4 reasons why India Inc preferred overseas borrowing in FY14

In FY2014, India Inc's share of assistance from banks and FIs fell to 68.4% while share of overseas borrowing-ECB increased to 41.4%, says CARE Ratings report


Indian corporate houses have preferred to raise funds through the external commercial borrowing (ECB) route over other avenues even as there has been a slowdown in total capital expenditure (capex) during FY14.


In a research report, CARE Ratings said, "Over the cumulative period (FY2009-FY2014), capital formation by way of assistance from banks and financial institutions (FIs) accounted for 84.8% of finance for the capital formation while that through ECBs stood at 13.8%. In the last three years, the share of ECBs for capital formation has been increasing."


Source: RBI


In FY2014, India Inc's share of assistance from banks and FIs fell to 68.4% from its peak of 91.1% in FY2010. On the other hand, share of overseas borrowing-ECB increased to 41.4% in FY14 from 12.3% in FY2009, the report said.


CARE Ratings listed four reasons for increased preference for ECB:


1. Interest rates were slashed to historically low level in the USA post the financial crisis in order to foster growth in the country. This situation when juxtaposed with the high interest rate regime in India prevalent since FY12, clearly suggests that in order to make the most of the interest differentials, companies preferred borrowing through the ECB route.


2. Additionally, in FY14 in particular, there was serious concern over the rising non-performing assets in the Indian banking system. This would have lead to some reluctance on the Banks to lend to companies.


3. RBI increased the limits for external commercial borrowings in FY14, thereby enabling companies to borrow more for capital formation.


4. Lastly, companies in general prefer raising capital through debt instruments as opposed to equity issues. Therefore, even though the secondary market was buoyant, companies preferred the debt route. Overall IPOs issuances had peaked at Rs33,097 crore in FY11, and then declined to Rs5,886 crore, Rs6,289 crore and Rs919 crore in FY12, FY13 and FY14, respectively.


However, CARE Ratings pointed out that in the debt market, corporates prefer private placement over the public issues. Banks and FIs play a significant role here as they mobilize a sizeable share of resources in the private placement market which in turn they lend to companies. The share of non-financial institutions in the private placement market has been more or less steady for the period under consideration. It fell slightly in FY11 and FY12 to 28.3% and 25.6%, respectively and then moved upwards in the subsequent two years in FY13 and FY14, the ratings agency said.


According to the research note, the capex envisaged by India Inc during FY15 stands at Rs1.24 lakh crore, which is less than 50% of the amount (Rs2.51 lakh crore) in FY14. " order to improve the capital expenditure in FY15 from its counterpart in FY14 would warrant more than Rs1.27 lakh crore by way of new investment plans in FY15. It remains to be seen if this is achieved," it added.


"However," CARE Ratings said, "the pace of turn around will be gradual interest rate environment, demand conditions and overall growth environment is still not overtly supportive of rapid investment. First quarter of FY15 has shown stability in capital formation and fresh spending by government as per the budgetary estimates and traction in the stalled projects space will be the supporting factors."


SBI announces stock split in 10 for 1 ratio

The decision to split stock will enhance broader investor participation specifically retail participation and increase in demand, SBI said


State Bank of India (SBI), the country's largest lender on Wednesday said its board approved reduction in the face value of its shares to Re1 from Rs10 and subsequently increase number of issued shares in proportion.


In a release, Arundhati Bhattacharya, Chairman of SBI said, “The decision to split stock will enhance broader investor participation specifically retail participation and increase in demand will enhance P/E Ratio”.


The reduction in face value would also reflect in its existing GDR programme.


SBI closed Wednesday 2.7% down at Rs2487 on the BSE, while the 30-share Sensex ended the day marginally down at 26,744.7.


SEBI Regulates ‘Research Analysts’

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