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Cheaper foreign funds for India Inc

The limit of FII in Govt securities and corporate bonds has also been enhanced to $5 bn and $3 bn from $3.2 bn and $1.5 bn, report Arun Kumar and Gaurav Choudhury.

business Updated: May 29, 2008 22:58 IST

India Inc would now be able to raise cheaper funds from overseas financial markets to fund its domestic expansion plans after the government enhanced external commercial borrowing (ECB) limits by up to five times. ECBs are loans raised by companies from international markets with a maturity of three years or more.

Under the new norms announced on Thursday, infrastructure companies can borrow up to $100 million for rupee expenditure, while other companies can raise debt from overseas markets up to $50 million, up from $20 million.

The limit of foreign institutional investment (FII) in government securities and corporate bonds has also been enhanced to $5 billion and $3 billion from $3.2 billion and $1.5 billion.

Experts said the new norms would help companies, especially infrastructure companies, to raise funds to finance projects.

According to Planning Commission, India would need about $500 billion over the next five years to fund its infrastructure requirements.

"It is a heartening development and the whole industry was waiting for this," said A Subbarao, chief financial officer, GMR Infrastructure. “However, the restriction on interest rates could stifle the advantage."

The new norm also changes the interest-rate ceilings for ECBs. Companies can now borrow at a rate of up to 2 per cent higher than the London Interbank Offered Rate (Libor) for loans with maturity between three and five years, while longer tenure loans can have an interest rate of up to 3.5 per cent higher than Libor.

The existing borrowing rate ceilings were 1.5 per cent and 2.5 per cent higher than Libor respectively.

"Liberalising ECB norms will help construction companies raise cheaper finances," said Amitabh Das Mundhra, director, Simplex Infrastructures.

Industry has been hemmed by a hard interest rate regime in the country after Reserve Bank of India (RBI) maintained a tight monetary policy to contain inflation that has hovered close to a worrisome 8 per cent in recent weeks.