India rules out U-turn on cross-border borrowing

03/05/2010 | Sid Verma

Indian infrastructure companies will not be allowed to refinance domestic debt through overseas borrowing for projects in the operating stage, the country’s finance secretary said on Sunday

Indian infrastructure companies will not be allowed to refinance domestic debt through overseas borrowing for projects in the operating stage, the country’s finance secretary said in Tashkent yesterday.

Ashok Chawla defied calls for a relaxation of capital controls to address India’s huge infrastructure needs, and told Emerging Markets: “There are adequate domestic debt-raising opportunities for infrastructure projects.”

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 don’t see why Indian infrastructure companies need to substitute domestic debt through overseas borrowings.”

Sachin Johri, managing director of equity investments at India’s 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 currency.

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 India’s financial system and consequently low external corporate debt was one reason for the country’s 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 liabilities.

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 single constraint”.

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