Ways2finance: Foreign loan quotas may be put up for auction

Move will bring in revenues, improve transparency

INDIA'S foreign borrowing policy could see a major change, with the government forwarding a proposal to introduce the auctioning of entitlements to borrow abroad to RBI as the new government seeks to introduce reforms which would cut down discretion and improve transparency.
    The overseas borrowing, or external commercial borrowing (ECB) policy, as it is officially known, is administered by the government along with the central bank, and currently works on a first-come-first-serve basis. In other words, at the start of the financial year, the annual ceiling for foreign borrowings is fixed by these authorities, after which firms are granted approvals based on their financing needs and adherence to norms such as pricing. According to a senior government official, the finance ministry has written to RBI, suggesting that foreign borrowings should be auctioned instead of being administered. "This is a scarce resource, and we have said a mechanism designed to auction foreign borrowing entitlements should be put in place," the official, who requested anonymity, said. The planned policy change will be discussed next week at a meeting of the high-level committee that sets India's ECB policy and which is headed by finance secretary Ashok Chawla.
    This would imply that each quarter or so in a fiscal, the government would put on auction a certain amount, say $10 billion. Companies, which want to raise relatively cheaper funds from abroad, would have to bid for the right to borrow. Whoever pays the highest will be allocated such borrowings. Both the finance ministry and RBI have discussed the proposal, but the finer details of how this would work out and the design of the auction are yet to be firmed up. In the past, the government had sounded out RBI on this proposal, but the central bank had then said implementing this would pose problems.
    The auction mechanism for ECBs, if eventually adopted, would mean revenues flowing to the government.
    Government officials said there is already a model which can be replicated. What they are referring to is the bidding process introduced by capital market regulator Sebi for allocating the right to invest in local corporate debt and government securities for foreign institutional investors (FIIs). The ceiling for investment by FIIs in debt markets is $8 billion, with the bulk of it being marked for corporate bonds ($5 billion) and the rest for government securities (G-Secs). The government is keen to enhance this limit, but RBI is wary of allowing higher investment in G-Secs.
    The open bidding by FIIs for investment limits in corporate bonds and G-Secs has replaced the earlier system of allocation on a first-come-first-serve basis.
    The rationale for auctioning ECB entitlements is that borrowers are deriving a benefit while the cost is being borne by the sovereign. When inflows in the form of ECBs come into the country — the central bank has to mop up these flows and then sterilise them — the rupee liquidity generated through buying of foreign currency which flows in is neutralised by the sale of bonds. The cost of such sterilisation is borne by the government.
BID & BORROW
The Present
The ECB policy currently works on a first-come-first-serve basis. An annual ceiling is fixed at the start of the fiscal year. Firms are then granted approvals based on their needs and adherence to certain norms
The Future
Foreign borrowings will be auctioned instead of being administered. The government would put on auction a certain amount, and companies would have to bid for the rights to borrow. The company that pays the highest will be allocated for such borrowings
The Advantages
Companies planning ECBs may also pay a part of the cost of sterilisation conducted by RBI
The Pitfalls
The auction route could jack up costs for companies. Also, small and medium enterprises could be hit, as they may be unable to match bids by stronger corporates ECB Move may hit small firms
THE argument is that the beneficiaries — Indian companies — should be made to compensate for this, at least partly.
    Not everyone agrees with this logic. Some bankers say the auction route could jack up costs, besides leaving relatively smaller firms in no position to match bids by stronger corporates. It may well be possible, however, that a separate quota may be carved out specifically for this segment.
    Last fiscal, the government fixed a ceiling of close to $32 billion for overseas borrowings. However, policymakers did not have to bother too much then as the collapse of the credit markets abroad resulted in the borrowings window remaining virtually closed for Indian firms.