By Saikat Chatterjee / Reuters
Mumbai: India’s moves to restrict capital inflows by tightening overseas borrowing rules for local firms will raise borrowing costs by 1 to 2 percentage points, analysts say, but could also add some life to illiquid debt markets.
The government’s new curbs would virtually block the offshore fund-raising route for small- and medium-sized firms, with infrastructure companies among the hardest hit, they said on Wednesday, 8 August.
“Foreign currency borrowings for small ticket companies will take a back seat. For companies in the $10-$50 million bracket, they will take a big hit,” said Prakash Subramaniam of Standard Chartered Bank, who estimated $6 billion to $9 billion of planned deals would now be frozen.
Surging capital inflows into Asia’s third-biggest economy have complicated monetary policy and currency management by pushing the rupee to nine-year highs against the dollar at a time when India wants to boost exports.
To limit pressure on the rupee to rise, the finance ministry said late on Tuesday that firms raising more than $20 million in external commercial borrowings (ECBs) would now only be able to use the proceeds abroad.
RBI approval is now needed to bring in borrowings of up to $20 million. Earlier, companies could bring in up to $500 million, and analysts say if the approval process becomes cumbersome, it would negate the benefits of borrowing abroad.
Firms raised about $16 billion via the offshore route in 2006-07, a six-fold increase from the previous year, attracted by lower offshore interest rates, a rising local currency which lowers interest payments in rupee terms, and the need to add capacity to feed growing demand.
Standard Chartered estimated Indian firms borrowed $9 billion overseas in the four months to end-July.
Sheshagiri Rao, director-finance at JSW Steel, which raised $500 million via ECBs this year and $300 million in 2006, said firms that now had to tap local markets might find their profit margins getting squeezed by the higher cost of debt.
“The flexibility to raise offshore borrowing to finance rupee expenditure will not be present in future,” he said.
Offshore 10-year bonds issued by State Bank of India, the country’s biggest bank, were quoted at around 7.6%, while 10-year bonds issued by a wholly-owned subsidiary were at 9.4% in the local market.
The size of the local corporate debt market is estimated at $25 billion, and the prospect of a rush of diverted issues is expected to push bond yields up.
“The addition in the supply is going to push costs higher. With a tight monetary bias continuing, investors will extract a steep price,” Anil Ladha, head of fixed-income capital markets at ICICI Securities said.
Still, the restrictions on foreign borrowings could breathe life into moribund local debt markets as India moves towards full capital account convertibility by 2011.
“You need to have a means of financing other than equity, and developing the local debt markets is a must towards full capital account convertibility,” said Dilip Shahani, head of Asia-Pacific research at HSBC in Hong Kong.
Indian companies can also still offer shares in the global equity markets and enter tie-ups with private equity players. Demand for bank loans, something the central bank was trying to curb earlier this year, is also expected to pick up.
“What will change is the financing mix via the foreign and local routes, and juggling the equity and debt mix,” said Sujan Hajra, chief economist, Anand Rathi Securities.