By Jayashree Jakhade

Responding to the fast changing scenario in the international money markets, the Indian Government has taken some very bold steps to liberalise external borrowings (ECBs). This paradigm shift by power brokers was in a bid to make India emerge an Asian Tiger.

The relaxation in rules and limits for ECBs has been welcomed by investors too. But, the million dollar question is whether it will stem the decline in ECB forays in the near future. For, there have been definite indications that Indian industry is no longer eager to make ECBs. ECB approvals in the last couple of years have witnessed a steep decline. As against ECB approvals of US $8-9 billion during fiscal 1996-97 and 1997-98, total ECB approvals fell sharply to US $5.2 billion in 1998-99. And, recent reports indicate that it is only southward bound despite industrial recovery and relaxation in ECB guidelines.

Actual breakup of ECBs show that actual borrowings have been half the approvals this year than last year. The annual US $8.5 remains way above utilisation levels. But ECB disbursals exceeded US $7 billion in 1996-97 and in 1997-98 at a time when rigid rules and regulations made ECB forays quite difficult. Now, when there are vast opportunities for investments open in India why is there a decline in the flow of ECBs? Certainly, it is not lack of credit-worthiness that has resulted in poor ECB inflows. For, during fiscal 1995-96 worldover depressionary conditions prevailed. And investments only flowed in during the following two years to the respective markets.

Back home, in the past four years, the corporate sector has not been making fresh investments. Rather, the focus has been on corporate restructuring. Again, globally there was a slump in demand which has resulted in import of plant and machinery sliding. This reflects in the low ECB inflows.

Decline in approvals
ECB approvals have fallen drastically despite the relaxation in the ECB guidelines. During 1999-2000, the government further liberalised the procedures to streamline the proceeds and facilitate better access to the international financial markets, keep maturities long, costs low and encourage infrastructure and export sector financing. However, ECB approvals in 1998-99 were much lower at US US $5,200 million compared to US US $8,712 million in 1997-98. In 1999-2000 (up to end December) approvals amounted to US US $2,136 million. The power sector accounted for the highest approvals amounting to US $1,699 million followed by the petroleum and natural gas segment with ECB approvals to the tune of US US $218 million.

Ports and roads came third accounting for US $80 million ECB approvals. Sectors such as telecom, civil aviation and railways saw no ECB demand. But, the future holds promise what with demand likely to grow which in turn will provide impetus to ECBs. The mood is upbeat also on account of the international credit rating agency Moody's upgrading India's credit rating from stable to positive. This will see a surge in ECBs.

Why the fall?
Several reasons are cited for the slowdown in corporate activity. There was massive build up of capacity till 1995-96 which remained unutilised. But later capacity utilisation levels improved despite the recessionary conditions prevailing in the economy. If good capacity utilisation levels are sustained investment demand could revive and ECBs will improve. But one should be cautious till such time that the import policy is not clearly enunciated and phasing out of Quantitative Restrictions (QRs) are not done with.

Yes, the commerce ministry does state that the country’s imports have not surged post-removal of QRs. In fact, the rate of growth of imports (in rupee terms) which stood at 36. 40 per cent in 1995-96 slumped to 13.2 per cent in 1996-97 and to 11 per cent in 1997-98. In 1998-99, imports grew by 14.2 per cent and by 14.9 per cent in 1999-2000. Thus, evidently there has been no pressure on imports is what the ministry points out. And that India in keeping with its international commitments has been phasing out QRs and liberalising.

In the future, the trend will be towards more equity finance which is a cheaper option than ECBs. Today, international markets offer many more sophisticated instruments of finance such as American Depository Issues and Bonds which are more attractive and less riskier than ECBs.

Relaxed environment
There exist several loopholes in the ECB guidelines even after relaxation of certain rules. As such, this financing route is unattractive. In the past, the international interest rate structure was far more attractive than the India’s interest rate structure.

It was a situation where Indian corporates could get funds from the international markets at rates far lower than those prevailing in India.

Better late than never, Indian markets are fast integrating with the overseas market now. The interest differential is slowly narrowing down.

But importantly, the decision to go in for ECBs is not merely finalised based on the prevailing interest rates. Rupee depreciation levels are also taken into consideration by the corporates before freezing in on their ECBs. Today, many a corporate dithers to access ECBs deterred mainly by the exchange risk.

Decline in the value of the Rupee has made import of capital goods and machinery an expensive proposition. Under the present sluggish industrial conditions, corporates do not stand to profit by importing their requirements.

It will take a while for fresh capacity to come up. Government’s infrastructural sops could well boost heavy capital-intensive infrastructure projects such as power, telecom and shipping. But, yet again till the time these projects go onstream there will be no visible pick up in ECBs.

Boost infrastructure
For infrastructure projects to go on stream, the government needs cheap short-term funds. Not only has the government woken up to this reality, it has gone ahead and entitled higher disbursements for infrastructure investors. It has also relaxed the end-use norms on the utilisation of foreign currency loans. Te new ECB guidelines take a holistic view of the shortfall in the ECB approvals.

An additional window for prepayment of foreign currency borrowings has also been provided specifically for the export earners. The revised norms provide higher ECB exposure to 100 per cent export-oriented units and there has been further simplification of the approval procedures. There are no changes in the average maturity profile norms for borrowings and also in the indicative spread for manufacturing companies and infrastructure projects. Hence, this is an all-out effort to make infrastructure finance easily available to help stalled projects to go on stream.

Some control retained
Even though liberalisation and relaxation of rules and regulations are the buzzwords, the government has retained certain restrictions: ECB investments will not be allowed in real estate and the capital markets. ECBs can be utilised for Rupee-related expenditure and not for specific project purposes. Further, ECBs can be used for funding new greenfield projects but not for acquisitions. The government has chalked out a new disinvestment programme and the new guidelines state that the PSUs will have to drop the covenant in the loan agreement on the government holding at least 51 per cent of the equity.

The government has not only relaxed procedures in line with international standards, it has made the approval process for ECBs simpler too. Consider: having got the initial approval from the finance ministry the borrower now need not go back to the ministry for final approval at the time of pricing the issue or what is called at the time of taking on record agreement. Further, companies which have got the prior approvals from RBI but have been unable to complete the transactions, will be allowed to debit initial expenses incurred in the process as current account transactions in accordance with the RBI guidelines. These expenses, however, will have to be capped at 0.2 per cent of the deal. Furthermore, as a measure of simplification, regional offices of the RBI would take the loan agreement and document on record of all ECB approvals once they have been approved by the government.

In all then, the government on its part has tried its level best to boost the investment climate. It is now up to the corporates to pick up the gauntlet. But, the vital requirement now is that corporates work on boosting their confidence levels before accessing the international funds and investing them in the country.