Airports Authority of India to raise $300 million

Relevancy

  • G.S. Paper 2
  • Objective Questions- External commercial borrowing and features
  • Subjective questions- significance and advantages of ECB
  • The Sahoo committee report on ECB

Why in news?

  • Airports Authority of India (AAI) is planning to raise close to USD 300 million via the external commercial borrowing (ECB) mode during the next fiscal to fund its capex plans for doubling the passenger-handling capacity of 345 million passengers per annum.
  • AAI is keen to upgrade some of the airports which are building some greenfield aerodromes, while also modernising underserved and unserved airports under the Udaan scheme.

What is External Commercial Borrowing (ECB)?

  • Any money that has been borrowed from foreign sources for financing commercial activities in India are called external commercial borrowings (ECBs). ECBs are defined as money borrowed from foreign resources, including the following:
  • Commercial bank loans
  • Buyers’ credit and suppliers’ credit
  • Credit from official export credit agencies and commercial borrowings from the private-sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

ECBs in India

  • India has always promoted capital inflows as a part of the development policy.
  • The DEA (Department of Economic Affairs), Ministry of Finance, along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.
  • Unlike China, most of the Indian foreign debt is mainly owned by the private corporate sector.
  • ECBs have emerged as one of the chief conduits for strengthening the Indian corporate debt market.
  • RBI recently liberalised the norms for ECB by including more sectors in the window.
  • The chief purpose for accessing funds through ECBs has evolved over time, with refinancing being the primary reason in the recent past.
  • There are restrictions with regards to end use of the funds too.
  • The government follows a well-designed ECB policy – government puts ceiling for the total amount of ECBs that can be obtained by all Indian firms through the ECB route during a year.

Advantages

  • Interest rates are also lower compared to domestic funds.
  • Due to rising NPAs there is low credit offtake from banks. So ECBs serve the financial needs of the companies.
  • ECBs provide opportunity to borrow large volume of funds.
  • The funds are available for relatively long term.
  • Avenues of lower cost funds can improve the profitability of the companies and can aid economic growth.
  • Corporate can raise ECBs from internationally recognised sources such as banks, export credit agencies, international capital markets etc.
  • It provides access to international markets for the borrowers and gives good exposure to opportunities globally.
  • It is a way of raising capital without giving away any control, as debt holders don’t have voting rights, etc.

Disadvantages

  • Higher debt on the company’s balance sheet is usually viewed negatively by the rating agencies.
  • This may result in a possible downgrade by rating agencies which eventually might increase the cost of debt.
  • The growing importance of ECBs in the composition of external debt is a cause of concern for the Indian economy. Availability of funds at a cheaper rate may bring in lax attitude on the company’s side resulting in excessive borrowing.
  • This eventually results in higher debt on the balance sheet which may affect many financial ratios adversely.
  • Since the repayment of the principal and the interest needs to be made in foreign currency, It exposes the company to interest and currency fluctuations.
  • Companies may have to incur hedging costs or assume exchange rate risk which if goes against may end up negative for the borrowers.

The Sahoo Committee report on ECB

  • The Sahoo Committee was set up in 2013, to develop a framework for access to domestic and overseas capital markets.
  • The Committee noted that the possibility of market failure can be ameliorated, by requiring firms that borrow in foreign currency to hedge their exchange risk exposure.
  • The policy should aim at removal of all impediments to the development of the domestic rupee debt market.
  • The Committee made an assessment of the currency risk by Indian firms undertaking ECB.
  • The Indian domestic rupee debt market is a viable alternative to foreign borrowing for financing Indian firms and does not entail any market failure.
  • The present complex array of controls on foreign currency borrowing should be done away with.