The Hindu Business Line : Using forex reserves now for acquisitions

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Chennai Feb. 14 The price tag for the mega acquisitions by the Tatas and Birlas in the past ten days was $18 billion. Total cross border acquisitions throughout 2006 were only $7 billion. About 80 per cent of the $12.1 billion Tata-Corus deal may be funded by debt, which will also play a part in financing the $6 billion Hindalco-Novelis acquisition. Mr Kumaramangalam Birla hinted as much when he told reporters that "the current debt equity ratio of Hindalco will definitely go up."

Rupee Resources

The big question is how much of this debt will be raised abroad and how much internally; either through banks or through on and offshore resources of group companies. To put it in a nutshell, the answer is: not much.

Delivering her keynote address on cross-border acquisitions, the RBI Deputy Governor, Mrs Shyamala Gopinath, said that since the cost of acquisitions was mostly financed by money raised abroad, the drawdown of India's forex reserves on this count was only $2.7 billion in 2005-06.

To put this in perspective, even if only 20 per cent of the Tata/Birla deals are financed with rupee resources, reserves will be down $3.6 billion on this count. And the year has only just begun.

One last thing. Money raised or leveraged abroad, directly or indirectly, or guarantees given, defer the pressure on reserves. But deferral is not particularly needed at this time.

Higher returns

The picture may not be so sanguine when the chickens come home to roost; five, ten or fifteen years from now.

Therefore, the RBI should earmark some part of these forex reserves for on-lending.

This would give the RBI a higher return than what it is earning now, and also help lower the cost of acquisitions.

But the trouble with obvious ideas is that if they were doable they would have already been done.

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