The Hindu Business Line : Norms eased for external commercial borrowings

IN continuation of the pre-poll `mini Budget' package, as announced by the Finance Minister, Mr Jaswant Singh, last week, the Government on Monday overhauled the policy guidelines governing external commercial borrowings (ECBs) to render it more corporate-friendly.

The latest changes effected today include removal of the end-use restrictions, revision of the maximum spreads — relative to the six-month London Inter-bank Offered Rates (Libor) — besides specification of new norms for raising such borrowings under the automatic route.

The Ministry has now specified that ECBs up to $ 500 million can come in through the automatic route, provided the average maturity of the borrowing is over five years. Hitherto, ECBs only up to $ 50 million were permitted under the automatic route.

The latest changes also specify a $ 20-million limit under the automatic route for ECBs of three-five years' average maturity.

Moreover, all cases falling outside the purview of the automatic route under the new liberalised ECB policy will now be decided by an empowered committee of the Reserve Bank of India (RBI).

The central bank will also prescribe the reporting mechanism for ECBs coming under the automatic route.

Simplifying the criteria for interest rate spreads, the Government has now specified two slabs based on the average maturity of such borrowings. For ECBs with average maturity of three-five years, the maximum spread has been stipulated at 200 basis points over the six-month Libor.

In the case of ECBs with average maturity of over five years, the maximum spread over the six-month Libor has been specified at 350 basis points over Libor.

The Finance Ministry had, in November 2003, lowered the maximum all-in-cost spreads over Libor for infrastructure projects to 250 basis points from 400 basis points. For the long-term, ECBs with maturity of eight years and above, the maximum spread had been slashed from 450 to 300 basis points.

For normal projects, borrowings were allowed at an all-in-cost not exceeding 150 basis points over the six-month Libor for the concerned currency.

This type of categorisation for interest rate spreads has now been dispensed with. Removing the end-use restriction, the Finance Ministry has said that, "ECBs would be allowed for corporate investments in industrial sectors, especially infrastructure."

The existing stipulation that money has to be parked abroad, unless actually required would continue to be in force. Further, there is no change in the existing prohibition on parking of ECB proceeds in the capital market and real estate.

Prior to the latest change, the Government had tightened access to ECBs by stipulating that issuers can raise more than $ 50 million through this route for only financing either infrastructure projects or for import of capital equipment.

Even under the latest regime, banks, non-banking financial companies (NBFCs) and financial institutions (FIs) are barred from accessing ECBs. However, banks and financial institutions, which have participated in the textile or steel sector restructuring package of the Government/RBI would be permitted to access ECBs to the extent of their investment in the package. Further, banks/FIs /NBFCs will not be able to provide guarantee/letter of comfort.

An official release also said that similar liberalisation, as being made for ECBs, has been carried out for Foreign Currency Convertible Bonds with regard to spreads, end-use restrictions and procedures.

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