Govt set to ease ECB regime

Concerns on Masala bond tax treatment to be addressed

To top up the liberalisation of foreign direct investment (FDI) caps in a host of sectors, the central government plans to relax several limits on external commercial borrowings (ECB) this week. The measures will include allowing leeway for borrowers to raise capital in a larger basket of currencies, against an over-reliance on dollar-denominated loans so far, and a larger window for exposure to the real estate sector.

The government could also reverse the restrictions on raising borrowings from foreign corporate bodies. "The plan is to bring the ECB guidelines in line with that allowed under FDI rules," said a source familiar with the developments.

The government feels the series of relaxations allowed for larger investments into the economy has renewed interest among foreign investors to put money into India, and this needs to be sharpened.

The source also said this was part of the government's larger plan to raise inflows to India through rupee and foreign-currency channels.

Since the widening of the ECB window will not need any approval from the legislature, the finance ministry will issue press releases. It hopes the move will have the same impact as the FDI liberalisation measures. Simultaneously, to whet foreign markets' appetite for the large basket of Masala bonds, some already afloat and some in the pipeline, the government plans to issue clarifications on their tax treatment. These are expected to address some of the concerns about the popular name given for the overseas float of rupee bonds.

While the Central Board of Direct Taxes has announced tax set-off for these bonds, including those on withholding tax, investors have raised concerns that those would only apply prospectively - that is, from April 2016 - as they need to be voted upon by Parliament.

By convention, direct tax measures in India are brought in as laws only through the annual Finance Bill passed as part of the Union Budget. Tax benefits and impositions apply from the next assessment year. But the government has decided to assure investors that the tax benefits will apply for investments made in these Masala bonds in 2015-16.

COMING SOON

• Govt could reverse the restrictions on raising foreign borrowings from foreign corporate bodies
   
• The plan is to bring the ECB guidelines in line with that allowed under foreign direct investment rules
   
• It is part of the govt's larger plan to raise inflows to India through rupee and foreign currency channels