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India rushes head first into overseas
borrowing
By Arun Bhattacharjee
NEW DELHI - In its 57 years of independence,
corporate India has never looked better: a buoyant
economy with 8.1 percent growth, corporate pre-tax
profits averaging 25-40 percent, a booming capital
market and, finally, the freedom to borrow overseas -
either directly from international banking institutions
or through convertible bonds.
Any reservations
the country's central bank, the Reserve Bank of India,
may have had have since been removed. India's growing
foreign direct investment is now worth US$7 billion.
Moody's Investors Service's upgraded India's credit
rating to that of a country worth investment. Successes
like these, combined with corporate pressure on the
government for overseas funds for infrastructure growth
and investment, have prompted the ruling Bharatiya
Janata Party to liberalize external commercial borrowing
guidelines (ECB). The move comes as the government
prepares for the coming elections - basing their
campaign on the country's "feel good" factor, largely as
a result of the steaming economy.
With the
manufacturing sector ready to invest around $10 billion,
external commercial borrowing turns out to be the best
bet for corporate India. Aggressive borrowing by India's
corporate sector (around $3.1 billion is in the pipeline
and that figure is expected to grow to between $5
billion and $7 billion) is mainly influenced by a
lukewarm response from domestic banks for infrastructure
projects and funds available at nearly one third the
rate of interest these banks charge. For the
restructured steel industry, this works out to be 14
percent against the London Inter-Bank Offered Rate of
3.6 to 4.1 percent abroad, varying on the size and
duration of the loan.
Ayaz Ibrahim, HSBC's
director and chief investment officer of equities for
Asia-Pacific (excluding Japan) recently said that the
strongest reason India's gross domestic product did not
flow into equity returns was that access to foreign
capital was not available. He feels that India is an
underinvested country, where 14 percent of the domestic
market is controlled by foreign investors, against the
18-20 percent in Malaysia and 38-39 percent in Thailand.
This reality is fast changing as major Indian
companies are now raising funds overseas through
investment bankers as well as through convertible bonds;
welcome by the government as these reduce the borrowers'
risk and at the same time encourage investors. It
appears that investment banks are enlisting more people
and institutions to invest in Indian bonds as the
corporate sector's price earning ratio varies between
15.8 and 31.7 and compares well with those in developed
countries, such as the United States.
This time,
borrowers include a broad spectrum of India's corporate
sector, from petrochemicals, telecommunications,
automobile, hospitality and tourism to petroleum,
infrastructure and services competing to raise funds
overseas for domestic growth and investment, or, for
buying companies overseas. Reliance Industries, India's
second largest group by turnover last year, raised $200
million through ECB and is trying to raise another $500
million through ECB convertible bonds of varying
maturity period. Similarly Tata Group, India's number
one corporate giant, the Aditya Birla Group, Bharti
Televenture and a host of other companies are borrowing
to acquire companies abroad.
For instance,
Reliance acquired Italy's FLAG Telecom for $211 million;
the Aditya V Birla group purchased copper mines in
Australia and a Carbon Black unit in China; Pune-based
Sterlite group acquired another copper mine in Australia
and government-owned Oil and Natural Gas Company bought
oil fields in Russia by raising funds from the overseas
market.
A representative of a US-based
investment banker confirms that corporate India is
raising over $3 billion through ECB and those include
utility vehicle and truck producer Ashok Leyland, Zee
Telefilms, Bharti Cellular National Hydroelectric
Corporation, Exim Bank and the Power Finance
Corporation. The last three being government-owned
companies, the race for overseas funds is no more
confined to the ambitious and the fast growing privately
owned corporate sector.
A senior executive of
Bharti Televenture says: "India's corporate sector is
finding it increasingly cost-effective to tap the ECB
route for raising funds, largely due to the relaxed
norms by the government and forward covers ruling at
0.6-0.7 percent." Earlier, the overseas funds were
costly as the Indian banks raising the overseas loans
were used as a guarantor and charged a fee of 2-2.5
percent, making the borrowing costly, although less than
the cost of borrowing capital from the domestic sources.
A Reliance source in Delhi explains that there
is a rush for Indian ECB bonds, as the image of Indian
industry looks better and most of the time these are
oversubscribed by a minimum of 30 percent.
However, critics at the Indian Council for
Applied Economic Research (ICAER) warn that with India's
external debts having risen 2.5 percent, reaching
$112.54 billion, proper management of this fund is
absolutely essential to continue to ride the confidence
wave. They argue that the balance of a payment surplus
of $8.5 billion in reality hides the outsourcing income
by the software companies and the repatriated funds by
non-resident Indians, totaling $4.2 billion.
The
latest figures released by the Ministry of Finance last
week show India's external debt increased from $104.7
billion to $112.5 billion by the end of September,
although it was lower than that in the first quarter of
2003-04 ($5 billion). It does not matter how large the
debt is, provided the performance and corporate
management continue to be better, says an ICAER
economist. He adds that the new accountability shown by
the Indian corporate sector by posting the details of
their performance on their websites - debts,
profitability and losses along with their certified
accounts - is reflected in the way the corporate sector
is raising funds through overseas bonds and direct ECBs.
But caution should be exercised, as should
India's "feel good" economy suddenly take a turn for the
worse, the country will be left with a mountain of debt
and a financial crisis reminiscent of that in 1997, when
the globalization of Asia's economy caused it to spin
right out of control.
(Copyright 2004 Asia Times
Online Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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