Indian debt issuance: two steps forward, one step back
The Reserve Bank of India’s recent reforms to its external commercial borrowings (ECB) policy make for a simpler and looser process for firms raising debt offshore. But the central bank has also put up new roadblocks for issuers that could drastically affect their access to capital markets.
India’s policy on ECB, a term used to describe debt raised from the international market, has long been a shifting tangle of regulations keeping all parts of the borrowings defined in such precise boxes that deciphering them is a headache. But with its January 16 overhaul of the framework, the central bank has taken clear measures to simplify the process.
For starters, all international borrowing and lending transactions have been consolidated into two categories: one focusing on just foreign currency denominated ECB, and the other on rupee-denominated borrowings. This replaces the former four-tier structure that split borrowings based on the currency, tenors and the nature of the borrowers.
Additionally, the RBI has simplified the minimum average maturity period requirements, now allowing all ECBs to have a three year maturity regardless of the amount being borrowed. Sector limits have also been scrapped, with eligible borrowers now able to raise up to $750m in a financial year without previous approval.
The revamp is certainly welcome — especially as it provides more opportunities for Indian borrowers to access funding from the international markets.
Previously, layers of regulations restricted borrowers to certain tenors depending on the amount of funds they planned to raise. For instance, most issuers could only use a three year tenor to raise up to $50m or its equivalent. While high quality Indian bond sellers may still opt for five year maturities or longer, having the flexibility to use a three year for benchmark-sized deals opens up the possibility for firms to easily navigate the market and price offshore transactions more attractively. This is certainly helpful at a time when investors are showing a clear preference for shorter-tenor deals.
But in its efforts to simplify ECB rules, the RBI has cut off some key sources of offshore funding — dealing a blow to many borrowers.
The central bank previously distinguished between short-term and long-term foreign currency borrowings, something it will no longer do under the consolidated framework. But on the flipside, it has restrictions on how ECB proceeds can be used. It has barred investments in real estate or for working capital, and — more importantly — it has banned the use of ECBs for repaying rupee loans (both the limitations come with some caveats around the nature of the lender).
The latter is worrying. In the past, borrowers were able to skirt this restriction by using long-term international borrowing to tackle onshore debt. But as there is no longer a distinction between tenors, refinancing debt has been made incredibly difficult. That puts a damper on the plans of any Indian firm hoping to refinance onshore debt with cheaper foreign currency financing — an attractive option given tight domestic credit conditions.
There are other issues too, as the RBI still has exceptions for borrowers of different sectors. For example, oil companies can raise ECB for working capital purposes with a maturity of three years without the mandatory hedging and individual limit requirements that other borrowers still need to adhere to. Additionally, firms in the manufacturing sector can raise up to $50m each year with a tenor of just one year.
Admittedly, the RBI’s attempts to liberalise ECBs and attract more capital flows are undeniably good for India’s capital markets, which have only had a small offshore presence in recent years.
But while clear definitions can be helpful, the RBI’s reluctance to offer more flexibility around international debt-raising will only hinder the country’s companies in the long run.