Centre relaxes ECB guidelines - Views on News from Equitymaster

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Centre relaxes ECB guidelines

Feb 10, 2000

The government has eased the guidelines pertaining to the issue and proceeds of external commercial borrowings (ECBs). The move is aimed at making the ECB market more accessible to domestic companies. Among the highlights of the new policy are:

  • A simple two step procedure introduced
  • End use norms for funds raised relaxed. The companies will however not be permitted to invest in real estate and the capital markets
  • Guidelines for infrastructure related projects eased significantly
  • 100% prepayment from export proceeds permitted
  • 100% export oriented units permitted to fund 60% of project cost via ECBs

The guidelines will go a long way in improving the accessibility of the ECB markets for domestic companies. The infrastructure sector will benefit as a result of the decision to permit promoters to fund equity stakes upto US$ 200 m in special purpose vehicles. Core sector projects have been permitted to raise ECBs equivalent to 50% of the project cost. This move will bring in much needed funding for these sectors.

The high interest rates in the domestic markets are a deterrent for companies to set up capital intensive projects. With ECB rates much lower than domestic rates companies can get access to cheaper finance. In view of India's comfortable foreign exchange reserves the decision to ease the guidelines in a step in the right direction. The companies opting for this route must however be cautious of the fact that a depreciation in the value of the rupee vis a vis the US Dollar could significantly impact the cost of borrowing (in the absence of hedging). The government must therefore also look at easing guidelines pertaining to foreign exchange cover.

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