Sahoo panel bats for lifting caps on ECBs

Recommends lifting all sectoral caps, end-use restriction but insists on firms hedging at least a specified proportion

A government-appointed panel has recommended doing away with caps on external commercial borrowing (ECB) but limiting these to the percentage of hedging that companies undertake.

The M S Sahoo committee, set up to review the domestic and foreign capital markets, gave its report to the finance ministry in February. This was made public on Friday and the government has invited comments and feedback till May 10.

M S Sahoo, who chaired the panel, was a wholetime director in the Securities and Exchange Board of India. He is now a member in the Competition Commission of India.

“The restrictions on borrowers, lenders, end-uses, amount, maturity, all-in-cost ceiling, etc, were products of the time and have outlived their utility. These must be removed, as these do not now address the identified market failure associated with ECB, systemic risk arising from currency exposure and global risk tolerance,” the committee has said. Current ECB regulations have sector-specific caps, company-specific caps and restrictions on how the debt raised is used. Manufacturing and infrastructure companies can raise up to $750 million in a financial year. For those in the services sector, such as hotels, hospitals and software companies, raising up to $200 mn in a financial year is allowed. Raising more than this requires approval from the Reserve Bank of  India (RBI) and the central government.

Similar caps govern ECB for companies in other sectors, including non-banking finance companies, micro finance companies, mutual funds, trading, logistics and holding companies. Also, there are end-use restrictions. Usage of the debt in capital markets or investing it in other companies isn't allowed (except if the company raising debt from abroad is an infrastructure finance company or a bank). Real estate cannot be bought with the debt raised through ECB.

“ECB may be accessed by any firm for any end-use. The negative list under the Foreign Direct Investment policy should be the negative list for ECB,” the report said.

Companies also have to limit their borrowing cost at 350 basis points over the six-month London Inter Bank Offered Rate (Libor) for three to five-year maturity and at 500 bps over Libor for more than five years. The report recommends ECB may be had from any lender  from a global Financial Action Task Force-compliant jurisdiction and with no Indian interests.  This implies that Indian banks, along with their foreign branches, and subsidiaries of banks incorporated in India should not be allowed to extend ECB, including guarantees.

Irrespective of the nature and purpose of ECB, every borrower must hedge a specified percentage of currency exposure, the committee recommended. "Such percentage must be uniform across sectors or borrowers."

The committee said the hedge ratio may be decided by the authorities -- finance ministry or an RBI committee -- after keeping in view the financing needs of firms and of the economy, the development of onshore currency derivatives markets and any other systemic concern, such as volatility in global risk tolerance. The ratio may be modified by the authorities periodically. Sources in the government say it could be decided by the High Level Committee on ECB, led by Finance Secretary Rajiv Mehrishi.

RBI executive director G Padmanabhan and Sebi executive director S Ravindran, who were members of the committee, did not fully concur with some of the recommendations and observations. This was the third report by the Sahoo panel. Two earlier ones have come, on liberalisation of foreign and domestic depository receipts.