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Reliance seeks nod for $500-m loan

Shaji Vikraman

NEW DELHI, May 6

RELIANCE Industries Ltd (RIL), which was denied withholding tax benefits by the Government in 1999-2000 for not adhering to the external commercial borrowings (ECBs) norms, has now sought the approval of the Finance Ministry to raise $500 million from th e overseas loan market.

This is exclusive of another big-ticket application submitted to the Ministry from group company, Reliance Petroleum Ltd (RPL), to raise $750 million from the international loan markets.

RIL has not accessed the overseas debt market for almost close to two years after this cropped up.

The issue related to the ECB proceeds of $1.3 billion raised by the company a couple of years ago.

Since RIL did not repatriate the proceeds in accordance with the Government's ECB norms, the Ministry decided not to extend the benefit of an exemption on the withholding tax to the company.

The ECB guidelines stipulate that the proceeds can be retained abroad for up to one year or until the capital expenditure on the project is incurred, whichever is earlier.

RIL had subsequently appealed against this decision to the Reserve Bank of India and to the Ministry. The former Finance Minister, Mr P. Chidambaram, had taken a brief as a lawyer for the company in this case. The Finance Ministry then referred the case to the Attorney General of India, whose opinion is now being awaited.

Since a final view on this case is yet to be taken, the fresh application for an ECB will have to be referred to the High Level Committee on Capital Markets (HLC) headed by the RBI Governor, Dr Bimal Jalan, officials have indicated. The HLC had given the go ahead to the Government to withdraw the benefit of an exemption on withholding tax to RIL.

If this is done finally, it will hurt the company badly as the pay-out on account of this tax impost could be substantial.

On an average, the withholding tax works out to 20 per cent, depending on the tax avoidance treaty with each country. The withholding tax would have to be calculated on over $one billion of past borrowings, if a decision goes against the company finally.

The issue has dragged on for quite some time. The Government has been moving cautiously on this, considering the battery of top lawyers ranged against it in this case.

According to bankers, the timing of the company's move now to raise money abroad through the debt route could be attributed not only to the softening of interest rates in key markets such as the US, but also to the fact that from June 1, all issuance of ECBs by Indian companies will attract a withholding tax.

The proposal of RPL to raise $750 million is expected to be cleared faster as the case relates only to the promoter company. This and a couple of other applications from corporates will help push ECB volumes up this year compared to the low issuance over the last couple of years.

In 2000-01, total ECB approvals to Indian corporates was one of the lowest in the last few years at just close to $1.72 billion.