Cos prefer cheap foreign funds, avoid equity, domestic borrowings

“This clearly indicates that raising funds abroad is cheaper than going in for domestic borrowing. It also makes sense for companies as the primary market is still in doldrums and companies are not sure whether they will get a good response,” said a senior official with a foreign bank. When companies can raise funds at an interest rate less than four to six per cent of the prime lending rates (PLR) of 13.5 per cent being charged by public sector banks, there is no need for them to look elsewhere for their fund requirements.

Reliance, for example, raised $ 150 million from European institutional investors at a coupon rate of 7.625 per cent earlier this week. This is almost six per cent less than PLR of public sector banks and even cheaper than Treasury Bills of the Reserve Bank of India. Reliance — till March 1997 it had raised $ 914 million in the international fixed income market — has led the list of companies for mobilising cheap funds from abroad. Reliance had raised $ 405 million last week itself (including the $ 150 million sterling issue at a coupon rate of 8.75 per cent). Reliance Petroleum had raised another $ 300 million last week, thereby raising the total amount mobilised by the Reliance group last month to a whopping $ 705 million (around Rs 2500 crore).

Telco was able to raise $ 200 million at 168 basis points above 10-year US Treasury rate which, if swapped in the international market, works out to be 130 basis points above the Libor rate. Industrial Credit and Investment Corporation of India (ICICI) is planning to tap the Yankee bond market to raise $ 150 million. Reliance-Nynex, the telecom venture of the Reliance group, is planning an issue (which can be upto $ 200 million) to part-finance its projects. Birla AT&T had already raised $ 283 million (around Rs 1000 crore) to finance its cellular network in Gujarat, Maharashtra and Goa.

Significantly as most of the borrowings were above 10-year period, these will not be considered as part of the overall ceiling for the external commercial borrowings. Under the revised ECB guidelines, borrowings above 10 years have been kept outside the annual ECB ceiling.

Earlier Indian companies had tapped only the Yankee bond market but the Sterling market was also opened up last week after the Reliance issue. It is also considering Deutsche mark and Japanese yen markets as well.

According to banking sources, reputed companies with good rating will be able to access cheap funds from abroad. In fact, sensing a boom in the demand from Indian companies, leading foreign banks have started lobbying with companies for arranging funds.

They expect more and more companies, especially telecom ventures and those in the core sectors like steel, oil, refinery and transport, to go abroad for funds in the coming months.

As bankers pointed out, one reason for the sluggish credit offtake and the continuing depression in the primary market is the availability of cheap loans from foreign markets. With big borrowers going abroad for funds, Indian banks are left with small and medium size borrowers. Here again, companies borrowed abroad will have competitive advantage as they had raised funds at a cheaper rate. “RIL’s ability to access international markets for competitive debt financing has led to a reduction in its average cost of capital coupled with an increase in the average maturity of its debt,” its spokesman said.

Adding to the worries of the primary market and commercial banks, domestic private placements of debt instruments have also shot up with a host of Indian companies privately placing non-convertible debentures and bonds at coupon rates ranging from 13.75 to 14.50 per cent.