Too little, too late

Nine months after the government put curbs on use of external commercial borrowings (ECBs), it wants to go easy. Keeping in mind the cash crunch faced by infrastructure companies, it has doubled the ECB limit to $100 million. For all other companies, the limit has been hiked from $20 million to $50 million.

Apart from allowing companies to raise more capital, the government also wants foreign institutional investors (FIIs) to invest more in the local debt markets. So, the FII investment cap in government securities has been raised from $3.2 billion to $5 billion and from $1.5 billion to $3 billion in corporate bonds.

The government wants to ensure that corporates do not face a problem in raising capital. In August 2007, concerns over a strong rupee hurting exporters had forced the government to put restrictions on ECBs. It had then put a ceiling on the amount that can be borrowed for rupee expenditure and wanted to know the end-use of money raised through ECBs.

However, debt market experts feel that the removal of the ECB curbs may not be of much help. Ashish Ghiya, Managing Director, Derivium Capital & Securities, says: “Today, market conditions have changed. When the curbs were first imposed in August 2007, Indian companies could raise money through equity or debt and there was a demand for Indian paper among foreign investors.

Now the sources of funds have dried up, so the ECB route can be tapped by the companies. But will there be lenders in the international market?” Clearly, the sentiment in the international debt market has gone from bad to worse as the subprime mortgage crisis unfolded.

A.V. Rajwade, an independent forex and treasury management consultant, feels that if the economic slowdown continues, the current ECB limits may not be fully utilised by the companies.

Brokers feel that the increase in the foreign investment ceiling could bring in more foreign investors to Indian markets; but a depreciating rupee could dampen their sentiment. Avinash Thakur, Head of Debt Capital Market, DSP Merrill Lynch, says: “The increase in the FII investment ceiling will certainly help in bringing more inflows. But the rupee will continue to be under pressure in the near term because additional dollar inflow on account of ECB liberalisation may not be adequate to offset the dollar outflow on account of a much higher oil import bill.”

—Rachna Monga