The Hindu Business Line : `Overseas borrowings by cos are in sync with globalisation'

Chennai June 2 Indian companies raised almost $20 billion abroad in the 11-month period from April 2006. March this year saw the highest-ever borrowing in a single month: of nearly $5 billion as ECB (external commercial borrowing).

"The raison d'être of a vibrant and deep market is the freedom of choice to make financial decisions," says Mr Robin Roy, Associate Director, PricewaterhouseCoopers.

"While capital (read investor) follows the path of least resistance, borrowers look at options based on cost, liquidity and ease of servicing," he says.

Here are Mr Roy's answers to a few quick questions from Business Line.

On the recent forex liberalisation measures?

The Reserve Bank of India has encouraged companies to even repay forex loans, based on their cash flows.

The overseas investment limit (total financial commitments) for Indian companies in joint ventures wholly owned subsidiaries has been enhanced from the existing 200 per cent of net worth to 300 per cent of net worth, as per the last audited balance sheet. With India Inc performing well across all important industries, this is indeed a window of opportunity.

What are the key factors behind liberalisation?

The apparent drivers for these measures include:

* The RBI cannot afford to sit on huge volumes of forex and allow the rupee to appreciate. This has a domino effect on exports, a major forex earner.

* A Catch 22 situation where the Government is trying to control inflation and also sterilise forex inflows (increased due to positive factors, like economy doing well, NRIs remitting more savings, IT companies being able to hold their operating margins against foreign billings).

* Pushing for capital account convertibility more quickly.

* Individuals and corporates (and SMEs) are more amenable now to be exposed to risk determined investments and partake of the opportunities of upside gains.

Are there positives in raising money overseas?

Overseas markets are more liquid, price discovery is more objective; and with the US dollar behaving the way it is, corporates are inclined to borrow overseas more aggressively for their capex (capital expenditure) and project finance requirements.

Besides, if the company has a "natural hedge" through export earnings the cost of forex cover for exchange risk management is also obviated.

The interesting thing is that companies have raised ECBs for amounts ranging from below $100,000 and going up to half a billion dollars (as per the RBI Statistics for March 2007), with maturities ranging from 3 years to 11 years and above.

Is the domestic market the loser, in the process?

Of course, there is the "opportunity loss" for the domestic debt market, which is still quite some time away from helping raise such amounts of term money (some estimates indicate that India Inc needs about Rs 8,00,000 crore or about $20 billion across 7,000 projects) at a reasonable cost. As long as this does not significantly alter the country's residual maturities of debt and long-term borrowings, this is welcome.

Overseas investors have been buying the BRIC (Brazil, Russia, India, China) story for quite some time now.

With a maze of FDI restrictions and threshold levels locally, an indirect way for some of them would be to fulfil the requirements of corporates by enabling money to be raised overseas.

Does ECB facilitate cross-border acqui- sitions?

Corporates are looking at overseas expansions and using the ECB route for this. The recent announcement of Kingfisher Airlines wooing Deccan with a tempting offer to buy into the low budget airlines would again provide opportunities for merchant bankers to arrange for resources, which would include overseas borrowings.

How is the risk management scenario?

The introduction of risk management instruments like credit derivatives indicates that the regulator would be gradually allowing more "global" structured products to be introduced in the local market.

Some time back "mortgage guarantee" products were approved, subject to some eligibility criteria.

This is seen as a major step in managing the growing default risks in the domestic mortgage markets.

Thus, the window of opportunity for foreign players for offering risk management products and managing the risks emanating from such increased borrowings is becoming wider.

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