The finance ministry has announced a five-fold increase, from $100 million to $500 million, in the amount companies building roads, ports, power plants, telecom and other infrastructure sectors can borrow overseas to spend in India.
The changes come into immediate effect with the Reserve Bank of India (RBI) notifying them this evening.
The move is expected to rally corporate sentiment and boost investor confidence in India’s burgeoning infrastructure that is expected to require $500 billion by 2012.
The government has also raised the upper limit of interest on such overseas borrowings by 100 basis points for tenors above seven years to enable companies to borrow at competitive rates from international markets, where interest rates have risen sharply.
“Considering the huge funding requirements, particularly to meet rupee expenditure, it has been decided to enhance the existing limit of $100 million to $500 million per year for borrowers in the infrastructure sector under the approval route,” the finance ministry statement said.
Further, external commercial borrowings (ECBs) above $100 million should have a minimum average maturity of 7 years, the statement added.
The restriction of $50 million for non-infrastructure companies for rupee capital expenditure, however, has been left unchanged.
All other aspects of the ECB policy have also been left unchanged. These include the $500 million limit per company per year under the automatic route, among other rules.
Overseas borrowing for the real estate sector is still banned.
Indications of ECB relaxations had come in from last week and earlier in the day today, Ashok Chawla, economic affairs secretary in the finance ministry, had indicated as much.
| BUILDING FOR CHANGE | ||
| Average maturity period |
All-in-cost ceilings over | |
| Existing | Revised | |
| Three years and up to five years | 200 bps | Unchanged |
| More than five years and up to seven years | 350 bps | Unchanged |
| More than seven years | 350 bps | 450 bps |
| *London Inter-Bank Offered Rate | ||
He added that the government and RBI were watching the situation closely and more measures would be taken depending on the liquidity situation and capital market developments.
This is the second time ECB norms have been relaxed this financial year. In May, the government had allowed infrastructure firms to borrow $100 million for rupee expenditure.
Finance ministry officials said the government might also look at relaxing the $200 million investment limit for individual foreign institutional investors (FII) in debt. At present, the limit on FII investment in government bonds is $5 billion. Earlier, the finance ministry had sought to increase it to $10 billion. Some end-use restrictions on borrowed capital may also be eased, they added.
HDFC Bank Chief Economist Abheek Barua said: “The appetite for Indian debt is not so high. I do not expect a huge surge in inflows,” he said but added that the market might be disappointed that the relaxation did not apply to non-infrastructure sectors.
In 2007-08, inflows on account of ECB and foreign currency convertible bonds were over $22 billion. This is expected to slow to $16 billion this fiscal, the Prime Minister’s Economic Advisory Council has estimated. In the first quarter, inflows on this account declined 42 per cent to $4.1 billion.
Sanjay Sethi, executive director and head of infrastructure, Kotak Investment Banking, said: “Given the serious credit market crisis globally, the impact of relaxing ECB norms might be slower than envisaged in the short term.”
He added that once the situation in the global financial markets stabilised, “today’s development will act as a good facilitator in attracting funds for the infrastructure sector”.
Also read:
Sept 20: ECB rules will be eased soon, says North Block
