Easier ECB rules: OMCs look to raise $1.4 billion in first tranche

State-run oil-marking companies have decided to raise around $1.4 billion in the first tranche, following the Reserve Bank of India’s (RBI) recent decision to ease rules for raising foreign currency loans overseas. 

Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL), and Indian Oil Corporation (IOC) are seeking quotations for rates from various lenders to raise the funds under the relaxed external currency borrowing (ECB) norms, to meet working capital requirements, which mainly arise out of crude oil purchases.

“We are looking to raise $300 million and an additional $200 million as a green shoe option. We have just asked for proposals, and the process should be complete by mid-November,” said a top official from HPCL. He added that whether more funds were needed to be raised through the ECB route would be decided later.

On October 3, the RBI allowed the OMCs to raise dollars directly from overseas markets without a need for hedging. In its notification, the central bank said the minimum maturity profile of the borrowings should be three years and five years, and the overall cap under the scheme would be $10 billion.

IOC, the country’s largest refiner, is looking to raise $300 million under the ECB route in the first tranche. “We intend to raise about half of the $10 billion, which the RBI allowed for eventually,” said an official on condition of anonymity. The decision to ease the ECB norms was taken to help the OMCs access dollars through borrowings and, in turn, cut its physical demand. The first tranche is not expected to help in a significant way. “As OMCs borrow, the physical demand for foreign currency will come down and help the rupee. The first tranche of OMC borrowing is a positive step but may not be a very significant one,” said Madan Sabnavis, chief economist at CARE Ratings.

He added, “A cut down on the OMCs’ dollar purchase will help in case the rupee weakness was due to fundamental factors. However, I would attribute it more to international factors and, hence, OMCs’ borrowing for capital requirement will have a limited impact.” State-run BPCL also plans to raise up to $600 million as ECBs for its working capital requirement. A top official said the company would look at what rates were offered and further decision on the fundraising of a similar nature would be taken.

The borrowing rates at which the OMCs manage to finalise these ECBs will also determine the benefit it will get from the move. Deepak Mahurkar, partner and leader, Oil & Gas Industry Practice, PwC India, said, “The only gain for OMCs (from this ECB) would be if they manage to get these loans at good rates given their good credit profile. In the event of a stronger rupee at the time of repayment for these ECBs, the OMCs will also benefit to that extent.” The OMCs had to resort to borrowing for working capital during subsidy and oil bonds days, he said. “The current exercise of borrowing in foreign currency for working capital would help deal with currency demand for high-value foreign exchange purchases for rupee earnings companies. If interest rates are attractive, and if the rupee is benign during repayment in future, the companies would be advantaged significantly,” said Mahurkar.

The HPCL official quoted above pegged the OMC’s monthly forex requirement at $700 million. Oil and gas analysts estimate a similar range of forex requirement for BPCL, and almost double of it for IOC.