New Delhi: The Reserve Bank of India has allowed bidders of insolvent companies to raise extra commercial borrowings abroad and use those proceeds to repay the rupee loans of the targeted insolvent companies they are keen on acquiring. The RBI decided to ease the existing limitation on end-use of ECB proceeds after realizing that many bidders may find it cheaper to borrow abroad to acquire such distressed assets.

Companies keen to raise ECBs will need the approval of the central bank. The RBI will allow companies to raise these foreign funds from all eligible lenders except from overseas branches and subsidiaries of Indian banks.

Guidelines in this regard will be issued by the end of this month, an RBI release said.

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The RBI’s move to relax the provisions on end-use of ECB proceeds comes after feedback from industry and other stakeholders and will be a shot in the arm for the Insolvency and Bankruptcy Code, one of the more successful economic policies of the Prime Minister Narendra Modi-led government.

The resolution of debt belonging to bankrupt companies has been a big hurdle in the government’s intent to clean up the system. Liquidity has been tight, largely owing to the IL&FS imbroglio, debt defaults by other corporates and high NPAs in the banking sector.

Money for interested bidders of stressed assets has been difficult to come by, making the already tough resolution of such cases even more difficult. The RBI step should change that.  

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