Stiff ECB norms may see rollback

Corporates planning big-ticket external commercial borrowing will have lots to cheer about in the new year. The government is understood to be considering a partial rollback of the stiff norms announced in November.

According to sources close to the development, the relaxed norms will be announced under a comprehensive policy for external commercial borrowing.

The new policy will be part of the Budget for 2003-04. But in case elections are advanced and there is a vote-on-account, the new norms will be announced separately.

Though a final decision has not yet been taken, guidelines relating to the amount and end-use of foreign loans are expected to be relaxed. Hedging of foreign loans would, however, be retained, the sources said.

Under the norms announced in November 2003, corporates can borrow up to $50 million without any restriction on the end-use, while loans above $50 million can be raised only for financing import of equipment and specific foreign currency requirements.

The interest rate on external commercial borrowing has also been restricted with spreads coming down from 300-450 basis points to 150-300 basis points above Libor. Along with a review of the end-use restrictions, the spread may also be reviewed.

However, on the issue of banks and financial institutions issuing guarantees to corporates for external commercial borrowing, sources said it was yet to be brought under the purview of the new policy since bank guarantees were a separate matter.

The government is also working out a separate scheme for foreign currency convertible bonds, which till now have been linked to the policy on external commercial borrowing.

With the government allowing conversion of external commercial borrowing proceeds to equity, there was a need to outline a separate policy for foreign currency convertible bonds, the sources pointed out.

While announcing the guidelines for external commercial borrowing in November, finance ministry officials had said the piling up of foreign exchange reserves, a soft interest rate bias and low credit offtake from domestic banks were the reasons behind the tightening of the norms.

In the pipeline

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• Separate policy for foreign currency convertible bonds
• Relaxations expected in minimum $50 million bar for automatic approvals
• End-use norms may be eased
• Hedging requirement of forex borrowing to be retained
• Tightened spreads (150-300 bps) may be relaxed