The Hindu Business Line : Norms tightened for external borrowings

In the latest revision to its ECB policy, the Finance Ministry has prescribed lower caps {relative to six-month LIBOR (London Inter Bank Offered Rate)} on the cost of such borrowings.

For normal projects, borrowings will henceforth be allowed only at an all-in-cost not exceeding 150 basis points over the six-month LIBOR for the concerned currency.

This is against the existing maximum permissible spread of 300 basis points.

Considering that the existing six-month dollar-denominated LIBOR is currently ruling at 1.25 per cent, this means that a corporate cannot mobilise ECB funds at more than 2.75 per cent in dollar terms.

This is against the earlier 4.25 per cent maximum dollar-denominated rate, inclusive of arranger's fee, etc.

For infrastructure projects, the maximum all-in-cost spreads over LIBOR have been reduced from 400 to 250 basis points.

Similarly, for long-term ECBs with maturity of eight years and above it has been slashed from 450 to 300 basis points.

This implies only the cream among Indian corporates, enjoying high credit-rating in the international market, will be in a position to access the borrowings window.

The Government has also stipulated tough end-use conditions on the monies to be raised.

Borrowings exceeding $50 million will be permitted only for financing import of equipment and meeting the foreign exchange requirements of the infrastructure projects.

Further, the unutilised funds will have to be compulsorily parked outside and cannot be brought into the country.

This is being seen in the context of the problems faced by the Reserve Bank of India in managing large-scale capital inflows and burgeoning forex reserves.

The Government has also banned financial intermediaries, including development financial institutions and non-banking financial companies, from accessing the ECB window.

At the same time, this condition will not apply to financial institutions and banks (such as IDBI), who would be raising such funds as part of the loan restructuring packages for the textile and steel industries announced by the Government in consultation with the RBI.

Even in respect of borrowings below $50 million, which fall under the automatic route and do not require either the RBI or the Finance Ministry's nod, it has been stipulated that the entire money raised for meeting rupee expenditure will have to be hedged.

This condition again would not apply to exporters and others who have a `natural hedge' in the form of uncovered foreign exchange receivables, which will have to be ensured by banks and authorised dealers.

"The above amendments to the ECB guidelines will come into force from the date of issue of notification of regulations/directions," an official release stated.

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