Oil firms look at ECBs to meet borrowing needs
New Delhi   23-Dec-2011

A bearish outlook for the rupee has prompted oil marketing companies (OMCs) to meet their borrowing needs by raising funds through external commercial borrowings (ECBs).

State-owned IndianOil has, for instance, till date, raised $750 million through ECBs (long-term foreign-currency borrowing). The company says it keeps a constant watch on overseas markets, and that further availments would be decided on the basis of conducive conditions in overseas market.

“IndianOil has during the current fiscal raised, through ECBs, $750 million. That is our full quota under automatic route,” according to P K Goyal, director (finance), of the enterprise headquartered here. “We have been raising ECBs in order to keep an optimum balance between domestic and foreign currency loans. The loans were raised to finance our Paradip Refinery project.” The 1964-founded company’s current borrowing is more than Rs 79,000 crore.

Hindustan Petroleum, on the other hand, has raised around $500 million so far -- and is looking at raising another $250 million next month. “Raising money through ECBs works out cheaper for us,” says a senior official from HPCL. “The depreciating rupee has made us raise more via ECBs.”

Indian companies have largely accessed ECBs as the interest rates on such borrowings is about 5-6 per cent cheaper than that on rupee-denominated domestic loans. Even after incurring cost to cover the exchange rate risks, is it relatively cheaper to raise funds abroad.

The rupee has depreciated by about 17.4 per cent in the calendar year 2011 over close of Rs 44.70 at end of December 2010. Also, the depreciating rupee has made crude oil purchases dearer for OMCs, despite a drop in Brent prices over the last month. This may push oil subsidies higher, according to analysts.

ECBs are an instrument to facilitate the access to foreign money by private as well as public sector undertakings. The borrowings include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed-rate bonds.

According to T S Srinivasan, general manager (treasury) with Indian Overseas Bank, while cost advantage of raising funds abroad has declined, OMCs are looking at tapping funds overseas for volume and ease of borrowing. The companies need large amount of foreign exchange. Given the sharp drop in dollar supply into country, their presence to pick up dollar in the domestic market immediately skews currency rates. Hence it makes sense for them to use overseas market, says the treasury head of another large public sector bank.

This is probably why Bharat Petroleum Corporation Ltd is also planning to raise $300 million through the ECB route.

Analysts say bad performance of capital markets has resulted in subdued fund raising through equity instruments such as initial public offering, follow-on public offers, rights issues and qualified institutional placements.

SMC Global Securities Ltd says Indian companies have flocked towards the debt instrument of ECBs to compensate the subdued nature of equity instruments. “During calendar year 2011, Indian companies have raised about ECBs to the tune of US$ 30bn. That is significantly higher than calendar year 2010, when the fund raising through ECBs was at $22 billion,” notes Jagannadham Thunuguntla, its strategist & head of research.