|
External Commercial Borrowings: Norms Eased
|
A high level committee chaired by Economic affairs secretary R.Gopalan announced a series of changes in the External Commercial Borrowing (ECB) guidelines. The committee comprised of officials form both Ministry of Finance as well as the RBI. The key changes that were announced as under:
- The ECB limit for more than 5yr maturities through the automatic route, wherein the RBI approval is not required has been hiked from $500 mn to $750 mn for individual companies.
- The overall ECB issuance however for the current fiscal has been kept unchanged at $30 bn with an assurance that it may be increased at a later stage incase required.
- The end-use of ECB funds has been widened by allowing 25% of the ECB proceeds to be utilized towards repayment of existing rupee debt. And the ECB proceeds can now be utilized towards refinancing of buyer’s & supplier’s credit also.
- ECB denominated in rupee can now be availed.
- ECB denominated in Chinese Yuan (CNY) is now permitted with an overall limit of $1 bn.
- High Net worth Individuals (HNIs) are now allowed to invest in infrastructure debt funds.
- Infrastructure finance companies’ issuances will be eligible for inclusion under FII in debt limit.
- The committee has also agreed to propose to the Revenue department to allow tax exemption on withholding tax on interest payable on ECB issuances of maturity 5 yrs & beyond.
We expect RBI to notify the new ECB guidelines in due course.
Our Analysis
- The overall cap on ECB at $30 bn is likely to be raised soon, as half of the limit has already been utilized in the first 4 months of the current fiscal. The Government is aware that there would be a growing demand form the corporates to access cheaper overseas funding since the domestic interest have been rising steadily. The ECB issuance limit was last raised from $20 bn to 30 bn in 2010.
- With the broadening of end use of ECB funds the Government is trying to address the problems of the corporate sector who are reeling under the pressure of rising domestic interest rates and also of late, due to a crunch in USD liquidity. The liberalization would help corporates to fund working capital at cheaper rates, as RBI continues to raise domestic interest rates to arrest inflation which is now approaching double digit growth.
- The ECB denominated in rupee is a welcome move as this will eliminate the currency risk for a corporate, while retaining the interest benefit. The requirement of entering into separate derivative contracts like swaps, currency options, caps etc to hedge ECB exposure can be done away with. However it is important to see if the rates offered by banks would be in line all-in cost of ECB in foreign currency. The corporate availing Rupee ECB will however forego the benefit of profit Rupee appreciation, while repaying the ECB.
- The Yuan denominated ECB will provide access to cheaper funding as the Chinese interest rates are relatively lower and also lesser currency volatility will make the currency an attractive funding source. Recently Reliance Power and a nationalized Bank have tapped CNY funds through an offshore bond issuance. However the corporates need to keep in mind that the CNY is a managed currency and we cannot rule out sudden adverse monetary developments in the CNY. Moreover hedging a CNY ECB would be another issue in terms of the lack of derivatives market for the CNY.
To conclude we do feel that the said recommendations would result in cheaper funding options for Indian corporates, and eventually, would lead to higher capital in-flows.
Aniket More
(Manager – Strategic Advisory Services)
|
|