New Delhi: Enthused by the reviving investor interest in the Indian power sector, state-owned Power Finance Corp. Ltd (PFC) plans to tap the overseas debt market.

PFC, one of the largest lenders in the Indian power sector, plans to raise $250 million through external commercial borrowings (ECBs). It will hold road shows next month.

“Some forex portfolio is required for hedging. We plan to raise money through the ECB route, given the fact that the mood and the sentiment has changed about India after the new political dispensation has come to power," a PFC executive said, requesting anonymity.

Analysts have termed the Narendra Modi-led National Democratic Alliance (NDA) government that came to power with 336 seats in the 16th Lok Sabha election as a catalyst that has improved investor sentiment.

“The election was clearly a game-changer, and it’s tempting to shrug off this GDP (gross domestic product) print—surely things will improve from here, with the BJP’s (Bharatiya Janata Party, which heads the NDA) victory acting as a catalyst for a bounce in private investment and household spending," HSBC wrote in a 1 June report. “Sentiment matters and the prospect of faster reforms will unleash pent-up demand in the coming months."

Lending organizations want to raise money through this route as they believe ECBs offer the advantage to reduce interest rates and are attractive even after hedging. Under the ECB window, firms in India are allowed to borrow from overseas, under certain conditions, through different instruments.

PFC raised $500 million through ECBs in 2012-13 through syndicated loans. According to PFC, it enters into hedging transactions to cover exchange rate and interest rate risk through various instruments like currency forward, option, principal swap, interest rate swap and forward rate agreements. On 31 March, 2013, PFC’s total foreign currency liabilities were $1,040.30 million.

Queries emailed to a PFC spokesperson on 17 June remained unanswered.

“We want to broad-base our borrowing bucket and plan to bring in some foreign portfolio," said the PFC official cited earlier. Another PFC executive, who also didn’t want to be identified, confirmed the development.

The health of the power distribution sector holds the key to the success of generation projects in a sector seen as a key bottleneck in efforts to sustain and boost growth. With attempts being made to bridge the gap between the cost of electricity procurement and tariff realization, the Union government’s bailout plan for power distributions companies (discoms) included regular tariff revisions as part of the conditions to be met.

Policy interventions, debt restructuring initiatives and tariff hikes are expected to improve the financial health of state electricity boards. Electricity distributors owe 2 trillion to banks and other financial firms.

PFC registered a net profit of 5,418 crore on a turnover of 21,537 crore in the previous financial year (2013-14). In 2013-14, PFC, which has loan assets of 1,89,231 crore, sanctioned 60,729 crore and disbursed 47,162 crore. It has set itself a resource mobilization target of 44,000 crore in the current fiscal (2014-15).

However, the ECB position has to be hedged properly because if the currency depreciates sharply, it will lead to increase in the company’s liability. Also, at the macro level, higher level of borrowing from overseas may push the currency to appreciate, which makes exports uncompetitive in the international market.

Authorization is required from the Reserve Bank of India, which has generally discouraged ECBs as this adds to the problem of excessive capital inflows into the country, which the bank manages through monetary policy tools to ensure price stability.

On 31 March, PFC had total borrowings of 1,59,215 crore, of which 1,50,289 crore was rupee-denominated loans and 8,926 crore as foreign currency loans.

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