External commercial borrowings rise to the most in more than two years

External commercial borrowings rise to the most in more than two years

Mumbai: Indian companies raised $5.63 billion (Rs 25,000 crore) overseas in March, the highest amount in more than two years, to take advantage of low interest rates abroad.

Companies such as Reliance Communications Ltd and Aircel Ltd had raised money overseas in the month to refinance rupee loans availed for bidding for third-generation (3G) telecom spectrum. Others such as Infrastructure Development Finance Co., Indian Railway Finance Corp. Ltd and Rural Electrification Corp. Ltd had raised money to fund projects. Mint could not independently contact these firms.

Interest rates at home have been climbing with India’s central bank raising its key policy rate eight times in a year to 6.75% to tame inflation. The rate is expected by economists to be increased further in the monetary policy review on 3 May. In comparison, one-month and three-month Libor is currently at 0.21% and 0.27%, respectively.

Reserve Bank of India (RBI) data on external commercial borrowings, or ECBs, show 105 companies raised money overseas in March.

“The interest rate differential is the only fact driving the overseas loan markets," said Hitendra Dave, managing director and head of global markets at HSBC Bank in India. “Depending on the kind of companies, the interest rate difference can be between 100-300 basis points over what companies can raise through rupee loans."

One basis point is one-hundredth of a percentage point.

The highest capital raising overseas by Indian companies since September 2008, when Lehman Brothers Holdings Inc. declared bankruptcy, was $4.32 billion in March 2010, the next highest foreign borrowing since then was $3.41 billion in December. In February, 61 Indian companies raised $1.44 billion in ECBs.

During the bull run of 2005-07, many Indian companies raised large sums of money through ECBs and foreign currency convertible bonds, or FCCBs, mainly to fund growth and expansion plans.

During the downturn, when a credit crunch hit banks globally, finding money became tough for Indian companies.

ECBs dropped to a five-year low of $298 million in April 2009 as Indian firms could not attract global money either.

The volatility of India’s equity market since January is also an impediment for companies to raise money locally. Though firms do not substitute equity with debt so soon, options for other equity-linked money raising have been scarce.

“With the equity markets in India volatile since January, doing a convertible (FCCB) is not possible and, hence, the only option a company has is to go for plain vanilla debt overseas," said Nimish Shah, managing director of Fortune Financial Services (India) Ltd, an investment bank.

With the International Monetary Fund asking the Indian central bank to contain inflation, bankers expect a further 25 basis point increase in key interest rates on 3 May.

“Interest rates overseas, too, are set to harden and one needs to wait and watch whether this kind of fund raising continues," Shah said.