REC looks to raise $1 bn through FCCB, $500 m through ECB

Speaking to CNBC-TV18, HD Khunteta, director of finance at Rural Electrification Corporation says that the Budget 2012-13 has many proposals that will bode well for the power sector. There is however nothing specifically for the state electricity boards (SEBs), he says.

Going ahead, the company has proposed raising USD 1 billion through the FCCB route which is pending Cabinet approval. REC will nonetheless raise USD 500 million through ECBs, either through bonds or by way of loan, Khunteta says. Below is the edited transcript of the interview. Also watch the accompanying video. Q: There were some announcements in the Budget to help improve funding availability for the infra sector regarding fund availability to power sector as well, ECBs available to them. How will this aid your clientele, do you see them now becoming a little healthier?
A: As far as the SEBs are concerned, Budget does not contain anything which maybe facilitate their financial position, except that a new scheme was likely come- the inter-subsidy scheme, which has not been announced in this Budget. It may be announced later on. But to the power sector, many good proposals are there such as no custom duty on imported coal, power developers can raise money through ECB to finance debt and withholding tax has also been reduced from 20% to 5%.
For solar projects, lot of benefits have been given, and for tax-free bonds, allocation of Rs 10,000 crore from which Rs 5,000 crore will be distributed to Power Finance Corporation, Rs 5,000 maybe to REC, so that will also lower the cost of borrowing. Tax holiday has been extended by one year. So these benefits have been proposed in the Finance Bill 2012-13, and these proposals are good for the power sector. Q: How will these new funding measures help reduce the overall borrowing cost at REC, do you expect that to dip a bit?
A: In case of tax-free bonds, normally it is raised at around 9.15%. Now we will be in a position to raise at around 8.10%. So we can have the benefit of more than 100 bps in tax-free bonds on Rs 5,000 crore, which means Rs 50 crore benefit may be there in case of tax-free bonds.
In last 18 months, we have raised more than USD 2 billion from the international market through ECB and more than 80% is hedged at 7.3-7.5%. The cost of borrowing after hedging is much lower than the domestic market rate which is around 9.2-9.25%. So we have raised the money from the international market at a much cheaper rate and next year, we are planning to raise through FCCB of USD 1 billion but of course, that is subject to approval of the Cabinet.
The department of disinvestment has already given their no objection (NOC) to raise FCCB of USD 1 billion to be approved by the finance minister, so cabinet note has been submitted to the Prime Minister