OFFSHORE FUNDS: The European currency crisis is worrying small and medium Indian borrowers

By Abhishek Anand

Troubled markets Indian companies are now being asked to pay higher interest for external borrowings

CORPORATE INDIA is rattled. Along with hardening interest rates and the newly introduced base rate regime, which restricts lending below a particular level (varying from bank to bank), Indian companies may now also have to put up with selective offshore lending by banks and financial institutions abroad. This comes amidst the worsening economic situation in the Eurozone.
Current signs are that the source of cheap funding for Indian companies is in disarray and they are having a tough time raising funds through External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs) from overseas markets. Both took a big hit in the last one month. Consider these figures: according to Reserve Bank of India (RBI) data, the offshore fund-raising plan it had approved dropped to $0.69 billion in May, as against $2.81 billion in June. The drop was a whopping 75 percent; and if the RBI-approved fund-raising in March is taken into account, the fall is even sharper. Last March, all companies got approvals to borrow $4.32 billion from overseas through FCCBs and ECBs.
“The major fund-raising source destinations are the US, the UK, Germany and some other European countries. The crisis in some of them, such as Greece and Portugal, has impacted the sentiment even in other countries. As a consequence, institutions have become cautious and lending to companies is subdued,” Rohit Berry, partner, BMR Advisors, told TEHELKA.

Only companies with a credible track record are managing to raise funds through ECBs and FCCBs

FUND-RAISING through ECBs include loans from banks, buyers and suppliers’ credit, fixed and floating rate bonds (bonds that cannot be converted into equities) and borrowings from private sector windows of multilateral financial institutions like the International Finance Corporation and the Asian Development Bank (ADB). FCCBs are primarily debt instruments which are issued in currency other than the issuer’s — with the option of converting them into equities at some later date. Like other bonds, FCCBs also make regular coupon (interest) payments. As a result, the interest rate has begun to harden — hampering borrowing from overseas. “Interest rates have gone up in the overseas market and even the “AAA” rated companies are having to pay 250 basis point over and above the Libor rate for loans of five years or less. Companies are thus unable to borrow within the RBI ceiling, resulting in lesser overseas borrowings,” says LP Agarwal, managing director, PNB Investments. Effective January 1 last, the RBI has put a cap on the interest that any company would have to pay for borrowings through the ECB route. “Corporates are not allowed to pay an all-in-cost of 300 basis points above the London Interbank Offered Rate (Libor) for borrowing up to five years. For borrowings over this period, the maximum cost which corporates are now allowed is 500 basis points above Libor,” according to an RBI circular issued last December.
(Libor is an average of the rates at which international banks are willing to lend funds to each other.)
However, companies with a credible track record are still managing to raise funds through ECBs and FCCBs. Some of the major ones that have managed to do so are Fortis Healthcare, Lupin, Kanoria Chemicals, Shree Cement, Reliance Industries, Tata Teleservices, Vodafone Essar and Aircel.
“Though companies with ‘AAA’ or ‘AA’ ratings are still managing to raise funds within the RBI stipulated cap, banks are generally treading cautiously and those with lower ratings will have problems raising funds,” says Ashok Bhandari, chief financial officer, Shree Cements. The latter had got RBI approval in March to raise $20 million for modernisation. On the other hand, Reliance Industries got the nod for raising funds to the tune of $800 million in the same month. Reliance Industries plans to utilise the proceeds to refinance some of its old loans.
“Demand and supply apart, companies may be waiting for the various currencies to stabilise. Once the Euro does so against the dollar, we might start seeing higher offshore borrowings by Indian companies,” Ashish Basil, partner, Ernst and Young points out.