New Delhi: Further liberalisation of ECB norms

New Delhi, Feb 21: The government is mulling the idea of further liberalisation 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 governing the ECBs emanates from the enhanced outward flow of Foreign Direct Investment (FDI), the latest being big ticket investment in this regard relating to the Tata's acquiring the British steel giant Corus. Cross border acqisitions in 2006-07 amounted to nearly 18 billion dollars as compared to the figure of 2.7 billion dollars in 2005-06.

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

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

Informed sources say that ECBs flows routed through the Special Purpose Vehicles or overseas subsidiares specially intended for acquisitions and mergers will be incentivised through fresh policy initiatives.

External Commercial Borrowings (ECB) are defined to include commercial bank loans, buyer's credit, supplier's credit, securitised instruments such as floating rate notes, fixed rate bonds, credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions such as Intrenational Finance Corporation (IFC) and Asian Development Bank (ADB), and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds.

Officials said the provision of ECB for next year needs to be higher than that for 2007. The sources said the limit needs to be increased as Indian corporates increasingly need money to fund acquisitions, 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 million in a year through the automatic route and another 250 million through the approval route. The limit using the approval limit may also be hiked, the sources said.

The government will, however, tighten norms to ensure that bad debts are minimal. This will entail stricter norms for debt to equity and 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 out relaxation of norms relating to Indian Banks arranging the overseas acquisitions. But the central bank will need to bring in tougher prudential norms for deals relating to acquisitions and mergers using the ECB route.

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

Funds from overseas markets work out cheaper compared to domestic borrowings. Besides, the availability of funds from international markets is huge compared to the domestic market. This enables the corporates to raise large amount of funds at competitive prices depending on the risk perception. The growth in the domestic debt market 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 minimum average maturity of three years and ECBs above 20 million dollars or equivalent 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 to 10 years, instead of the earlier three to five years.

UNI