Raising debt just became easier! (for infra companies)

Sources:

Economic Times (29 Apr 2010): http://bit.ly/aLi8LE

ICAI.org (ECB guidelines 2004): http://bit.ly/dBxMyR

Infrastructure companies may soon be able to refinance part of their domestic debt through borrowings overseas. This will allow them to raise funding from a wider range of sources, and give them access to cheaper loans as interest rates head higher in India. A high-level committee on ECB, managed jointly by the finance ministry and RBI, had discussed the proposal in relation to funding of power equipment but opened a window to allow refinancing of debt taken for equipment purchases for other infra sectors as well. 

Currently, companies can borrow overseas at an average rate including currency hedging costs at around 9-10% (LIBOR + 450-500 bp spread + 3-4% hedging cost), which is still lower than domestic credit. However, for some sectors in infrastructure like ports which have income in foreign currency, it may turn out to be even cheaper since hedging costs do not have to be accounted for.

Long-term financing is not easily available from the local lenders, particularly banks that have a asset-liability mismatch issue when they provide long-term funding from their deposit funds that typically have a 3-5 year maturity. Moreover, India will need over $1 trillion of funds over the twelfth plan for the infrastructure sector. A greater access to overseas funds will help raise cheaper funds for executing infrastructure projects. 

The selective nature of the relaxation, limiting refinancing to only equipment purchases, was due to concerns over capital inflows and their monetary policy implications. Capital flows into emerging economies such as India are expected to rise with recovery in the global economy. 

The concern was echoed by the Reserve Bank of India (RBI) governor. “The surge in capital flows into some emerging market economies even as the crisis is not yet fully behind us has seen the return of the familiar question - the advisability of imposing a Tobin type tax on capital flows.”