In a complete overhaul of the country’s external commercial borrowing regime, a high-powered panel has suggested removal of restrictions on norms for end-use, ceilings, borrowings, maturity for such overseas funding as well as deepening the derivatives market to help firms hedge currency risks and minimise the costs of hedging.
“The restrictions on borrowers, lenders, end-uses, amount, maturity, all-in-cost ceiling, etc. were product of the time and have outlived their utility. These must be removed as these do not address the identified market failure associated with ECB, that is, systemic risk arising from currency exposure and global risk tolerance,” said a panel headed by former Sebi member MS Sahoo.
The panel, which has submitted its report to the finance ministry, has also suggested opening up ECBs for any end-use and having just a negative list that is aligned to that for foreign direct investments. The ministry has also sought public comments on the report.
ECBs are a mechanism used by companies to raise low cost funds from abroad in foreign currencies. The annual flow of funds through this route is estimated at about
$30 billion. Under current norms, ECBs are tightly monitored and regulated by the finance ministry, Reserve Bank of India and Sebi with rules on end use, ceilings for each sector and maturity period.
However, the 10-member panel has suggested removing restrictions on how much a firm can borrow and doing away with approvals for any ECB transaction.
Instead, the borrowing by firms should be linked to their commitment to hedge the currency exposure arising from ECBs. The panel has also suggested that “the hedge ratio should be the key lever of the ECB policy” and has suggested developing a currency derivatives market so that firms raising ECBs can tap it to hedge the risk either through natural hedge or financial hedge.
“The cost of hedging should be minimum so that the gains from ECB are not frittered away in derivative transactions and ECB becomes prohibitively costly. The cost of hedging would be reasonable only if there is a deep and liquid well-functioning onshore currency derivatives market. The efforts must be made to develop such a currency derivatives market and the hedging ratio should factor in the level of development of currency derivative market,” it said.