Dollar borrowing: ECB window opened

The government on Thursday threw wide open the closed ECB window. It also removed almost all the bars in the window. Corporates can now get automatic approvals for raising ECBs (external commercial borrowings), with only one caveat: The loan has to be for a minimum of five years.
The much criticised end-use restrictions on ECBs imposed recently are also set to be knocked off; only one holy cow stays: ECB proceeds cannot be invested in the stock markets and real estate. The maximum spreads for different types of projects will, however, remain unchanged with the all-in cost for normal manufacturing projects being 150 basis points over Libor. Among the potential gainers will be Essar Steel, which wants to raise $500m, Bharti Cellular ($416m), Exim Bank ($300m), NTPC ($200m) and PNB, which had sought an approval to raise $200m, besides Reliance, which had put in an application to borrow $250m. In the revised policy to be operationalised shortly, approvals for ECBs will be on the automatic route, irrespective of the size of the borrowings.
The auto route will be available for the industrial sector, especially for infrastructure and for small & medium enterprises, provided the minimum maturity of the borrowings is five years, irrespective of the size of the borrowings.
In the present regime, the automatic route for ECBs is limited to $50m with approvals for borrowings of $50-100m being granted by RBI and all ECB approvals for $100m and above by the finance ministry. Today’s move will signal a major shift in terms of liberalisation of the policy.
By putting ECB approvals on the automatic route, the onus will now be on RBI. The finance ministry is set to move out of administering the ECB window for big ticket borrowings. This move had been planned for long and, now, bolstered by the strong foreign exchange reserves, the government has let go.
The removal of the fetters on raising overseas commercial borrowings goes hand-in-hand with the announcement of a liberalisation of remittances for both current and capital account purposes. For a long time, the finance ministry and RBI had clamped down on ECBs as encouraging these borrowings would have posed problems on the macro-economic front. The capital inflows would have added to the problem of liquidity management for the country’s central bank.
The policy turnaround seems to be based on the fact that with the liberalisation of external investment norms for corporates, inflows could be matched by outflows for overseas acquisitions and the like.
RBI will issue the revised ECB guidelines shortly. According to finance minister Jaswant Singh, the new scheme will minimise discretionary elements, simplify and rationalise the procedures, besides promoting transparency.