ECB limit raised by RBI in India

ECB limit raised by RBI in India

As borrowings cost higher in domestic markets, firms allowed to raise cheaper funds to refinance rupee loans.

With interest rates in the country ruling high, the finance ministry on Thursday allowed Indian companies to raise cheaper funds overseas to refinance their rupee loans. For the first time, it allowed China’s Renminbi as an acceptable currency — under external commercial borrowings with an overall ceiling of $1 billion.

A high-level committee on external commercial borrowings (ECB) also decided to increase the overall limit for these borrowings under the ‘automatic’ route to $750 million from the current $500 million. Such ECBs, where a corporate can raise money without seeking regulator’s approval, would have a maturity of above five years. The overall ECB limit of $30 billion was left unchanged, as only about $15.13 billion from it has been used so far this year.

* Automatic approval limit increased to $750 mn from $500 mn
* $30 billion overall ceiling can be increased later, if needed
* Refinancing of rupee loans allowed though ECB
* ECB can be raised in Chinese currency Renminbi
* Refinance of buyer’s/ supplier’s credit permitted through ECB
* Interest during construction under ECB permitted
* Allowed availing of ECB denominated in rupee
* High networth individuals can invest in infra debt fund
* Inclusion of infra finance companies as eligible issuers for FII’s debt limit
* Tax exemption on interest on withholding tax to be taken up with revenue dept

“This is not going to be something cast in stone,” economic affairs secretary R Gopalan said. “If there is a requirement of additional ECB for infrastructure we will positively consider revising this limit,” he told reporters after the meeting that was attended by officials from the Reserve Bank of India (RBI).

The companies will now be allowed to use 25 per cent of the ECB to pay off their rupee debt. The remaining 75 per cent will have to be used for new projects. Under the existing ECB policy, the government does not allow any corporate to refinance its existing rupee loan through ECB.

Finance ministry officials said refinance of rupee debt of all maturities would “hugely benefit” the corporate sector, especially infrastructure companies buying capital goods, as it would incentivise further investment. As the money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that.

The ministry has not put any ceiling on individual companies for using renminbi as currency for ECB. Even though the overall limit for permitting it under ECB is only $1 billion, the officials denied possibilities of a single company using the entire amount as it would come under ‘approval’ route. India currently allows ECBs in US dollar, euro, British pound and Japanese yen.

“The cost of borrowing in Renminbi is far less,” said a finance ministry official. “Companies go for it as it is on easier terms. We are getting their (China’s) money cheap.”

The limit for automatic approval has also been increased from $100 million to $200 million for the services sector (hospitals, tourism) and from $5 million to $10 million for non-government organisations and microfinance institutions. The decisions will come into effect through a notification by RBI.

The relaxation came in the wake of high interest rates in India and rising global uncertainty. Finance ministry officials said more than 90 per cent of the decisions were based on the industry’s suggestions at a meeting with finance minister Pranab Mukherjee last month.

Among other key decisions, the ministry allowed high networth individuals for investment in infra debt fund, included infrastructure finance companies as eligible issuers for FII’s debt limit for infrastructure, permitted refinance of buyer’s/suppliers credit through ECB, okayed interest during construction under ECB, gave a nod to availing of ECB denominated in rupee since the borrower is insulated from the exchange rate risk, and provided clarity on definition of equity for ECB from foreign equity holders.

On the issue of exempting withholding tax on interest payable on ECBs of maturity of five or more years, an official said it would be “taken up strongly” with the department of revenue.

Source: Business standard, Sept 16, 2011

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