COMPANY LAW
| Govt may open $1 bn overseas core-loan window Tue, 05 Oct 2010 19:42:41 GMT |
| The Economic Times Govt may open $1 bn overseas core-loan window The government is working on a proposal to open a new overseas borrowing window for Indian corporates enabling them to raise up to $1 billion annually exclusively for infrastructure projects . The department of economic affairs, or DEA, the policymaking arm of the finance ministry, has proposed that Indian firms be allowed to raise up to $1 billion by selling long tenure bonds in the overseas markets or as loans. This will be a separate facility available to corporates that are eligible to borrow up to $500 million now. The DEA has also recommended that withholding tax should be waived on such long-term foreign currency loans, which, if accepted by the revenue department, could make such borrowings more competitive. Currently, interest paid on all foreign currency loans attract withholding tax of up to 20% depending on the tax residency of the lender. Countries that have double taxation avoidance treaties, or DTAT, with India have lower rates. However, countries with which India does not have double taxation avoidance treaties or where the lender cannot be clearly identified as belonging to a specific jurisdiction, a rate of 20% is applied on the entire interest paid. “As there are virtually no borrowings of this nature currently, this would not impact the current revenue estimates related to withholding tax. On the other hand, it will help raise long-term funds at competitive rates for crucial infrastructure sectors such as power, telecommunications, ports and roads,” said a senior official in the finance ministry involved in policy formulation. Indian corporates have not been able to access long-term foreign loans of maturities beyond 10 years mainly on account of the impact of the high withholding tax on such borrowings. According to government officials involved in policymaking, long-term debt is a stable source of capital since it would enable a project to retain funds till it is fully commissioned and stabilised. Since there would be no immediate payment requirements, there would also not be any pressure on the economy, cash flows or foreign exchange reserves on account of outflows. The other argument being advanced in favour of this move is that the availability of long-term foreign debt would help ease pressure on local lenders. Credit to the infrastructure sector during financial year 2010 was about $25 billion. “The growth in requirement of long-term debt is more than the growth in the size of banks, and banks are unable to support all the incremental requirement,” said the official. “Infrastructure projects require long-term funding often longer than 10 years. However, access to long-term funding for maturities beyond 10 years is virtually not available to the Indian corporate sector,” said the official quoted earlier. The official also said that according to data released by the Reserve Bank of India on commercial banks, less than 20% of loans and advances of Indian banks are for maturities beyond five years. “The proportion would be much lower for maturities beyond 10 years,” he added. Prime Minister Manmohan Singh has said investments in infrastructure would need to be scaled up to $1 trillion during the next five years. “Even if 50% of this is invested by the government, it would still require debt of about $350 billion assuming a debt/equity ratio of 70:30. This would mean debt of about $70 billion every year. Therefore, we need to tap every possible source of long-term financing for these sectors,” says the official. |
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