RBI raises FCCB limit to $750 million

Mumbai: In a bid to give India Inc respite from possible pressures arising from redemption of foreign currency convertible bonds, the Reserve Bank of India on Thursday said eligible borrowers can raise these bonds for up to $750 million or equivalent per financial year for permissible end-uses.

Similarly, corporates in specified service sectors such as hotel, hospital and software can raise FCCBs up to $200 million or equivalent for permissible end-uses during a financial year subject to the condition that the borrowing is not used for acquisition of land.

A FCCB is a hybrid debt and equity instrument issued in foreign currency. Not only does it gives the bondholder regular coupon and principal payments, but also gives the option to convert the bond into shares.

The central bank's move on FCCB comes in the wake of its September 2011 notification whereby the external commercial borrowing (ECB) limit for eligible borrowers under the automatic route was enhanced from $500 million to $750 million or equivalent per financial year for permissible end-uses.

Consequent to the enhancement in the limits under the automatic route, the RBI clarified that the ECB/FCCB availed for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of $750 million.

The enhancement in the ECB/FCCB comes at a time when India Inc is staring huge FCCB and ECB redemptions in 2011-12.

According to a CRISIL report, repayment of foreign currency convertible bonds and external commercial borrowings and related interest payments add up to nearly $16 billion.

“Corporate debt repayment may continue to exert downward pressure on the rupee through the rest of the fiscal as Indian companies pay back their foreign debt. Considering the prevailing weakness in the equity markets, it would be difficult to swap FCCB repayments with equity or roll them over,” the report said.

The RBI, in its notification, said that consequent to the enhancement in ECB limits, the revised average maturity guidelines under the automatic route would be: ECB up to $20 million or equivalent in a financial year with minimum average maturity of three years; and ECB above $20 million and up to $750 million or equivalent in a financial year with minimum average maturity of five years.