Further liberalisation in ECB necessary to curb slowdown

FOREIGN ENTERPRISE

The liquidity crunch has become a prime concern for the government. The government is conscious that unless this problem is sorted out, the economic slowdown cannot be controlled. Besides improving the banks’ capacity to lend, the finance ministry has also identified two areas for improving the availability of funds. These are external commercial borrowings (ECB) and foreign direct investment (FDI)

The government and RBI are looking at easing ECB and FDI norms to enhance overseas funds flow. The Ways and means to attract more NRI deposits are also being explored.

The following steps have recently been taken to liberalise ECB Scheme: ECB limit for rupee expenditure for infrastructure companies has been raised from $100 million to $500 million per borrower per financial year. Telecom sector – payment for obtaining licence/permit for 3G spectrum will be considered an eligible end-use for the purpose of ECB.

Currently, ECB proceeds are required to be parked overseas until actual requirement in India and such proceeds can be invested in the prescribed liquid assets. It has now been decided that the borrowers will be extended the flexibility to either keep these funds off-shore as above or keep it with the overseas branches / subsidiaries of Indian banks abroad or to remit these funds to India for credit to their Rupee accounts with AD Category I banks in India, pending utilisation for permissible end-uses. However, as hitherto, the rupee funds will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.

At present, all in cost ceilings over 6 months LIBOR for average maturity period of 3 to 5 years, 5 to 7 years and for more than 7 years is 200 bps, 350 bps and 450 bps, respectively. In view of the tight liquidity conditions in the International financial markets, it has been decided to rationalise and enhance the all-in-cost ceilings at 300 bps for 3 to 5 years of average maturity period and 500 bps for more than 5 years of average maturity period.

The issue which requires further consideration from RBI is the fact that the foreign subsidiaries are facing practical difficulties in meeting their financial requirements. The capital of a subsidiary is provided by the foreign holding company. Many a time, the subsidiaries in India need further funds for their Indian operations. Sometimes, companies in India suffer a loss. Unless the loss is made good by the parent company, the Indian operations are adversely affected.

The subsidiary company can raise money from its parent company in any of the following manners:equity share, preference shares, debentures, loan.

Quite often, the parent company is interested in assisting its subsidiary financially but the foreign company does not desire to block its funds permanently. The foreign company, in fact, is interested to grant a temporary relief to its subsidiary. Therefore, the option of increasing the equity is not considered viable. The other options like issuing of preference shares or debentures are not workable because only preference shares/debentures, which are fully and mandatorily convertible into equity within a specified time, would be eligible to be issued to non-residents under the FDI scheme. Foreign investments in other types of preference shares/debentures (i.e. non-convertible, optionally convertible or partially convertible) would be considered as debt, which must conform to ECB guidelines caps and end-use restrictions. Further, the foreign company cannot give simple loans to its Indian subsidiary without complying the ECB requirements.

It is suggested that while the RBI is in the process of liberalising ECB norms, it should take into consideration the difficulty faced by the Indian subsidiaries. The ECB regulations should permit interest-free temporary loans from foreign parent companies to their Indian subsidiaries. This step will go a long way not only in improving the subsidiary’s funds requirement in India, but will also ease the pressure on banks in India to support such companies.

The author is a partner in SSKothari Mehta & Co.

hp.agrawal@sskmin.com