$600 M Ecbs Approved In Two Months

The finance ministry has approved $500 million to $600 million in external commercial borrowings (ECBs) in the first two months of the newly launched rupee lending facility.

In fact, the facility has gained popularity with corporates. For, they get to borrow cheap funds from foreign majors, without having to incur foreign currency risks associated with it.

The new facility has been restricted only to structured loans _bonds and debentures_and not allowed for syndicated loans. Internally, the finance ministry has placed a contingent cap of $1 billion on this facility. This will be over and above the $8.5 billion annual cap on ECBs.

 

In February, the ministry liberalised the norms for the new ECB instrument_credit enhancement schemes for structured obligations_which allows foreign commercial banks or parent companies to guarantee rupee borrowings of corporates from domestic banks and financial institutions.

Accordingly, the government decided that henceforth, debt service in a post-default situation would be denominated in rupees or in forex as envisaged initially in the contract document. It is expected to give a fillip to guarantees provided by foreign banks to domestic borrowings.

But till the liberalisation of the guidelines, there were no takers for this facility despite the tax concession on infrastructure investments under Section 10 (23g) of the Income Tax Act.

Under the Section, corporates subscribing to bonds and debentures floated by infrastructure companies are entitled to tax free interest earnings.

The foreign banks objected to the clause which states that the liability of an Indian company will always be rupee-denominated and the debt servicing may be done in equivalent forex funds.

The guideline further stated that once a foreign bank brings in funds to meet the obligation arising out of default, it is not allowed to take the money out. Also, the default interest rate was pegged at either on the coupon rate of the bonds or 250 basis points over prevailing secondary market yield of five-year government security _ more or less at the prevailing lending rates. According to foreign bankers, these restrictive clauses implied that the foreign currency risk was to be borne entirely by them and that there was no penal charge on default by the domestic borrower.

Once the risks were factored in, the cost of borrowings went up sharply and made it unviable to finance. The new facility had found favour with a lot of infrastructure ventures. However, in the light of the dispute over the norms, not many deals could be struck. All this changed when the government made the requisite changes in February.