INDIA BUSINESS WORLD - JULY - AUGUST - 2007
The Month that was ...

NEW RESTRICTIONS ON RAISING FUNDS VIA ECB

THE government has put fresh restrictions on raising of foreign funds through external commercial borrowing (ECB). Companies would now be able to raise only upto $20 million for rupee expenditure that too with prior RBI approval. All ECB s above $ 20 million will be allowed only for foreign currency expenditure for permissible end use.

This means that companies going for ECBs to meet domestic expenses would have to look at local banking channels. They can now raise only $20 million through ECBs for rupee expenditure after taking RBI permission. However, such funds shall be continued to be parked overseas until actual requirement in India, an official statement said here.

This comes at a time when the domestic companies are facing higher interest rates at home and there is a growing demand for external funds to take advantage of the interest rate arbitrage. The government had in May barred real estate companies setting up integrated townships from raising ECBs. It had also lowered the ceiling on interest rates to be paid on such borrowings, making it difficult for small and medium-sized companies to raise ECBs.

However, there has been no change in the provision allowing individual companies to raise upto $500 million through automatic route. But, now they would be required to take RBI s approval for raising funds above $20 million for Rupee expenditure, an official said adding that the move was aimed at restricting non-serious players going for such borrowing. ECB policy is constantly reviewed by the Government in consultation with Reserve Bank of India (RBI) to keep it in tune with the evolving macroeconomic situation, changing market conditions, sectoral requirements, the external sector and the lessons of experience. Based on such review, it has been decided to modulate the capital inflows through ECB by modifying some aspects of the policy, the statement said. The move is aimed at containing huge inflow of external funds which were putting inflationary pressure on the economy. This is because the excess inflow of dollars puts pressure on the rupee by way of an increased demand for rupees. This happens as to absorb the dollars so as to neutralise its effect on the money market, the RBI has to release its equivalent rupees further leading to increased money supply having inflationary effect on the economy. The flow of dollars also aids in rise of value of rupee by creating more demand for it, he added. It may be pointed that companies raised ECBs amounting to $21 billion in 2006-07.All other aspects of ECB policy such as $500 million limit per company per year under the automatic Route, eligible borrower, recognised lender, average maturity period, all-in-cost ceiling, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged. The new norms which come into effect immediately will not apply to borrowers who have already entered into loan agreement and obtained loan registration numbers from the RBI. Also, borrowers who have taken verifiable and effective steps wherein the loan agreement has been entered into to avail of ECB in the previous dispensation, and not obtained the loan registration number, may apply to the RBI.