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Overseas proceeds for PSU acquisitions to be allowed

Shaji Vikraman

Indian companies will be permitted to utilise the proceeds of ECBs and GDRs and ADRs for funding the acquisition of shares disinvested by the Government in a state-owned company.

NEW DELHI, June 30

THE Finance Ministry has decided to modify the policy guidelines on External Commercial Borrowings (ECBs), Global Depository Receipts (GDRs) and American Depository Receipts (ADRs) to allow Indian companies to use the proceeds of such offerings for acquiring shares being disinvested by the Government in PSUs.

The changes in the end-use guidelines which are expected to be carried out shortly imply that that Indian companies will be permitted to utilise the proceeds of ECBs and GDRs and ADRs for funding the acquisition of shares disinvested by the Government in a state-owned company.

The existing ECB and ADR, GDR guidelines do not permit the use of proceeds of such offerings in only two areas - stock markets and real estate. In the past, the Government had refused to alter these guidelines despite lobbying by corporates saying that it would aid speculation in both the real estate segment and stock markets.

Senior Finance Ministry officials said that the proposal to modify the end- use guidelines had been approved by both the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Permission to utilise the proceeds of ADRs, GDRs and ECBs for bankrolling the acquisition of shares would, however, be restricted to the Government's disinvestment programme, a senior Government official said.

In other words, corporates will not be allowed to fund any takeovers in the domestic market except in the specific case of acquisition of shares being disinvested by the Government in a state-owned company.

The proposal signals a major shift in the policy governing the utilisation of proceeds of ECBs and overseas equity offerings. In one of the last major liberalisation moves carried out well over a couple of years ago, Indian corporates were permitted to utilise the proceeds of ECBs and GDRs, ADRs for general corporate purposes, including restructuring.

Although some Indian companies and their investment bankers tried to interpret this as a de facto approval for funding acquisitions, the Finance Ministry made it clear that use of such funds for acquiring shares or for investment in real estate would violate the guidelines.

However, the clincher seems to have been the fact that a change in the guidelines is crucial to ensuring the success of the Government's disinvestment plans for the bigger PSUs. In the case of the bigger listed PSUs, like, for instance, the oil and telecom companies, the acquisition cost will be substantial after factoring in the open offer which follows the strategic sale.

Except a handful of Indian corporates which have deep pockets, the rest of the potential bidders for acquiring the Government's equity in the disinvestment programme lack financial muscle. Indian banks and financial institutions, especially the state-owned ones, are reluctant to fund acquisition of shares even in cases of friendly takeovers.

Indeed, it is the foreign banks which had pitched for changing these guidelines as they perceive this is as a good business opportunity.

Officials said that a view would be taken shortly on whether to allow the proceeds of overseas commercial borrowings and equity offerings to be used for funding the open offer which has to be made mandatorily in the case of a listed PSU.

In the case of ECBs for instance, a key issue is the maturity of the loan. Despite tremendous pressure, the Government has refused over the last several years to reduce the minimum average maturity of ECBs of five years for loans of $100 million and above. Therefore, if a company is allowed to use ECB proceeds for acquisition of shares of a PSU, the acquirer then may not be allowed to unload the holdings until the loan is retired.

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