ECB floodgate opens

Govt puts $500mn on automatic route, relaxes interest spread

The finance ministry yielded to India Inc's demand for easier access to external commercial borrowings (ECBs) by permitting foreign loans up to $500 million with an average maturity of over five years through the automatic route.

It also relaxed the interest rate spread on over 5-year ECBs to 350 basis points above London inter bank offer rate (Libor) from 250-300 basis points allowed for infrastructure and long-term projects at present.

Smaller corporates availing of ECBs with a tenure not over 3-5 years, have also been allowed loans up to $ 50 million under the automatic route provided the interest spread is within 200 basis points of Libor.

The end-use restrictions imposed in November have also been done away with and corporates can now tap overseas debt for investment in the industrial sector with focus on infrastructure.

The last review had drastically curbed corporates' access to foreign loans by restricting ECBs over $50 million to only financing equipment imports and infrastructure projects.

Finance Secretary DC Gupta told Business Standard: "We had some headroom available. Moreover, the intention is to give a fillip to the manufacturing sector, which has to sustain the current growth momentum in the next fiscal."

ECB proposals of several companies and banks are pending with the finance ministry. These include $500 million of Reliance Industries, IDBI ($500 million), Punjab National Bank ($ 215 million) and NTPC($100 million).

The ministry has, however, decided to continue with the ban on overseas borrowing for real estate and capital market investments. Also, the proceeds have to be necessarily parked abroad unless actually required here.

Further, banks, financial institutions and non-banking finance companies have also been barred from tapping the overseas markets for commercial loans. They will not be allowed to provide guarantees or letters of comfort.

However, banks and FIs that participated in the textile and steel sector restructuring packages of the government would be permitted to the extent of their investment.

Institutional sources said that banks and FIs have approached the finance ministry for permission to raise over $ 1 billion for funding these packages.

The ministry has made similar liberalisation for foreign currency convertible bonds with regard to spreads, end-use restrictions and procedures.

All cases, which fall outside the purview of the automatic route would be referred to the empowered committee of the Reserve Bank of India, a statement issued by the finance ministry today said.

Reacting to the guidelines, D D Rathi, group executive president & CFO, Grasim Industries, said: "The new ECB guidelines for eligibility criteria and removal of the end-user restrictions are a welcome news. The revised interest rates spreads, although theoretical for the high-end corporates, will enable the smaller borrowers more access. However, the government has not altered any guideline with regard to the 100 per cent compulsory hedging, which could be made more flexible. As for the changes in the procedures, the guidelines should have been more specific with regard to the timeframe "" there is a big market for 5 years. Maybe a category of 5 years and above should have been included."

Y M Deosthalee, CFO, Larsen & Tuobro, added: "There is case for further relaxation. The spread restrictions were uncalled for. There is a lot of investor appetite in the market and interest rate determination should be left to market forces. A lot of corporates are going in for capacity expansion, and therefore these restrictions will not be beneficial to them as most of them will be raising money for capex and 3-5 years is not enough. Also, the $20 million ceiling for 3-5 years is very small, it should have been in the range of $100 million. There is a lot of interest in Indian commercial paper and these guidelines should facilitate the long-term investment process."