The Reserve Bank of India today threw open overseas borrowing norms by allowing companies to borrow up to $500 million for rupee expenditure under the automatic route for permissible end uses.
The list of end use includes investments in the industrial sector, foreign direct investment in joint ventures or 100 per cent subsidiaries, first-stage acquisition of shares in disinvestment and open offers as well as micro-lending to self-help groups by NGOs. Existing restrictions on using rupee funds for investment in capital markets, real estate or inter-corporate lending continue to remain in force.
The requirement of a minimum average maturity period of seven years for loans of more than $100 million for rupee expenditure by infrastructure sector firms has also been done away with.
This is the latest in a series of steps taken by the central bank to ease the liquidity crunch faced by companies, thanks to the financial crisis arising out of sub-prime mortgage lending in the US. This is the third time in two months that external commercial norms have been revised to improve the access of Indian companies to overseas funds.
In another crucial change, borrowers, who were hitherto required to park the funds overseas until actual deployment in India, have now been granted the flexibility to remit the funds to India for credit to their rupee accounts with banks in the country, pending utilisation.
This is expected to increase liquidity in the banking system as well as support the Indian currency, which has weakened against the US dollar to below Rs 49. With the banking system overseas under strain, Indian companies were keen to repatriate their overseas borrowings into India. Companies are also keen to capitalise on the fast depreciating Indian rupee.
| ECB LIBERALISATION, ACT III |
| * Companies can now borrow up to $500 million for rupee expenditure under automatic route |
| * Minimum average maturity period of 7 years removed for loans of over $100 million for rupee expenditure by infrastructure firms |
| * Borrowers can remit funds to India for credit to rupee accounts with banks, pending utilisation |
| * Interest ceiling doubled to 200 bps for loans of 3-5 years, by 150 bps to 500 bps for loans up to 7 years |
| * Telecom firms allowed to raise overseas funds to acquire 3G mobile licences |
| * RBI will monitor unhedged exposures by banks |
In a late night announcement, RBI also raised the interest ceiling by 100 basis points to 200 basis points for loans of between three and five years and by 150 basis points to 500 basis points for loans of up to seven years. This has been done in view of the tight liquidity conditions in international financial markets. The central bank also said the all-in-cost ceilings will be reviewed in the future, depending on conditions in the international financial markets.
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In addition, RBI has also allowed telecom companies to raise funds overseas to acquire third-generation (3G) mobile licences. The auction of 3G spectrum, which is scheduled for later this year, is expected to raise at least Rs 40,000 crore for the exchequer and help bridge the fiscal deficit. "This move will act as an enabler to the timely conduct of 3G auctions in the country." Manoj Kohli, CEO and joint managing director, Bharti Airtel said.
The changes come into effect immediately.
“It is a big policy change. The ECB route has been thrown completely wide open. After this, no major restrictions on overseas borrowings remain,” a finance ministry official said.
The central bank also said it will monitor unhedged exposures by banks, in view of the risks associated with such exposures by small and medium enterprises in India.