The Reserve Bank of India allowed Indian companies to raise external commercial borrowings for overseas acquisitions.
The move is aimed at helping domestic companies in becoming global players by increasing their investment overseas.
The end use of external commercial borrowings had been enlarged to include overseas direct investment in joint ventures and wholly owned subsidiaries, a RBI notification said.
This will encourage local companies to make fresh investment or expand existing joint ventures and wholly owned subsidiaries, including mergers and acquisitions, abroad as they can now raise resources abroad at globally competitive rates.
Last week Finance Minister Jaswant Singh gave a clarion call to India Inc to head overseas and buy companies abroad.
He also had said foreign exchange reserves over $100 billion were not for "safe keeping" and companies must use it for foreign acquisitions.
The amendment to the existing policy would take effect immediately, the RBI notification said, adding that the proceeds of external commercial borrowings should be parked overseas till they were invested in acquiring a foreign company.
"The implication of this move is enormous. Domestic companies will no longer face a resource crunch while striking mergers and acquisitions abroad. In other words, the RBI is saying if you have a target, go and get it, funds are no constraint," said the chief financial officer of a large manufacturing company.
Incidentally, the RBI's committee on external commercial borrowings met on Monday to scrutinise applications for raising funds abroad. This was the first meeting of the committee after the guidelines on external commercial borrowings were relaxed on January 19.
A string of business groups, including the Tatas and Reliance, is planning to raise funds abroad, through debt and foreign currency convertible bonds. Tata Motors is planning an external commercial borrowing for its proposed takeover of Daewoo Motors.
"We will see many such deals over the next few months," said an investment banker at a foreign bank. Over $2 billion of external commercial borrowings could be in the pipeline, he added.