Companies may get to borrow more abroad

Finance ministry is likely to go by the recommendations of a committee on liberalising external commercial borrowings, headed by M S Sahoo

The finance ministry might scrap some restrictions on overseas borrowing by companies in next month's Budget and some others later. The ministry is likely to go by the recommendations of a committee on liberalising external commercial borrowings (ECBs), headed by M S Sahoo, a former director with the Securities and Exchange Board of India. The committee will give its report just ahead of the Budget, but ministry officials are in talks with its members to lift some rules in the Budget itself.

The panel might suggest junking the current limits on the foreign loans companies can take, the interest rates they pay on those, quotas by industry and end-use rules. "Why should we have curbs on how much a company should borrow, and at what price," asked an official who did not wish to be named.

EASING ON ANVIL

• FinMin plans to relax the ECB regime
• It will base its actions on the Sahoo panel’s recommendations, which are yet to come
• The panel is likely to recommend doing away with restrictions on individual companies
• At present, there are various restrictions, such as $750-mn cap under automatic route on the amount that can be raised as ECB by a company (excluding hotels, hospitals and software ones, which can raise up to $200 mn in a financial year)
• There also is a ceiling on interest rates at which these loans could be accessed
• Among end-use restrictions, these cannot be used for on-lending or investment in capital market, for working capital purposes and for realty sector.
• 3.2 bn was raised through ECBs in April, almost three times the $1.1 bn in the same month last year

These conditions are part of India's old industrial regulations. The Sahoo committee might recommend removing all of them within existing capital controls. The central bank will still keep an eye out for the pressure of redemption of India Inc's foreign loans and their effect on economic growth, inflation and foreign exchange reserves.

"External commercial borrowings are not unmixed blessings. We will have to see how to sterilise the economy from its effects," another official, who did not wish to be named, told Business Standard.

Companies could be asked to hedge their foreign loans which might raise short-term borrowing costs but would improve their paying capacity.

Anish Thacker, partner at tax & audit consultancy EY, said freeing up foreign loans for companies made sense so long as the economy's interests were not jeopardised.