RBI tweaks rules on foreign debt raising to aid India Inc

The Reserve Bank of India (RBI) on Thursday eased the raising of foreign debt. It has revised the average maturity of external commercial borrowings (ECBs) so as to avoid any asset-liability mismatch.

In the changed rules, any ECB up to $20 million in a financial year should have a minimum average maturity of three years. Above that amount and up to $750 million, the average maturity mu?st be five years.

RBI has also permitted the floating of more foreign currency convertible bonds (FCCBs), both fresh issues or new issues, to refinance old bonds. The limit for this has gone up to $750 million under the automatic route from $500 million earlier. Hotels, hospitals and software companies can now raise FCCBs up to $200 million in a financial year for permissible end-uses. But they cannot use the money to buy la?nd. Experts, however, said the relaxation has come a tad too late. ?Overseas credit markets now have an acute shortage of dollars. With inter-bank lending in a squeeze as banks are unwilling to lend to one another, the cost of borrowing has gone up, made worse by the rupee depreciation. The easing of regulations, therefore, may not help companies at this stage ? at least not until the European debt issues are settled and confidence returns to markets,? said Avinash Gupta, financial advisory leader of Deloitte India.

RBI also clarified that ECBs/FCCBs to refinance existing FCCBs will be part of the $750 million under the automatic route.

According to an estimate by brokerage and research firm Espirito Santo, about $3 billion worth of FCCBs are coming up for repayment by March.

In calendar 2012 several ECBs and FCCBs worth about $130 billion will fall due for repayment, the bulk of them in the private sector, according to a Kotak report two months ago.

?Refinancing these ECBs and retiring old FCCBs will continue to be a problem. Many mid-level companies raised bonds at three to five times their present stock prices. But now many of them are in trouble as they face redemption pressures. The easing of the regulations will do little to improve their situation,? said a banker with a foreign bank who did not want to be identified in this report.

On September 23, RBI had eased some of the ECB regulations to enable companies to borrow up to $750 million under the automatic route. The earlier limit was $500 million.

FCCBs are convertible bonds issued in a currency different than domestic currency of the issuing company. The money so raised is, therefore, in a foreign currency. A convertible bond is a halfway house between debt and equity. It acts like a bond by making regular coupon and principal payments, but the bondholder also has the option to convert the bond into stock.

These bonds are popular with both investors and issuers. Investors have the safety of guaranteed payments; they can also take advantage of large price appreciations in the issuing company?s stock.

RBI also allows companies to partially repay their rupee loans with ECB money. But for every $100 borrowed overseas, companies have to invest $75 in new projects and only the balance $25 can be used to retire rupee debt. Companies can also borrow in Chinese yuan with an upper limit of $1 billion.

Source: http://www.mydigitalfc.com/news/rbi-tweaks-rules-foreign-debt-raising-aid-india-inc-501

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