The Hindu Business Line : Easing ECB

SOME SANITY HAS returned to government policy on external commercial borrowings. About time too. The changes announced last November were not just unrealistic but actually a fraud on the business community for in the name of rationalising access, the Government effectively shut the door on corporates wanting to raise monies abroad through this route. The latest norms allow companies to raise as much as $500 million under the `automatic' route unlike earlier, when the entitlement was a mere tenth of the present limit.

Though the official announcement speaks of removal of end-use restrictions, it is by no means clear if the ECB funds can be used for working capital purposes. The absence of any reference to using ECB proceeds for meeting rupee expenditure suggests that the Government does not as yet contemplate liberalising access norms for this purpose. That would be unfortunate as most companies now eligible to borrow abroad have built adequate manufacturing capacities and so may not need to fund fresh project proposals at least in the near future. But they can certainly use cheaper external borrowings to finance working capital investments. The Government would do well to come out with a formal clarification, as fairness demands that domestic enterprises borrow funds on comparable terms as overseas companies if they are to compete on level terms.

The freedom to borrow at better spreads to the LIBOR across different maturities is welcome. For instance, the stipulation that such funds be accessed at a premium of 350 basis points to LIBOR for maturity in excess of five years is a more reasonable one. Given the overseas perceptions of risk in lending to Indian entities (international credit rating agencies still do not think India represents an acceptable level of risk) the earlier stipulation of 200 basis point premium over six-month LIBOR would have been impossible to fulfil. No less welcome is the decision to empower the RBI to vet requests from corporates under the non-automatic route. References to the Finance Ministry often raise unnecessary suspicions of political interference. In the event, vesting the power with the RBI, that is at least one level removed from the political machinery at the Centre, would erase this perception.

The Government would do well to discount any concerns it may hear that Indian companies will borrow excessively and de-stabilises the external sector of the economy. The external liabilities in relation to the foreign exchange reserves are still at eminently manageable levels. Unfortunately, the ECB has become a political football evident in the Government practically dismantling the controls that it imposed only two months ago even as the external environment has remained pretty much the same since the last policy announcement.

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