Cos can borrow from array of foreign investors who will bear currency risk

Domestic firms can now borrow from international financial entities, pension funds, insurance funds, sovereign wealth funds and other long-term investors as the Reserve Bank of India (RBI) has relaxed the external commercial borrowing (ECB) regulations on Monday.

The currency risk for such loans will be with the lenders, the banking regulator said in a late-evening release.

The central bank has, however, barred borrowers from using the funds for stock market operations, real estate activity and for purchase of land.

This, according to experts, will reduce the funding cost for companies which were finding it difficult to service the high-cost domestic bank borrowings.

Under the revised guidelines, the ECBs can be used as working capital by airline companies, can be used by consistent foreign exchange earners under the $10 billion scheme and for low-cost affordable housing projects.

ECB funds can also be used to repay trade credit up to three years, payment towards capital goods already imported, purchase of second-hand domestic capital goods, plant machinery, on-lending to infrastructure special purpose vehicle and overseas direct investment in JVs.

The pricing for 3-5 year ECBs will be 300 basis points over the six month Libor, for ECBs of over 5-year maturity the cost will 450 basis over Libor. The penal interest if any for default or breach of convenants should not be more than 2%over the and above the contracted interest rate, the central bank said in the release.