Amount raised by ECBs rockets 64% in November

Monies raised by domestic companies through external commercial borrowings (ECB) rose 64% in November at $1.1 billion, compared with $689 million in October, according to data released by Reserve Bank of India (RBI) on Monday.

There was no fund raising by way of foreign currency convertible bonds (FCCB) in November. The last to raise money through this route was Gitanjali Gems, which picked up $110 million in October.

ECBs include bank loans, suppliers’ and buyers’ credits, fixed and floating rate bonds without convertibility and borrowings from private sector windows of multilateral financial institutions.

“Keeping pace with the growth momentum of industrial production, firms are going for ECBs. The rates are also quite attractive in the international market for this type of fund raising,” said Prashant Sawant, analyst with London-based KNG Securities LLP.

During April to October 2010, India’s Index of Industrial Production (IIP) grew by 10.3% compared with a growth of 6.9% in the same period of 2009.

Data for November 2010 is yet to be announced. During April to November this year, loans raised by way of ECBs were up 33% year on year to $11.5 billion compared with $8.63 billion in the same period of 2009.

According to the RBI norms, from January this year, the maximum cost of ECBs allowed is is six-month Libor plus 300 basis points (or 3%) for loans of three years to five years duration.

For longer-term borrowings or loans with a duration more than five years — it is six- month Libor plus 500 basis points.

The six-month Libor is currently at 0.46%.

“Local rates are higher, so firms have the opportunity to borrow at competitive rates overseas. The growth percentage in ECBs might not be the same going forward, but ECBs will increase” said Jayesh Mehta, managing director and country treasurer, Bank of America.

There are restrictions for end-uses of ECBs, which these firms will have to keep in mind. That includes, the money can’t be invested for acquisitions in India nor it can be used for investments in real estate and capital markets.

Therefore, according to Vinod Wadhwani, director, Ambit Corporate Finance as the economy is picking up, more firms will go for ECBs as they will need these funds for investments in imported capital goods and machinery.

In the time to come firms with better ratings and income in foreign currency will go for ECBs. Their income in foreign currencies will help them to mitigate foreign exchange fluctuation risks.