Govt panel for easier ECB norms, deepening derivatives mkt

A government committee today suggested removal of restrictions like ceilings and end-use norms for overseas borrowings through ECB route and deepening of the derivatives market to help firms hedge currency risks.
The annual flow of funds through External Commercial Borrowing (ECB), which refers to commercial loans in foreign currencies, is around USD 30 billion. Companies use this mechanism to raise low cost funds from abroad.
"The restrictions on borrowers, lenders, end-uses, amount, maturity, all-in-cost ceiling, etc. Were product of the time and have outlived their utility. These must be removed as these do not address now the identified market failure associated with ECB, that is, systemic risk arising from currency exposure and global risk tolerance," the panel said.

Headed by financial sector expert M S Sahoo, the committee suggested that there should be no restriction on the amount that a firm can borrow and it should be linked to its commitment to hedge the currency exposure emanating from ECB.
As per the existing norms, the permission to raise funds through ECB is subject to various restriction like sectoral limit and individual limit end-use regulation.
According to the recommendations, steps should be taken to develop a liquid and deep onshore derivatives market with a view to helping the ECB borrowers hedge their currency risks.

"Keeping the availability of effective facility for borrowers to hedge their currency exposures onshore and financial needs of the firms and of the economy,the authorities should specify and modify the hedge ratio (percentage of currency exposure to be hedged). However, they must ensure that this ratio is uniform across sectors or borrowers," it said in a report submitted to Finance Ministry today.

The 10-member panel suggested the borrowing may be accessed by any firm for any end-use and the negative list under the FDI policy should be the negative list for ECB.
"Since quite a few firms would depend on the derivative market to meet their hedging requirement, it is necessary to develop the on-shore currency derivatives market. Government, RBI and SEBI must make a concerted plan to make the currency derivatives market deep and liquid," it said.
This would reduce the cost of hedging and make hedging facilities available so that the requirement of hedging does not come on the way of ECB, it said, adding this implies that the hedge ratio must factor in the level of development of the onshore currency derivatives market.

It suggested that there should be no requirement of approval for any ECB transaction.