After 7 years, government hikes ECB limit to USD 750

Here's something that will cheer India Inc. Siddharth Zarabi of CNBC-TV18 reports that the government has hiked external commercial borrowing (ECB) limits for the service sector and for borrowing under the automatic route.

In a scenario where Indian companies face very high domestic interest rate, this comes as quite a historic move. The last change in the automatic approval limit to USD 500 million was done in 2004, and the latest move raises that to USD 750 million. ECB borrowing was hiked from USD 100 million to USD 200 million for the services sector. The figure has been doubled from USD 5 million to USD 10 million for microfinance institutions and high net worth individuals. Also read: India firms raise USD 4.16 bn in July through ECBs
The biggest change, however, is that for the first ever time, the government of India and the Reserve Bank have agreed to allow external commercial borrowing by Indian corporates in a currency other than the dollar. This time, it is the Chinese currency! Nonetheless, this will only be via the approval route, and finance ministry sources have suggested that the USD 1 billion sub-limit within the overall ceiling of USD 30 billion is just the beginning.
Clearly, it is a massive signal, and in some ways is recognition by India of the rising status of the Chinese currency, which however, is not fully convertible yet as there are issues with regards to hedging. Anyhow, this will probably come as very big news to all companies which are sourcing products, mostly capital goods, from the Chinese market.
The second big thing was allowing high net worth individuals (HNIs) to invest in infra debt funds via the ECB route. The definition of equity for ECBs from foreign equity holders too has been clarified.
Infrastructure finance companies are now going to be considered eligible issuers for FII debt limits for infrastructure. Rupee loans can be refinanced of all maturities through ECB. Refinance of buyer and supplier credit has also been permitted.
The only disappointment for India Inc comes from the fact that the one issue it wanted addressed was withholding tax on interest paid on ECBs for maturity of five or more years, and that was not discussed. However, interest has been allowed during construction period.
It is to be noted that the government has not mentioned about relaxing the yearly cap on ECB of USD 30 billion. Arguments have however been presented that it needs to be looked at on a case-to-case basis. Also watch accompanying video for Siddharth Zarabi's comments.