OVER the years, India Inc has widened its reach well beyond the country’s borders. Be it Tata Steel’s acquisition of Corus or numerous other acquisitions by IT giants like Infosys Technologies and Wipro, Indian companies are now increasingly expanding into foreign territories to offer additional value to their shareholders.

While one reason for this is that Indian companies have realised that the market for goods and services has become global, the other reason is that they now have the resources to spread their wings far and wide. Most companies in India are now far bigger in size than earlier and have seen substantial improvement in their financials as well. And this has not gone unnoticed by the international financial community.

The willingness to invest in India’s growth story has opened up an entirely new source of growth for India Inc — foreign capital. Earlier, even the idea of Tata Steel acquiring Anglo-Dutch steel maker Corus for $12 billion and raising an estimated $9 billion from foreign sources was unthinkable.

When we talk about foreign capital, the first thing which comes to mind is external commercial borrowings (ECBs). The government has permitted domestic companies to raise funds from foreign financial institutions, which helps them to expand and quickly scale up their operations. Moreover, since interest rates in international markets are less than those prevailing in the domestic market, raising funds from abroad is more economical for Indian companies.

For instance, a few years ago, the interest rate charged by a domestic bank for a loan for an infrastructure project was more than 10%, while the Libor (London Inter Bank Offer Rate) was at 4%. Hence, a number of projects became financially viable due to the savings in terms of interest cost.

Moreover, the Indian market is not as liquid as overseas markets. And since companies are eyeing big-ticket acquisitions these days, it makes more sense to raise money in a market which is much more liquid and helps in better price discovery.

Apart from ECBs, corporates use instruments like American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs) and foreign currency convertible bonds (FCCBs) to raise external funds.

An analysis of data for the period August 2007 to July 2008 shows that ET500 companies have raised more than $15 billion through ECBs and FCCBs.

A few years ago, the ministry of commerce had set a target of mobilising $10 billion through foreign direct investment (FDI). Now, Indian corporates are raising much more than $10 billion just through overseas borrowings. Moreover, the $15-billion figure does not include the amount invested by foreign institutional investors in the primary and secondary markets.

Out of the $15 billion raised by ET500 companies, more than $8 billion was utilised for import of capital goods. This shows that companies which import machinery often use the ECB route to raise money, as it is much cheaper. Great Eastern Shipping and Shipping Corporation of India are the major companies which have utilised ECB proceeds for importing capital goods. This is because domestic shipping companies have been increasingly expanding their fleet size as demand for raw materials like iron ore and coal has pushed up the day rates, making investments in ships worthwhile.

Reliance Industries, Bharti Airtel, Larsen & Toubro, NTPC and Reliance Communications are the other major companies which have utilised ECB proceeds to import capital goods. Jet Airways is also using the ECB route to arrange finance lease for importing aircraft into India. The company has raised around $1.7 billion for this purpose in the past 12 months.

Another $3 billion of the above $15-billion figure was utilised for overseas acquisitions during August 2007 to July 2008. For instance, Wipro raised 35 billion yen in March 2008 to aggressively pursue its acquisition strategy. The company decided to raise the money in yen terms as its cost of borrowing was lower.

In March 2008, Tata Chemicals completed the acquisition of US-based soda ash maker General Chemicals. Of the $850 million it arranged for funding this acquisition, $500 million was via the ECB route. This ECB funding was at Libor + 4.25%, including the charge for covering foreign exchange risk.

Hence, the entire interest cost of the acquisition turned out to be less than 7.5%, compared to the prime lending rate of 11-12% offered by most domestic banks at that time. This shows that companies effectively use the ECB route for inorganic growth and in certain cases, it accounts for a major part of their funding.

However, in the past few months, there has been a slowdown in overseas borrowings. This is attributable to the general economic upheaval in India in the form of rising interest rates and a slowdown in implementation of investment plans. Despite this slowdown, Indian companies will continue to seek foreign capital to fund their overseas acquisitions and expand their domestic capacity.

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