Govt plans to relax ECB norms

The government is planning to relax the recent diktat of clubbing non-convertible, optionally convertible or partially convertible preference shares as External Commercial Borrowings for some companies.

According to sources, these companies are those which have shown clear intention of raising finance through such instruments by conducting general body meeting or by passing a special resolution under Section (81)1A of the Companies Act.

Under the exemption, such companies will be given the nod to raise capital through such partially convertible instruments and these will be treated as equity and not ECB.

Similarly, the press note on preference shares will be amended by allowing more time to such companies to comply with the guidelines after they restructure their capital.

Sources added the objective for allowing such an exemption was that these companies had already finalised plans for enhancing their equity base and were caught off-guard with the revised regulation. In the process, they have incurred substantial costs in finalising the plans for raising capital.

On April 30, the government decided to treat foreign investment through any type of preference shares other than the fully convertible ones as debt.

Thereby, as debt, these instruments -- non-convertible, optionally convertible or partially convertible preference shares -- will be clubbed under the overall limits and will be guided under the norms of external commercial borrowings.

The guideline was put to effect immediately from May 1, 2007. Under the earlier press note in 1997, preference shares were treated as share capital whether they were fully or partially convertible. A fully convertible preference share is one, which can be converted into the share of the company on maturity.

The restriction was imposed to discourage companies from raising foreign investment through such instruments, which used to qualify as equity, but did not get compulsorily converted into shares. This, in turn, raises the entire sovereign debt and higher foreign exchange risk for the country as a whole.

The revision in May was the first time the government decided to treat a class of preference shares as debt. While the total limit to be raised under ECB is annually capped at $22 billion, Indian companies raised over $9 billion in ECBs in April- December 2006-07 as against $4.3 billion in the same period of 2005-06.