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.
DECISIONS AT A GLANCE
* 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
Ozg Corporate Funding Consultant
Ozg Center, New Delhi & Mumbai
Email: funding.consultant@ozg.co.in
