RBI draft proposes allowing cos to tap SWFs, pension funds for external debt

Mumbai - In order to encourage overseas funding, the RBI on Wednesday proposed to allow domestic companies to borrow money from pension funds, sovereign wealth funds (SWFs) and insurance funds as part of the ECBs. The draft framework on External Commercial Borrowings (ECBs), however, proposed to lower the all-in cost borrowing by 0.50 percent to ensure that the funds are borrowed from abroad at a reasonable interest rate.  The modification in the ECB guidelines on which the RBI has invited comments till October 1 are aimed at replacing the ECB policy with a more rational and liberal framework, keeping in view the evolving domestic as well as global macroeconomic and financial conditions, challenges faced in external sector management and the experience gained so far, the draft guidelines added. The basic thrust of the revised framework, the RBI said, is to retain more qualitative parameters for the normal (foreign currency-denominated) ECB and to provide more liberal dispensation for long-term borrowings in foreign currency. According to the draft guidelines, there will only be a small negative list which include stock market operations, real estate activity and purchase of land. They will not be allowed to raise resources through ECBs and rupee-denominated borrowing. The framework for the rupee-denominated bonds will be announced separately, it said, adding the real estate investment trust and Infrastructure Investment Trust will be permitted to raise funds through these instruments. The currency risk with regard to the rupee denominated ECB lies with the lender or investor and hence the modified framework provides for minimal control for these borrowings. The RBI proposed to expand the list of recognised ECB lenders by including overseas regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar other long-term investors. It also allowed Indian banks to act as ECB lenders subject to norms. It proposed to cap the minimum maturity of ECB up to $50 million at 3 years and 5 years for amount exceeding $50 million. The minimum average maturity for long-term ECB should be 10 years. With regard to all inclusive cost, it said, interest rate for normal ECB should be 50 basis points less than the existing rate which is LIBOR plus 350 basis point. As per the proposed guidelines, ECB funds can also be used to repay trade credit up to 3 years, payment towards capital goods already imported, purchase of secondhand domestic capital goods, plant machinery, on-lending to infrastructure Special Purpose Vehicle and Overseas Direct Investment in JVs. The guidelines also proposed part pre-payment by existing borrower by raising fresh ECBs. It also allowed refinancing of existing ECBs with a fresh one. The basic objective of the ECB policy is to supplement domestic capital for creation of capital assets in the country, limited by considerations for capital account management, it said. With above objective in view, the ECB regime has been progressively liberalised over the years, allowing different entities to raise ECB, it added. Earlier in the day, Economic Affairs Secretary Shaktikanta Das said the RBI will soon come out with a draft paper on liberalising external commercial borrowings (ECB) norms. ECB has implications for monetary stability as it adds to the country’s overall external debt and future repayment liability. PTI