The Reserve Bank of India is considering a proposal to increase the lock-in period for loans by foreign companies to their ventures in India.
The central bank's objective is to align the regulations for such loans with the tenure and end-use norms for external commercial borrowings in a bid to check foreign currency inflows.
The government recently tightened ECB end-use norms disallowing overseas commercial borrowings above $20 million for rupee expenditure. Loans taken under ECB regulations have a three-year lock-in.
A foreign company can lend to its Indian venture up to four times the amount of its direct equity investment if the equity stake is above 25 per cent. Such lending is capped at $5 million if a foreign company owns only up to 25 per cent equity in the Indian company.
The tenure of such loans varies, and could be up to three years depending on sector-specific stipulations for foreign direct investment.
The central bank is worried that such foreign currency flows could be destabilising, since large inflows and outflows could take place in very short periods. The extent of such loans raised by joint ventures of foreign companies in India was not known as the data are not available in the public domain.
Sources said the RBI is also concerned that such sources of funds could now be used to skirt the central bank's decision to reduce the interest rate a company can pay on overseas loans under the ECB route. The RBI has capped coupon on three-year loans at dollar LIBOR plus 1.5 per cent and on five-year loans at dollar LIBOR plus 2.5 per cent.
Tightening the tap