Move aimed at modulating capital inflows

New norms

ECB proceeds

of over $20 m will have to be parked overseas for use as foreign currency expenditure.

Prior RBI approval

needed under the Approval Route for ECB up to $20 million for rupee expenditure.

Changes not

applicable to borrowers who have already entered into a loan agreement and have loan registration numbers.

Our Bureau

New Delhi, Aug 7 Taking a cue from the Prime Minister’s Economic Advisory Council’s caution, the Government today modified the external commercial borrowing (ECB) policy to modulate capital inflows.

Henceforth, ECB of more than $20 million per borrowing company would be permitted only for foreign currency expenditure for permissible end-uses. Accordingly, borrowers raising ECB more than $20 million would have to park the proceeds overseas.

This modification would be applicable to ECB exceeding $20 million per financial year both under the Automatic Route and under the Approval Route, an official release said here.

In the case of ECB up to $20 million per borrowing company, to be used as foreign currency expenditure for specified end-uses under the Automatic Route, the funds would have to be parked overseas and not remitted to India.

Borrowers proposing to avail themselves of ECB up to $20 million for rupee expenditure, for specified end-uses, would require prior approval of the Reserve Bank of India under the Approval Route. However, such funds would be continued to be parked overseas until actual requirement in India.

The latest changes will not apply to borrowers who have already entered into a loan agreement and obtained loan registration numbers from the RBI. Those borrowers who have taken verifiable and effective steps and loan agreements have been entered into under the earlier dispensation, would now have to apply to the RBI through their authorised dealer to obtain the loan registration number.

The new conditions in the ECB policy take immediate effect.

‘No flexibility’

Reacting to the changes in the ECB policy, Mr Sanjay Hegde, Executive Director, PricewaterhouseCoopers (PwC), told

Business Line

that the latest changes takes away the flexibility that was available to the corporates. “This is an intervention aimed at tackling the rupee appreciation (by modulating the capital inflows),” he said.

Small ticket borrowings accounted for nearly 70 per cent of the approvals in March 2007 were for amounts less than $20 million. But overall flows are influenced by a few large ticket transactions.

The annual policy statement of the RBI for the fiscal 2007-08 spoke of a major turnaround in ECB inflows last year. The year saw an increase in inflow of $9.1 billion compared to 2005-06, which had registered a negative growth. The Government has been under pressure to stem the appreciation of the rupee against the dollar and capital flows have had a decisive role in this context.

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(This article was published in the Business Line print edition dated August 8, 2007)
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