New ECB norms: Who is investing in power projects anyway

The RBI is expected to notify the new guidelines on external commercial borrowings for the power and the road sectors within a week. But the linking of forex loans to investments in new projects has not gone well with the industry.

The Reserve Bank of India (RBI) is expected to notify the new guidelines on external commercial borrowings (ECB) for the power and the roads/highways sector within a week. The norms are meant to pave way for the infrastructure companies to tap overseas financial institutions for cheap loans.

Finance Minister Pranab Mukherjee in his Budget had announced further reliefs to the infrastructure sector. For example, a power project developer can now use up to 40 per cent of the foreign debt to retire its existing rupee debt, but will have to invest the balance in a new power project. Since September, 2011, infrastructure companies had been permitted to use only up to 25 per cent of overseas debt (ECB) for refinancing of the domestic rupee loan under the approval route.

But it is too early to say what kind of impact the new policy will have on the power sector.  The linking of forex loans to investments in new projects has not gone well with the industry.  "Who is investing in new projects now," asks Subba Rao Amarthaluru, Group CFO at the infrastructure major, GMR Group. "Nobody is investing in new coal-based generation projects, and the government itself has advised against taking up any new gas-based generation projects. So the new norms would not help the power sector much."

The banks are also said to be staying away from granting new loans to the new power projects considering its sorry state of affairs and mounting losses.  Sections of people in the infrastructure industry think that it would have helped developers if the government had allowed them to access forex loans and specified the extent to which they could retire their rupee debt. "There is no clarity on the pricing, too. The government will have to allow higher pricing (the margin allowed above the LIBOR rate) as forex loans may not be easily accessible given the condition of the power sector in India," says Amarthaluru.      

There are developers who have made generous use of government of India's relaxed ECB norms. Reliance Power Chairman Anil Ambani told shareholders in September 2011 that the size of the company's foreign debt is higher than that of the rupee loans extended by the Indian banks. Reliance Power has raised, perhaps, the largest overseas debt with cheapest cost of funds.

In the roads and highways space, the government has allowed ECBs for capital expenditure on the maintenance and operations of toll systems, provided they are a part of the original project. The decision is expected provide an additional source of low cost capital and encourage greater investments in road construction projects. But the developers are looking for clarity. "As of now, we can use ECBs for development highways. But we are not sure if operation and maintenance aspects are also covered. A clarity is still to emerge," says Chander S. Bansal, Director & CEO at the Hyderabad-based infrastructure firm, Rithwik Projects.

According to reports, Indian companies raised about $35 billion in forex loans in fiscal 2011-12.