RBI to issue norms for foreign currency exchangeable bonds soon

The Reserve Bank of India is finalising guidelines of a new window for overseas borrowing by Indian companies. The RBI proposes to soon come out with the guidelines on foreign currency exchangeable bonds (FCEBs) in the backdrop of a slow-down in capital flows into the country.

However, with the rupee weakening by eight per cent since January, the RBI is unlikely to relax restrictions on domestic companies borrowing overseas in the near term, RBI sources said.

FCEBs, like foreign currency convertible bonds (FCCBs), allow corporates to raise money from overseas markets by issuing bonds. But, unlike FCCBs, where bonds can be converted into equity shares of the issuing company, in the case of FCEBs, the bonds can be converted into shares of any group company of the issuer.

This will offer an additional window for Indian corporates looking to raise capital abroad. At present, they have the options of external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs).

The government had notified the scheme in February this year. According to the notification, any Indian company which is not eligible to raise funds from the domestic security market, shall not be eligible to issue FCEBs.

The rate of interest payable on FCEBs and the issue expenses incurred in foreign currency shall be within the cost ceiling as specified by the RBI under the external commercial borrowings.

While funds raised through FCEBs cannot be invested in capital markets and real estates in the domestic market, corporates will be able to use the funds for their operations overseas.

All categories of investors, including foreign entities, individual investors and non-resident Indians, can subscribe to FCEBs.

FCEBs would offer corporates a new mechanism to unlock a part of holding in group companies for meeting their financial requirements, finance minister P Chidambaram had said while proposing the scheme.

The RBI has been in talks with the finance ministry on this matter for the past few weeks and the guidelines are likely to be issued sooner than later.

RBI, meanwhile, has warned against the country's ballooning fiscal deficit,  which is among the highest in the world, saying the underlying pressures are yet to show up.

"We are seeing the centre's fiscal situation is improving but I think there are several underlying fiscal pressures not entirely evident in the numbers," RBI governor Y V Reddy said at a conference in New Delhi.

The government proposes to bring down its fiscal deficit to 2.5 per cent of GDP for the 2008-09 financial year from 3.1 per cent in 2007-08. Under the Fiscal Responsibility and Budget Management Act, the government has set a 2008-09 target for wiping out its fiscal deficit

The government has already missed the target and a Rs72,000 crore farm debt waiver plan will further complicate matters for government.