Cac: Mixed Bag For Corporates
Financial capital transfer abroad have been allowed without any restrictions as to purpose. The amounts are however staggered over the three years of implementation.
That being the basic point, extensions have been permitted like allowing corporates to invest in foreign currency bonds and deposits abroad. However, this seems to be more of an enabling clause because real rates of return overseas are typically less than 5 per cent, whereas rupee denominated instruments fetch almost 7-10 per cent. It is unlikely that many corporates or even individual will rush in to deposit money in financial instruments abroad.
As regards raising money overseas, while the committee has removed all conditions on non-debt creating inflows, it has been careful with the provisions for raising debt.
Corporates can access capital markets abroad through GDRs/ADRs or other equity instruments. But this would require corporates to adhere to much stricter accounting and balance sheet norms. Also, corporate governance practices will come under the microscope as domestic corporates rush into the foreign equity markets.
Raising debt is however subject to rationing under the overall ECB limits. An exception has been made for loans with a maturity of over 10 years in phase 2 and seven years by phase 3. Corporate sources say while the committee has exuded confidence on almost all other macro economic indicators, retaining the sanctity of the ECB limit reflects disquiet over the external debt front.
Since access to cheap debt overseas could turn the fortunes of many an Indian company, sources say the committee should have recommended an exclusive quota for small and mid cap companies while allowing other companies free access to the debt market. The pricing of debt is, as always, contingent upon the corporate's ability to service debt.
And if big companies have confirmed future earnings stream in foreign currency, that would allow them to raise cheap debt, there is no reason why they should be penalised by the ECB policy.
Market determined pricing should determine the viability and therefore, the eligibility, of foreign borrowings.
However, one relaxation that may come in immediately useful for corporates pertains to setting up joint ventures and wholly owned subsidiaries abroad. Corporates can invest upto $50 million without reference to the RBI.
This will allow many domestic companies to enter into marketing and manufacturing alliances abroad. Particularly benefited will be the pharma companies.
Project exports have, however, been permitted without any restrictions. EPC contractors like L&T and project equipment contractors like BHEL should find unlimited opportunity abroad. Also benefiting immediately from the phase-1 relaxations will be the domestic software industry.
Exchange earners have been allowed to retain upto 100 per cent of their balances in chequeable deposits locally; it is almost like having access to offshore banking channels.