indian companies.
The RBI and the finance ministry are working on the modalities of the ECB auctioning process, which will replace the current system that works on a first-cum-first-served basis, with an annual ceiling fixed at the beginning of the year.
Currently, the annual ceiling on overseas borrowings is fixed at $32 billion, out of which a single company can raise a maximum of $500 million. ?In the proposed mechanism, companies will bid on the price and the quantity of ECBs. Companies will be required to pay a premium to the government,? an official said.
The government and the central bank will finalise the operational aspects of the auction process, including its timing and frequency. It could be conducted on a monthly or quarterly basis, the official said. Banks, though, would continue to facilitate companies in raising ECBs.
But the government has now veered around to the view that SMEs should ideally be tapping funds locally, as this would protect them from currency risk. ?SMEs don?t have sufficient expertise. They don?t have many people to manage forex risk,? a banker said.
Auctioning of loans will also help the government in managing the capital account as the government can tweak the quantity of loans being auctioned.
?Through the auction mechanism, authorities can intervene and stabilise the foreign exchange market, especially in times of huge volatility,? said Joiel Akilan, India chief representative, Banco Bilbao Vizcaya Argentaria, a Spanish bank dealing in ECBs, loan syndication and trade financing.
The ECB auction idea was originally floated by Arvind Virmani, formerly chief economic advisor to the finance ministry. In a working paper in November 2007, he had suggested this as a flexible and transparent way of managing capital flows.
Companies brought in a record $28.7 billion of ECBs into India in 2007-08, which declined sharply to $13.3 billion in 2008-09. In 2009-10, companies raised $21.67 billion via ECBs and foreign currency convertible bonds. ?The auction could be held on a quarterly or monthly basis with the annual ceiling appropriately divided into quarterly or monthly tranches. The bid variable could be the unit price per rupees crore of borrowing by Indian residents from foreign residents,? Virmani had suggested.
The ECB auction is expected to be broadly on the lines of a bidding process that the Sebi currently follows for the sale of government and corporate bonds toFIIs. Sebi has established an open bidding process, through which it allocates investment limits for foreign institutional investors wanting to invest in these debt papers.
