Infrastructure companies: Are we really hedged?

By Anish Mashruwala and Soumitra Majumdar, J. Sagar Associates
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As part of its efforts to ease regulated foreign currency loans in general, the Reserve Bank of India (RBI) recently liberalized its External Commercial Borrowing (ECB) policy to bolster medium-term debt investments in the infrastructure sector.

The RBI has reduced the minimum average maturity period of loans taken out by infrastructure companies to three years, irrespective of the amount, and has exempted mandatory 100% hedging to loan facilities that have an average maturity of five years or more. It has also reduced the mandatory hedge coverage to 70% from 100% for loans that have a maturity period of between three and five years.

Anish Mashruwala and Soumitra Majumdar J. Sagar Associates
Anish Mashruwala
J. Sagar Associates

The changes are meant to arrest the depreciation of the rupee by causing forex inflow in demand driven sectors and reducing the compliance cost for infrastructure companies, as hedging costs may vary between 4% to 7% of the loan amount. While the rupee has strengthened marginally, it still continues to be one of the worst performing Asian currencies. No definitive data is available to ascertain if there was indeed an uptake in ECB by infrastructure companies after the liberalisation.

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Anish Mashruwala and Soumitra Majumdar are partners at J. Sagar Associates. Views are personal.

J.-Sagar-AssociatesJ. Sagar AssociatesVakrils House, 18 Sprott RoadBallard Estate

Mumbai – 400 001, India

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Anish Mashruwala | Tel: +91 22 4341 8577

Email: anish.mashruwala@jsalaw.com

Soumitra Majumdar | Tel: +91 22 4341 8535

Email: soumitra.majumdar@jsalaw.com

Website: http://www.jsalaw.com

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