PIB News Analysis - 01 January 2013

Current Account Deficit widening due to large gold import
CAD was financed without drawing on reserves. This was mainly due to adequate inflow of FDI (US$ 12.8 billion) and FII (US$ 6.2 billion). In addition, external commercial borrowing amounted to US$ 1.7 billion. The net result is that we have not drawn on the foreign exchange reserves and, in fact, there is a marginal accretion of US$ 0.4 billion to the foreign exchange reserves. While the CAD is indeed worrying, it is within our capacity to finance the CAD, thanks to FDI, FII and ECB.

External commercial borrowing
An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs. ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., 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 etc.

For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. In telecom sector too, up to 50% funding through ECBs is allowed. Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should be used for new projects.The money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that.

Foreign Currency Convertible Bonds

Foreign currency convertible bonds (FCCBs) are convertible bonds that are issued in currency other than the domestic currency of the issuing company. FCCB's are issued by corporates for raising funds in foreign currency.

FCCBs with a maturity term of 3-5 years provide an option to the bondholders to either redeem their investments or convert FCCBs into equities at or before maturity term at pre-determined price. Consequently, FCCBs entitle an investor for coupon rate payments with an additional option of conversion of bonds into equities at a fixed price.
Features of FCCBs
  • FCCBs has comparably lower interest rates in comparison to regular bonds. Low interest is partly on account of the inherent option available to investors for conversion of FCCBs into equities.
  • Issuance of FCCBs does not require any collateral or security.
  • FCCBs are a low-cost source of borrowing for corporates.
  • Funds raised through issuance of FCCBs meet various expansion plans and capital expenditure requirement of corporates
  • Coupon rate is similar to interest rate.
  • If the equity conversion rate is low compared to the market price, investor can earn quick money