India Inc in a rush to go abroad for funds

Cash-starved Indian companies are increasingly turning to foreign markets to raise funds. At least half a dozen companies, such as ONGC Videsh Ltd (OVL), Dish TV, Power Grid Corp, Essar Oil and Gulf Oil, are looking to raise around $6 billion over the next few months through either equity, bonds or loans from overseas markets.

High interest rates in India, compared with record low bank rates abroad, are making Indian CFOs turn to foreign banks for debt.

"For companies with dollar-driven earnings, it makes sense to raise money through this route as they get a natural currency hedge," says ICICI Securities Executive Director Ajay Saraf. Bankers say a majority of such money raised is used for working capital requirements.

OVL, the overseas arm of state-owned ONGC, plans to raise about $1 billion through issue of dollar bonds early next year. PowerGrid also proposes to garner $500 million through the same route, while Dish TV intends to raise about $100 million through Global Depository Receipts (GDR). Gulf Oil has hired Royal Bank of Canada to raise $835 million through foreign borrowings to fund its Houghton takeover. Essar group companies Essar Oil and Essar Steel have also announced they would raise funds from abroad in the next few weeks. Essar Oil would raise $2 billion to replace its rupee borrowings with foreign loans, while Essar Steel would raise around $425 million.

"Also, companies with foreign currency debt are raising money overseas to roll over their loans," said RSM Astute Consulting Executive Director K H Viswanathan.

Bankers say State Bank of India's successful dollar bond issue in July has emboldened more Indian companies to raise money abroad. Until then, many shied away as they were uncertain about the perception of foreign investors and banks, amid worries over risks of ratings downgrade on India. Soon after the SBI issue, five other banks, including ICICI Bank, Axis Bank and Indian Overseas Bank, have raised money overseas.

However, the biggest foreign loans raised so far this year have been by the country's largest company, Reliance Industries Ltd. The oil and gas major has raised $4 billion in tranches to fund its expansion, both in India and overseas. In October, it raised $1.5 billion for refinery expansion, while the funds raised earlier in February and May this year were used for expansion of its Jamnagar refinery and shale gas business in the US. The issue received an overwhelming response from foreign bankers, enthusing other Indian companies to raise funds from abroad.

Bankers say easier access to money in the West, coupled with cheaper costs, is driving firms to raise cash abroad. Foreign banks, flush with cash because of the easy monetary policies of their central banks, are willing to loosen their purse strings for Indian firms because of the relative good health of these firms and the recent initiatives of the Indian government to prevent ratings downgrades.

A highly rated company can raise money abroad at 9-10 per cent, including all costs like hedging, while the same firm would be able to borrow locally at around 12 per cent.

It makes sense for firms with sizeable presence overseas to raise funds abroad through borrowing or bond issuances, as this would help them hedge against any currency volatility. Many Indian companies that have raised funds abroad in the past five years have defaulted on repayments, owing to the rupee's weakening against the dollar. The firms with substantial dollar earnings have zero risk on account of the rupee's volatility.