THE central bank has further signalled its desire to end the quantitative easing measures unveiled last year at the height of the global financial crisis by tightening norms for foreign borrowings.
The Reserve Bank of India on Wednesday reintroduced the price ceiling on overseas borrowings or the maximum rate at which Indian corporates can raise foreign funds. The RBI has also decided to disallow buyback of foreign currency convertible bonds with effect from January 2010. Both these moves come at a time when liquidity is no longer a constraint and capital flows are buoyant.
The cap on borrowing cost or the all-in-cost ceiling was withdrawn in January 2009 to enable companies raise funds at a time when there was a credit freeze in the markets.
The RBI has, however, made a concession in the foreign borrowings policy for telecom companies seeking to fund their acquisition of 3G spectrum and finance companies lending to core sector projects. The central bank has decided to let telecom companies avail of overseas borrowings for the purpose of payment for spectrum allocation. This modification, which comes into effect with immediate effect, comes a year after funding 3G spectrum was classified an eligible end-use for external borrowing
“The improvement in the credit market conditions and narrowing credit spreads in the international markets, it has been decided to withdraw the existing relaxation in the allin-cost ceilings under the approval route with effect from January 1, 2010” RBI said in a circular.
From January any corporate that raises external commercial borrowings, will have to ensure that it does not pay an all-in-cost of 300 basis points above Libor for borrowing up to five years. For borrowings over five years the maximum cost which corporates are allowed is now 500 basis points above Libor. The Libor or the London Interbank Offered Rate is an average of the rates at which international banks are willing to lend funds to each other. The Libor rates vary according to the currency.
RBI has however decided to continue allowing developers setting up integrated townships to to avail of foreign borrowings or ECBs until December 31, 2010, under the approval route. This borrowing window was earlier scheduled to close by the end of December `09. RBI has said that since stock markets have bounced back, it has decided to withdraw the facility allowing corporates to buyback foreign currency convertible bonds with effect from January 1, 2010. Earlier this year RBI had allowed Indian companies to buyback their FCCBs both under the automatic route and approval route until December 31, 2009.
The RBI said it has chosen to allow NBFCS involved in financing core sector projects to avail of ECB under the approval route, subject to complying with the prudential standards prescribed by RBI. The NBFCs are however required to fully hedge their currency risks since the funds will be used for investing in rupee assets.
In a major relaxation to telecom companies, RBI has decided to permit telecom companies avail of ECB for the purpose of payment for spectrum allocation. This modification, which comes into effect with immediate effect, comes a year after funding 3G spectrum was classified an eligible end use for external borrowing. All other aspects of ECB policy including the existing limit of $500m limit per company per financial year under the automatic route, eligible borrower, recognised lender, end-use, average maturity period, prepayment, and refinancing of existing will continue.
Source: ET
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