External commercial borrowings nod hint has infrastructure companies smiling

The government would look at easing norms to allow infrastructure firms to refinance their loans through external commercial borrowings (ECBs), finance secretary Arun Chawla said at an infrastructure summit in New Delhi earlier this week.
Should this happen, infrastructure companies have reasons to smile.

The move would serve two purposes, said Parvez Umrigar, managing director, Gammon Infrastructure Projects. “It will take care of liquidity in the domestic market and at the same time allow companies to access cheaper money available overseas.”

Going by him, local financing alone will not be able to take care of India’s ambitious infrastructure programme.

Prime minister Manmohan Singh has said investment in infrastructure in the Twelfth Five Year Plan has to double to $1 trillion (about Rs 41 lakh crore) from the current plan period.

An Indian company can raise up to $500 million in ECBs under the approval route for rupee expenditure and the same amount per year under the automatic route for overseas financial requirements. But these can’t be used to refinance loans.

S Vaikunthanathan, chief financial officer, Madhucon Projects, said the change in guidelines would be a move in the right direction.

“Now, we can access ECBs only for capital equipment, but with adequate funds available with foreign institutions, we can use them to refinance loans as well,” he added.

The government recently partially allowed refinancing of domestic loans through ECBs in the telecom sector.

An analyst with a local brokerage said current ECB rates are 200 basis points over London interbank offered rate (Libor).

Six-month Libor is currently at 0.44%.

“Locally, long-term loans come for a minimum of 9-10%. So, given a choice, infra firms will definitely go for refinancing through ECB,” the analysts said, requesting anonymity.

The cost of an overseas loan includes currency hedging costs.
E Sudhir Reddy, chairman and managing director, IVRCL Infrastructures & Projects, said refinancing through an overseas loan makes sense if the company has earnings in foreign currencies or is importing equipment as in the case of power projects. “Otherwise, it depends on the costs and risks involved,”
he added. However, he went to add, the government’s move would indeed be a big positive.  

Still, some believe the merits of such a move can’t be appraised unless the technicalities are known.

“No foreign institution would want to fund a long-term project without adequate exit options,” said a former senior official with a Chennai-based construction company. According to him, till the secondary corporate debt market is developed, funders will continue to be wary of infrastructure projects.