India eased External Overseas Borrowing Rules to enable Easier Access to Cheap Dollar Funds

The high-level committee on external commercial borrowings (ECB),chaired by secretary, department of economic affairs Arvind Mayaram on 22 August 2012 decided to further liberalise the foreign borrowing norms.

India eased overseas borrowing rules to enable easier access to cheap dollar funds to housing finance companies such as HDFC, small industry financier SIDBI. It was decided to permitted non-resident entities to provide rating enhancement facility to Indian borrower. India’s measure to ease overseas borrowing is expected to boost capital inflows by permitting lower rated companies to raise dollar funds. Even a company with low credit rating will be able to raise foreign funds using credit enhancement facility that states that third party is to assure the lender that he will be compensated if the borrower defaulted.

The government permitted foreign entities to provide credit enhancement to rupee bonds of Indian companies which will improve their appeal to investors. The minimum maturity period of such rupee bonds was reduced from seven years to three years.

Manufacturing sector too now will enjoy access to cheap dollar funds and they will be thus able to revive investments plans stuck on account of high costs. Earlier, only infrastructure and infrastructure finance companies could issue rupee-denominated bonds with guarantees from multilateral or regional financial institutions.

The decision taken by the high-level committee on 22 August 2012 includes the following:

•    Foreign institutional investors were permitted to invest in these bonds upto US$5 billion within the overall corporate bond limit of US$45 billion.
•    The minimum maturity period for rupee bonds was reduced to three years
•    Credit enhancement to provide an enabling mechanism for Indian companies to raise foreign debt
•    Costly credit observed to be one of the key issue impeding investments.
•    The panel also decided to increase the maturity of such buyers credit to maximum five years thereby allowing companies flexibility in payment. Extending refinance facility to SPVs will ease debt financing for infra projects.

Advantages for Lower-rated Companies

The guarantee for domestic companies from offshore entities effectively lifts the credit ratings of the bonds thereby benefitting lower-rated borrowers. Indian companies have always been constrained in their funding options due to high domestic interest rates and difficulties in tapping markets overseas.

The actions targeting credit guarantees will benefit sectors such as telecoms and energy, where foreign companies often operate via Indian units, but whose domestic borrowing get constrained if they had lower ratings than their parent companies.

Infrastructure and manufacturing companies can re-finance a higher proportion of their rupee borrowings via cheaper overseas debt. These infrastructure and manufacturing companies can now tap overseas loans up to 75% of their average forex earnings over the previous three financial years from 50% previously.