The Policy Over ECBs

Satyajit Gupta has an interesting column in The Mint that reviews the changes in the external commercial borrowings (ECBs) policy over the last few years in the context of changing economic conditions both within India and around the world. As for recent efforts by the Reserve Bank of India (RBI), Satyajit notes:

“ECBs have suffered in view of the adverse economic conditions coupled with the regulatory hurdles; a quick look at statistics shows that the quantum of ECBs accessed through the automatic route (that is, without prior RBI approval) fell drastically, from $1.104 billion (Rs5,508.96 crore) in October 2007 to $321 million in October 2008. RBI has tried to address the problems faced in the realm of ECBs by announcing a number of steps to liberalize the policy. These steps include increasing the all-in-cost ceiling (the all-in-cost ceiling is the total amount including interest, fees and expenses, except certain specified fees and expenses, per loan) allowing rupee expenditure from ECB proceeds, and so on. The all-in-cost ceiling can now also be dispensed with altogether, with specific RBI approval. The scheme with regard to foreign currency convertible bonds (FCCBs), a type of ECB, has also been liberalized and prepayment has been allowed for FCCBs without RBI approval upon fulfilment of specified conditions. While RBI officials have tried to stimulate the ECB market to provide the required foreign exchange liquidity at affordable rates, lenders globally have been either increasing rates of interest or demanding prepayment of existing loans.”

Despite RBI’s efforts, the inflow of ECBs is still slow. This shows that no amount of liberalisation in the policies will help stimulate flow of capital (both debt and equity) in conditions where liquidity is tight and valuations (and interest rates) are not conducive to deal flow. On a similar note, SEBI too has been making efforts to liberalise the securities markets – with some recent measures implemented today to stimulate the markets for public offerings of securities (highlighted here a short while ago by Mr. Jayant Thakur) – but securities market reforms too have been met with limited success so far in view of concerns over liquidity and valuations. Although these measures will not stimulate market activity by themselves, they will certainly help facilitate smoother capital flow once market conditions improve.