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P. Manoj

New Delhi , Jan. 13

THE domestic shipping industry has said that the Government's announcement on January 9 to remove the existing $50-million limit for tapping the External Commercial Borrowings (ECB) market with average maturity of five years and above under the automatic route was good.

However, a decision on removing the withholding tax on ECBs would make it much more competitive vis-à-vis domestic markets.

"The ECBs are very competitive, but the withholding tax is still a problem for Indian corporates. If the Government does not do something about the withholding tax, it will not help much," says a senior official with Shipping Corporation of India (SCI).

Unless the withholding tax is removed, the attractiveness towards ECBs will diminish. Already, funds are available from the domestic market at extremely competitive rates. "RBI/Finance Ministry approvals are not required for raising funds from the domestic market. Besides, it is easy to convince domestic bankers about documentation during negotiations. Whereas, foreign bankers are very sensitive and the legal fees are very high," the official said. Foreign banks are also not willing to take over the withholding tax burden.

The new ECB policy partially meets one of the key initiatives promised by the Shipping Ministry for the domestic industry in its blue-print for implementing the Rs 1,00,000-crore Sagar Mala project for the maritime sector announced by the Prime Minister, Mr A.B. Vajpayee, on August 15 last.

In its draft Cabinet note on the Sagar Mala project, the Shipping Ministry had proposed that the maximum limit on ECBs, without the need for RBI/Finance Ministry approval, should be raised keeping in view the highly capital intensive nature of ship acquisitions. But its request to remove the withholding tax on ECBs has not been favoured by the Finance Ministry.

The Government said that it has finalised a new, more liberal ECB policy to promote investment activity in the industrial sector, particularly infrastructure. "The new policy provides automatic route for ECBs with an average maturity of 5 years and above as long as they are utilised for investment in critical sectors," the Finance Ministry said.

Under the existing policy, corporates could raise only up to $50 million on the automatic route while proposals for ECBs above $50 million but up to $100 million would require permission from the RBI. Further, ECB proposals exceeding $100 million would have to be approved by the Finance Ministry.

Because of this restriction on limit, SCI had decided to reduce its ECB size from $104 million to $99 million for funding the purchase of two new very large crude carriers (VLCCs) from South Korean Hyundai Heavy Industries (HHI).

"If the RBI issues guidelines on the new ECB policy in the next few days, we will go in for the entire $104 million overseas loan instead of just $99 million," the SCI official said, adding that the deal has been finalised at an all-inclusive cost of less than 5 per cent.

At a price of $65 million per vessel, the total acquisition cost of the two tankers comes to $130 million. SCI has already paid $26 million from its internal kitty to the shipyard, constituting 20 per cent of the price of the two tankers, and the remaining $104 million is to be mobilised from overseas markets. But in view of the restriction, the ECB size was scaled down to $99 million to avoid going to the Finance Ministry for approval.

SCI will have to make some more payment to HHI before January 19.

"A notification from the RBI on the new ECB guidelines will help us in firming up the size of the ECB," the SCI official said.

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