Indian infrastructure companies will not be allowed to
refinance domestic debt through overseas borrowing for projects
in the operating stage, the countrys finance secretary
said in Tashkent yesterday.
Ashok Chawla defied calls for a relaxation of capital
controls to address Indias huge infrastructure needs, and
told Emerging Markets: There are adequate
domestic debt-raising opportunities for infrastructure
The government has recently allowed a select group of
telecom companies to refinance rupee debt through overseas
borrowings with one-year tenors. This raised hopes that
policymakers would relax restrictions on overseas debt
issuance, known as external commercial borrowings (ECBs) for
project finance, starting with the power sector.
But Chawla said: The ECB policy is dynamic and based
on the requirements of the industry. However, I dont see
why Indian infrastructure companies need to substitute domestic
debt through overseas borrowings.
Sachin Johri, managing director of equity investments at
Indias Infrastructure Development Finance Corporation
(IDFC), said that overseas demand to finance projects in the
operating stage in India rather than projects in
construction, which carry higher risk would provide a
lucrative alternative source of capital.
There are only four or five different banks that
provide domestic finance for infrastructure projects and
they are already beginning to reach the limit of their
exposures to the industry.
Indian construction companies and investors have warned that
the country is failing to meet its $100 billion annual
infrastructure investment target due to the high cost of
domestic bank capital. Johri said companies would be able to
issue overseas debt at, on average, interest rates 2% below
those on loans from domestic banks.
But Indian policymakers fear that relaxing capital controls
will set off a surge in capital inflows and overseas debt
issuance by Indian companies. This could trigger corporate
indebtedness, asset bubbles and appreciation pressures on the
On Monday, Duvvuri Subbarao, governor of the Reserve Bank of
India (RBI), said in Washington: The surge in capital
flows into some emerging market economies even as the
crisis is not yet fully behind us has seen the return of
the familiar question: the advisability of imposing a Tobin
type tax on capital flows.
Subir Gokarn, deputy RBI governor, told Emerging
Markets in an interview last month that if the country is
overwhelmed by a tide of capital, it would consider
policies of active capital account management, or
exchange rate intervention.
The closed nature of Indias financial system and
consequently low external corporate debt was one reason for the
countrys relative resilience in the crisis.
S Nanda Kumar, global infrastructure and project finance
analyst at Fitch in Chennai, said regulators were reluctant to
encourage Indian companies to issue dollar debt because this
would trigger a mismatch between their assets and
But Johri at IDFC said hedging projects for overseas loans
and debt with five- to seven-year maturities would offset any
systemic risk posed by overseas debt exposures.
Kumar of Fitch said the most important reason why India was
failing to fulfil its infrastructure investment drive is
the near-term problem of the lack of well-designed and bankable
projects. However, in the medium term, the high
cost of domestic bank capital is likely to be the biggest