Government has allowed power companies, such as NTPC and Reliance Power, to use 40% of the funds raised through external commercial borrowings (ECBs) route for refinancing rupee debt, raised from Indian financial institutions and banks. The rupee refinancing window would be allowed only if the balance 60% ECB funds is used for financing new power projects.
The RBI will issue guidelines on it in the next seven days after which this window will be opened to the sector, a finance ministry official said. The Budget 2012-13 has proposed to expand the scope of end use sectors and activities that raise money using the ECB route. While aviation sector has been allowed to tap ECB to meet their working capital requirements with a ceiling of $1 billion, power companies have been allowed to use the route to part finance rupee debt of existing power projects.
The facility to raise oversees loans for the rupee debt has been kept under the approval route. The government has not set any sectoral limit for the power sector under the overall ECB limit.
The key purpose of the move is to allow companies to expand their loan portfolio with banks to muster funds required for their expansion and new projects. Several banks and financial institutions have reached the sectoral exposure limit allowed by RBI for the power sector, thereby putting pressure on power sector companies to mobilise funds from the domestic market.
Earlier, companies operating in infrastructure sector were permitted to utilise 25% of the ECB loan to refinance their rupee debt. Government has extended the facility to power companies also with a higher limit on rupee debt financing.
The RBI will soon also issue guidelines in next seven days to allow ECBs for making capital expenditure on the maintenance and operations of toll systems for roads and highways. The infrastructure companies will be able to raise up to $750 million under the automatic route.
The Indian companies raised total of $35.9 billion oversees funds in the last fiscal year. Although, finance ministry has kept the annual overall ECBs ceiling unchanged at $30 billion, the ministry is open to extend the limit if the current limit is exhausted, Thomas Mathew, joint secretary, capital markets, finance ministry said.
Apart from currency fluctuations which can hurt the interest of companies, capital flows through ECB pose macro-economic challenges for the government. The flows through this channel can potentially add to inflation besides increasing country’s external debt.
Since the cost of raising ECBs is much lower than the domestic avenues, it remains one of the most attractive options for companies. The 57% of ECB raised between April 2011 and January 2012 saw its overall cost under Libor +30o bps, while borrowing cost from domestic banks touched the roof due to tight monetary stance taken by the Reserve bank of India.
Extending a lifeline to the ailing aviation sector facing difficulty in raising funds through domestic banks, government has permitted airline industry to raise working capital, subject to a total ceiling of $1 billion in the budget. In order to keep a check on funds raised through this window, government has extended the facility only for 1 year through the approval route.
The guidelines are expected to be announced in some time. Government has also permitted low cost affordable housing projects also to raise ECB through the approval route.
Apart from this, withholding tax on interest payments on ECBs has been significantly reduced from 20% to 5% for the period of 3 years in sectors like power, airlines, roads, affordable housing and fertilizers.