RBI cautious on use of forex for core projects

The proposal of the government on issuing innovative instruments as exchangeable bonds and use of foreign exchange reserves for financing infrastructure may have to wait.

In a note sent to the government, the RBI has specified that the proposal of the government to use foreign exchange reserves for infrastructure projects has implications on the overall policy for external commercial borrowing (ECB).

Since the proposal is to onlend it to companies involved in infrastructure in India or co-finance their ECB requirements, the guidelines for onlending has to be seen within the rules of the external commercial borrowing. This means the amount to be lent, maturity for the loans and interest rate on the loans to be given out of the reserves will have to be guided by the norms under the ECB rules.

Since the overall policy for ECB is under review of both RBI and the government, the modalities for using reserves for infrastructure will have to wait till a final call is taken on the ECB guidelines. This assumes significance since the overall policy review is shrouded in RBI's concern on the impact of ECB inflows on the money supply. Even if the amount onlent out of reserves do not come into India, it forms a part of the ECB of the company .

On the other hand, the RBI has also raised concern on the end-use monitoring of funds to be raised under the new instruments like exchangeable bonds. This is because these bonds, announced in the last budget, involves issuing of bonds by the holding companies which later gets converted into shares of one of its group companies, thus raising the issue of end-use monitoring of funds as to the identity of the actual fund raiser and the actual user of funds. Under the ECB guidelines, the funds can be raised by the company for its own requirement .

Under the budget proposal, these bonds will mostly help unlisted holding companies of major groups who are otherwise engaged in mega financing activities like development of infrastructure and overseas mergers and acquisitions.

The use of foreign exchange reserve for infrastructure financing was part of the recommendation of the Deepak Parekh Committee which stated that a small part of the forex could be used without the risk of monetary expansion. The committee had suggested the establishment of two wholly-owned overseas subsidiaries of India Infrastructure Finance Company (IIFCL) with two broad objectives. The subsidiaries could borrow funds from the RBI and lend to Indian companies implementing infrastructure projects in India, or co-finance their external commercial borrowings solely for capital expenditure outside India.

They could also invest funds borrowed from the RBI in highly rated collateral securities, and provide 'credit wrap' insurance to infrastructure projects in India for raising resources in international markets.

The loans by the RBI to these two subsidiary companies will be guaranteed by the Government of India, and the RBI will be assured of a return higher than the average rate of return on its incremental investment.