RBI says no to REC’s plan on $1 bn external borrowings

RBI says no to REC’s plan on $1 bn external borrowings

New Delhi: The Reserve Bank of India (RBI) has rejected Rural Electrification Corp. Ltd’s (REC’s) application to borrow $1 billion (Rs3,940 crore) in the current fiscal year through external commercial borrowings, or ECBs.

The apex bank has said that since there is already a lot of liquidity in the domestic market, there is no need to borrow from overseas. REC is one of the two largest lending organizations in the Indian power sector, along with Power Finance Corp. Ltd (PFC).

REC had approached the finance ministry and the central bank to get permission to borrow this amount as was reported by Mint on 4 August.

“We wanted to raise two tranches of $500 million each. The application has been rejected on the grounds of the domestic markets (being) flush with funds," confirmed a senior REC executive, who did not wish to be identified.

RBI has generally discouraged borrowings through ECBs as it adds to the problem of excessive capital inflows, which it manages through monetary policy tools to ensure price stability in the country.

Analysts say RBI’s approach stems from the fact that since the liquidity in the Indian market is improving, ECBs should be used sparingly as the apex bank has to manage money flows into the country.

The overall annual limit on ECB authorizations is $22 billion. According to RBI’s balance of payments data, ECBs in 2006-07 amounted to $16 billion.

“RBI has been adopting a conservative approach towards raising money through ECB funding for some time now. In such a scenario, REC can explore alternative instruments for raising finance from overseas," said Sanjay Aggarwal, national industry director (financial services) at accounting and consulting firm KPMG.

PFC and REC together account for 60% of all the money loaned to the power sector.

REC’s need to borrow also stems from the shortage of funds allocated for the power sector during the 11th Plan.

Of the $257.9 billion needed, the power sector is expected to fall short by around $100 billion. The power sector plans to add another 78,000MW by 2012, over and above its present capacity of 135,000MW.

REC wanted to raise the money through this route as it believes that ECBs offer the advantage to reduce interest rates and were attractive even after hedging.

The company had raised ECBs in yen equivalent worth $200 million in the last fiscal year. Power sector utilities are of the opinion that the company’s funds are cheaper to obtain because REC’s bonds enjoy a tax-free status.

REC has disbursed project funding to the tune of Rs15,000 crore in the last fiscal year and plans to touch the Rs40,000 crore mark this year.

Separately, REC’s initial public offering (IPO) plans have been delayed as it did not have the requisite number of independent directors on its board, as stipulated under clause 49 of the listing agreement between publicly-listed companies and stock exchanges.

REC has already filed its draft red herring prospectus for an IPO with market regulator Securities and Exchange Board of India for sale of 156 million equity shares, equivalent to 20% of its paid-up capital. The Union cabinet had given the go-ahead in February to sell 10% of its holdings in REC by piggybacking on fresh equity offerings of 10% in the firm.