Photo: Bloomberg
Photo: Bloomberg

Govt looks to liberalize external commercial borrowing regulations

Draft puts maturity cap of three-five years for normal borrowings, and 10 years for long-term borrowings

New Delhi: The Reserve Bank of India on Wednesday came out with draft guidelines on liberalizing external commercial borrowing (ECB) regulations for Indian companies, after consulting the government.

The draft guidelines propose to allow more investors but spell out a minimum average maturity cap of three to five years for normal borrowings, and 10 years for long-term borrowings.

For normal borrowings, RBI’s draft guidelines propose that the all-in cost, or the all-inclusive cost, should be 50 basis points lower than the existing provisions. But for longer-term borrowing of 10 years or more, the all-in cost can be increased by 50 basis points. One basis point is one-hundredth of a percentage point.

The draft suggests that ECBs up to $50 million or equivalent should have a minimum maturity of three years, and for over $50 million or equivalent it should be five years. Earlier, the limit was $20 million or equivalent for the two maturities.

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.

Currently, the all-in cost ceiling for ECBs with average maturity of three and up to five years is at six months London interbank offer rate (Libor) plus 350 basis points and six months Libor plus 500 basis points for ECBs over five years.

The cap in maturity and lowering of the maximum rate that can be offered will deter weak Indian companies from accessing foreign currency borrowings. But many better-rated companies will also get affected.

The guidelines have been framed keeping in view the evolving domestic as well as global macroeconomic and financial conditions and challenges faced in external sector management, RBI said.

“It is a good step from RBI considering the extreme volatility in foreign currency in the recent past and considering having unhedged exposure in foreign currency always carries risk for corporates as well as banks. Many corporates have suffered heavily due to extreme volatility in foreign currency and that has adversely affected their business," said Navin Kumar Jain, managing director at Jainco Corporate Advisors Pvt. Ltd, a financial advisory.

In its draft guidelines, the central bank also included regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar other long-term investors in the list of recognized lenders for long-term funding into India.

The long-term borrowing can be used for all purposes, except real estate, investing in capital market, activities prohibited as per foreign direct investment (FDI) guidelines, and purchase of land.

In case of rupee-denominated ECBs, the risk of which lies with the investors, the rate of interest will be commensurate with the market rate.

Overseas investors will be allowed to hedge their exposure in onshore markets. Back-to- back hedging will also be allowed, RBI said in its draft guidelines.

Earlier in the day, economic affairs secretary Shaktikanta Das said the finance ministry’s effort is to liberalize ECBs in a manner that will not cause any harm to the essential financial and monetary stability of India, adding it will “try and liberalize various norms so that funds are available to corporate and other investors in India".

While interest rates remain high in India, prohibiting investments, strict ECB regulations put constraints on Indian companies accessing credit from overseas markets, which is available at a cheaper rate.

P.R. Sanjai in Mumbai contributed to this story.

Close