Govt tightens screw on foreign loans

Under new rules, ECB proceeds of more than $20 million can only be used for foreign exchange expenditure, report Arun Kumar & Gaurav Choudhury.
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Updated on Aug 08, 2007 01:59 AM IST
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Hindustan Times | By Arun Kumar & Gaurav Choudhury, New Delhi

The government on Tuesday clamped down on external commercial borrowings. Under new rules, ECB proceeds of more than $20 million can only be used for foreign exchange expenditure.

Even for borrowings of less than $20 million, companies need to take the Reserve Bank of India’s approval for domestic use of this money.

The ECB policy is constantly reviewed by the government in consultation with the central bank to keep it in tune with the evolving macroeconomic situation, changing market conditions, sectoral requirements and the external sector.

ECBs were one of the cheapest sources for companies to raise funds. In 2006-07, India Inc raised $21 billion through ECBs. And most of this money has been used for capital expenditure in India.

“It has been decided to modulate capital inflows through ECBs by modifying some aspects of the policy,” the government said in a statement on Tuesday.

On April 30, the government had issued guidelines to stop the misuse of convertible preference shares to circumvent the sectoral foreign investment cap.

It had suggested that the foreign investment coming in as fully convertible preference shares would be treated as part of share capital of a company and would be included in calculating the foreign holding, where caps have been prescribed.

Companies, under the new guidelines, raising more than $20 million as foreign loans will have to park the proceeds overseas for use as foreign currency expenditure for permissible end-use. The changes will be applicable to ECBs raise through both the automatic route and the approval route.

ECBs up to $20 million per borrowing company will be allowed for foreign currency expenditure under the automatic route and these funds will have to be parked overseas. Borrowers proposing to avail ECBs up to $20 million for rupee expenditure will need prior approval of the RBI. However, such funds shall have to be parked overseas until their actual requirement in India.

The government has not altered other conditions required for raising funds through ECBs. The $500 million limit per company per year under the automatic route, eligible borrower and recognised lender criteria, average maturity period, all-in-cost-ceiling, prepayment and refinancing of existing ECBs and reporting arrangements remain unchanged.

Apprehending resistance from companies that have already entered into loan agreements, the government stated that the new norms would not be applicable for them. “These conditions will not apply to borrowers who have already entered into loan agreements and obtained loan registration numbers from the Reserve Bank,” it added.

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