In a bid to woo more foreign funds in infrastructure, the government on Monday eased the external commercial borrowing norms by raising the upper limit five times to $500 million under the automatic route with certain restrictions.

Corporates borrowing up to $500 million for over five years and at an interest rate up to Libor plus 3.5 per cent will not now need the Reserve Bank of India's or the government's permission.

Till now, corporates raising ECBs over $100 million required the government's permission.

However, the government will continue to discourage short-term borrowing through ECBs as corporates would require RBI permission for raising over $20 million for 3-5 years and that too at an interest rate of less than Libor plus 2 per cent.           

"All cases, which fall outside the purview of the auto-route in the new liberalised ECB policy, will be decided by an empowered committee of RBI," an official release said.

The move has been taken to check flight of capital while encouraging long term borrowings for infrastructure funding.

Similar liberalisation is being made in the case of foreign currency convertible bonds as well.

A few months back, the government had tightened ECB norms to discourage ECBs above $100 million in the face of burgeoning forex reserves.

With measures announced in the mini-Budget to promote Rs 1,10,000 crore (Rs 1,100 billion) investments in infrastructure, rural development and SME sector, the ECB relaxation appears to have been meant to attract more foreign funds in these sectors.

Although ECBs would be allowed for investment in industrial sectors, the government has made it clear that corporates needed to park the funds abroad unless actually required in the project.

"Usual restriction on ECB for investment in capital market or in real estate will, however, continue," the press release said.

Banks, non-banking finance companies and financial institutions are not eligible for ECBs in normal course but those involved in textile or steel sector restructuring packages would be allowed to raise funds from abroad. 

Banks and FIs will not be permitted to offer guarantees or letter of comfort to corporate opting for ECBs.

The interest rates on ECBs will be permitted with a maximum spread of 2 per cent over Libor for 3-5 years of borrowing, while it would be restricted to 3.5 per cent above Libor for borrowing over five years.

The revised guidelines will be applicable from the date of notification.