EBs or ECBs; there's a $500-mn cap
Cos can tap funds by issueing EBs or by tapping the ECB window within the overall cap of $500 mn.
By Radhika Bhalla, TNN |
NEW DELHI: The exchangeable bonds (EBs), announced in Union Budget 2007-08 as a major instrument for companies to unlock the value of their stakes in group companies, would have curbs on par with external commercial borrowings (ECBs), if issued abroad.
Put simply, companies will be able to tap overseas funds either through the issue of EBs or by tapping the ECB window within the overall cap of $500 million for a company and $22 billion for all companies in the financial year.
“Broadly, guidelines for exchangeable bonds will be on the lines of those existing for ECBs with some differences. To begin with, EBs will be allowed to be issued within the existing ceiling applicable for ECBs,” a finance ministry official told ET. Also, EBs too is expected to have a maturity period of 3-5 years, similar to that of existing for ECBs.
“In the case of ECBs, only companies in the real sector are eligible. For EBs, holding companies which may have strategic holdings in a number of companies will also be allowed to use the instrument for tapping overseas markets,” the official said. However, whether NBFCs and housing finance companies will be allowed to issue EBs is yet to be decided.
The financial derivative, introduced in Budget 2007-08 will enable companies to raise capital by unlocking value in their strategic holdings in group companies. EBs will enable large corporates that have several group companies to reap the benefit of a float without actually selling shares at the time the bonds are issued.
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A company can issue EBs to raise resources by offering the investor the option of converting the bonds into shares of a holding company of the issuer at the time of maturity. The bonds will be tradeable and will carry a competitive coupon rate. EBs are different from foreign currency convertible bonds (FCCBs) in that FCCBs can be redeemed only for shares of the issuing company and not for shares of a group company in which the issuing company has a stake. Analysts feel that allowing issue of EBs within the overall ECB cap may not allow companies to take full advantage of the derivative. “EBs should be outside the ECB limit if companies are to get the real benefit of borrowing overseas through this instrument and deploy the money for developmental activities,” Mr Vineet Gupta, head (bank and financial institution ratings) ICRA said. There are, in fact, no limits on FCCBs.
Under existing ECB guidelines, all corporates registered under the Companies Act except financial intermediaries such as banks, financial institutions (such as non-banking finance companies) and housing finance companies can raise upto $500 million annually through ECBs for investment in the real sector. The overall annual cap for ECBs is $22 billion for the current financial year.
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