Monday, May 26, 2008

Foreign Currency Borrowings: FCEBs and ECB

In an earlier post, we had analysed the notification of the Government of India permitting the issuance of Foreign Currency Exchangeable Bonds (FCEBs). The Reserve Bank of India (RBI) was expected to prescribe detailed guidelines on the mechanism for the issuance of FCEBs. It is now reported in LiveMint that the detailed guidelies would be issued by the RBI within a month.

Separately, we can expect to see some developments on the external commercial borrowings (ECBs) front. In view of increasing capital flows into India and a strenghtening rupee, the RBI had imposed tight restrictions on ECBs in August 2007, thereby making it difficult for Indian corporates to raise ECBs. But, now that the capital flows have stabilised, it may be time for a review of the policy. The Economic Times has an editorial that argues:

“The government may ease restrictions on overseas corporate borrowing when it, together with the RBI, reviews the external commercial borrowing (ECB) policy later this month. This is timely given the apparent drop in industrial activity and the recent sharp depreciation of the rupee against the dollar. Last year, the government had imposed restrictions on debt funds the corporates could bring into the country following a sharp increase in foreign inflows.

The government could, therefore, think of selectively relaxing ECB norms to make funds available to those sectors or industries that are finding it difficult to raise resources locally. The RBI should allow smaller corporates, the backbone of the economy, to access funds overseas for meeting rupee expenditure. The quantum of flows is unlikely to be of an order that would worry the central bank.”

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