ECB norms likely to be further liberalised

New Delhi, Feb 20: The government is mulling the idea of furtherliberalisation of norms relating to the External Commercial Borrowings(ECBs), which may even find a place in the coming Budget.

The need for further relaxation in the borrowing rules governingthe ECBs emanates from the enhanced outward flow of Foreign DirectInvestment (FDI), the latest being big ticket investment in this regardrelating to the Tata's acquiring the British steel giant Corus. Crossborder acqisitions in 2006-07 amounted to nearly 18 billion dollars ascompared to the figure of 2.7 billion dollars in 2005-06.

Outward flow of FDI has witnessed a gradual ascendancy and in thelast calender year it came close to the inward FDI flows. In line withthe movement of liberalisation of the capital account, ECB guidelinestoo have seen a gradual relaxation.

The Finance Ministry is holding talks with the Reserve Bank ofIndia in this regard and in the event of the policy being worked outbefore the Budget, it is likely to find a mention there.

Informed sources say that ECBs flows routed through the SpecialPurpose Vehicles or overseas subsidiares specially intended foracquisitions and mergers will be incentivised through fresh policyinitiatives.

External Commercial Borrowings (ECB) are defined to includecommercial bank loans, buyer's credit, supplier's credit, securitisedinstruments such as floating rate notes, fixed rate bonds, credit fromofficial export credit agencies, commercial borrowings from the privatesector window of multilateral financial institutions such asIntrenational Finance Corporation (IFC) and Asian Development Bank(ADB), and Investment by Foreign Institutional Investors (FIIs) indedicated debt funds.

Officials said the provision of ECB for next year needs to behigher than that for 2007. The sources said the limit needs to beincreased as Indian corporates increasingly need money to fundacquisitions, both in India and overseas.

The ministry is working out the proposals in this regard.

At present a corporate can access ECB borrowings upto 500 millionin a year through the automatic route and another 250 million throughthe approval route. The limit using the approval limit may also behiked, the sources said.

The government will, however, tighten norms to ensure that baddebts are minimal. This will entail stricter norms for debt to equityand debt to networth ratio.

The experience of the 1990s was horrendeous when loans to many key companies went into a tizzy.

Along with this, the Finance Ministry is also working outrelaxation of norms relating to Indian Banks arranging the overseasacquisitions. But the central bank will need to bring in tougherprudential norms for deals relating to acquisitions and mergers usingthe ECB route.

According to ECB guidelines, all companies registered under theCompanies Act, except financial institutions such as banks, financialintermediaries and housing finance companies, are eligible to raise upto 500 million dollars under the automatic route in a financial year.For financial institutions dealing exclusively with infrastructure orexport finance such as IDFC, IL&FS and Power Finance Corporation,the government had decided that approval would be given by RBI on acase-by-case basis.

Funds from overseas markets work out cheaper compared to domesticborrowings. Besides, the availability of funds from internationalmarkets is huge compared to the domestic market. This enables thecorporates to raise large amount of funds at competitive pricesdepending on the risk perception. The growth in the domestic debtmarket has not been able to keep pace with the demand for debt.

ECBs are approved within an overall annual ceiling.

Minimum average maturities for ECBs have been defined by the government.

ECBs up to 20 million dollars or equivalent should have a minimumaverage maturity of three years and ECBs above 20 million dollars orequivalent must have an average maturity of five years.

Recently, however, the government enhanced the tenure of ECBs.Now, entities wanting to raise ECBs can raise it for a tenure of up to10 years, instead of the earlier three to five years.

UNI