Centre puts on hold further relaxation of ECB guidelines

By: | Published: June 9, 2015 1:16 AM

Further easing of the rules for companies to raise funds from overseas may not be carried out soon.

Further easing of the rules for companies to raise funds from overseas may not be carried out soon. The government and the RBI are yet to firm up a plan to deregulate external commercial borrowings (ECBs) and at the same time make hedging mandatory for foreign currency risks as was suggested by an expert panel, sources said on Monday.

The restrictions on ECBs would remain for now till the central bank was comfortable that it would be able to address potential risks to macro-economic stability from complete liberalisation of borrowing norms, a senior finance ministry official said.

“Once the RBI is comfortable that it can monitor hedging, then we can go ahead with it,” the official said. The central bank is yet to propose a transition path for implementing the Sahoo panel report, the official said.

The MS Sahoo panel, which submitted its report in March, had suggested removal of restrictions such as sectoral and company-specific caps, maximum cost of funds, maturity and end-use-related for ECBs. It also suggested compulsory currency hedging, in sync with the requirements of the economy at a given time with the underlying theme of averting a market failure.

The panel said the current norms “are neither contemporary nor grounded in addressing identified market failures”.

The proposed reform was meant to end the discretionary (approval) route that lends itself to an undesirable degree of subjectivity. “Ultimately, everyone wants that outcome (suggested by the Sahoo panel),” the official said.

There are some concerns that increasing limits in ECB were very risky and liberalising it completely could trigger a situation like the Asian (currency) crisis, another official said.

The RBI and the government are currently discussing on how to reach it, “but so far we don’t think it’s a good idea to increase the ECB limits”, the second official said.

The authorities aren’t sure by how much overseas borrowing would rise if ECB norms are liberalised, but expect that the local currency to turn more “volatile”, in the current global situation, the officials said.

The government and RBI have an understanding among them that the overall ECB in a year should not breach the $40-billion mark.

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