Sahoo panel favours easing ECB norms
Panel recommends that all Indian firms should borrow in foreign currency without any upper ceiling, subject to specific hedging requirements
New Delhi: A finance ministry committee has recommended a complete liberalization of external commercial borrowing (ECB) regulations, including permitting all Indian companies to borrow in foreign currency without any upper ceiling, subject to specific hedging requirements.
The committee has also recommended doing away with restrictions on lenders, the maturity of the loan, the cost of borrowing and restriction in terms of end uses arguing that these do not serve any economic purpose in the current environment.
It also suggests completely doing away with the requirement of seeking prior approval of the Reserve Bank of India (RBI) for such borrowings.
At present, ECB borrowings can be done under the automatic and the approval routes but are subject to an upper limit, maturity period and specified end-use requirements like import of capital goods.
ECBs are subject to a all-in-cost ceiling of Libor plus 350 basis points (bps) for loans with an average maturity period of 3-5 years and Libor plus 500 bps for loans with an average maturity period of over 5 years.
Libor, or London Interbank Offered Rate, is a benchmark rate used internationally to price loans.
One basis point is one hundredth of a percentage point.
Under the automatic route, the maximum amount of ECB that can be raised by a corporate other than those in the hotel, hospital and software sectors is $750 million during a fiscal year. Banks and financial institutions can also raise funds through ECBs subject to RBI approval.
Also, entities can only borrow from recognized lenders like international banks, multilateral financial institutions and international capital markets.
The report of the committee, headed by M.S. Sahoo, former member of Securities and Exchange Board of India (Sebi), the market regulator, was put up by the finance ministry on its website on Friday, though it was submitted in February.
The committee has recommended that the objective of the ECB framework should be to allow Indian firms an effective option to borrow in foreign currency provided that sufficient safeguards are put in place to avoid a systemic risk that may arise from a large number of firms having unhedged foreign currency exposure.
While admitting that firms are exposed to balance-sheet risks due to exchange rate fluctuations, the Sahoo committee has made a strong pitch to allow firms to take such risks.
However, some of the recommendations of the committee were dissented by RBI’s representative G. Padmanabhan, who is an executive director at the central bank. He contended that some restrictions should be placed on ECB borrowings for an overall perspective of macroeconomic stability and protecting Indian firms from very large exposures.
Another member, S. Ravindran, executive director at Sebi, also disagreed with some recommendations.
The Sahoo committee was set up in 2013 to develop a framework of access to domestic and overseas capital markets. This is the third report of the committee, whose earlier reports include the issue of foreign currency convertible bonds and depository receipts.
In the current capital account-controlled environment, it is easier to get in equity rather than debt, said Abizer Diwanji, partner and national leader, financial services at EY, a consultancy firm. “In this context, easing of regulations is welcome. However, if all restrictions on debt are completely removed, it could lead to abuse, especially since restriction on equity caps continue,” he said.
For instance, an investor could opt to pump in capital through the debt route but with a put option to convert it to equity at a later date to go around the regulations.
Editor's Picks »
- ‘The biggest challenge being an SFB is listing out what the challenges are’
- Imran Khan, Nawaz Sharif face-off as Pakistan goes to polls this week
- Khazanah in early talks to invest in Pepe’s India arm
- Rajnath visits Assam days before release of second draft of NRC
- The Karnataka village that hit the headlines for the wrong reasons
- What ABB India’s performance in June quarter says about capex growth
- Bajaj Finance does well in Q1 even as competition hots up
- Kotak Mahindra Bank: The perils of being priced to perfection
- Higher cane price crushes hopes of sugar mills
- Market optimism before 2019 general election: History may not repeat itself