The Indian government permits external commercial borrowings (ECB) as an additional means of finance for Indian companies, thereby enabling them to augment their existing capacity and to supplement domestic resources. According to existing ECB norms, domestic rupee-denominated structured obligations can be credit enhanced by overseas entities, namely international banks and financial institutions and joint venture partners, under the approval route.
In addition to making funding available via the ECB route, the government has also implemented various mechanisms to provide increased funding to the infrastructure sector through the establishment of development finance institutions like the Industrial Development Bank of India, the Industrial Finance Corporation of India, ICICI, etc. However, such institutions have not been able to keep pace with the escalating funding needs of the infrastructure sector.
In light of the increasing financial requirements of the infrastructure sector, the Reserve Bank of India (RBI), through its Circular dated 2 March, has enacted a comprehensive policy framework to permit credit enhancement facilities to be used for domestic debt raised exclusively by corporate entities engaged in infrastructure development and finance.
Terms and conditions
Such credit enhancement facilities would be available for domestic debt raised via capital market instruments such as debentures and bonds. Only multilateral or regional financial entities and government-owned development financial institutions can extend these credit facilities which are subject to the fulfilment of the following criteria:
• A minimum average maturity of seven years is prescribed for the underlying debt instrument.
• Prepayment and call/put options would be restricted for an average maturity period of seven years
• Guarantee fees and other costs would be permitted up to a maximum of 2% of the principal amount of the domestic debt.
• The all-in-cost ceilings applicable to the maturity period of the ECBs raised, would also be applicable to the novated loan. This is subject to the condition that on the credit enhancement being invoked, the guarantor should be able to satisfy the liability, which can be repaid in foreign currency to the overseas lenders.
• If a default is made in repayment of the loan, which is serviced in rupees, the applicable rate of interest would be either that of the coupon of the bonds or 250 basis points over the prevalent secondary market yield of five years Indian government security as on the date of novation, whichever is higher.
• If the credit enhancement facility is availed by an infrastructure finance company (IFC), these companies are required to mandatorily comply with the eligibility criteria and prudential norms stipulated by the RBI. Further, an IFC is required to hedge the total foreign currency exposure in the event the novated loan is designated in foreign currency.
• The reporting requirements presently stipulated for ECBs would also extend to the novated loans.
Impact on infrastructure sector
The RBI’s move to permit credit enhancement facilities is expected to immensely augment the quantum of bonds issued by such infrastructure companies and meet the requirement for alternate avenues for securing funding for infrastructure projects in India.
In line with the comprehensive credit enhancement policy, the RBI has attempted to provide an impetus to domestic bonds and debentures issued by infrastructure development companies and IFCs.
IFCs extend long-term financial aid to infrastructure projects such as roads, railways, airports, seaports, urban infrastructure, inland waterways, gas pipelines, special economic zones, bridges, townships, commercial structures, independent and captive power projects, equipment in the power sector, private berths and container-handling jetties in ports, port equipment, etc.
The credit enhancement extended by non-resident entities, will promote the credit-worthiness of Indian companies engaged in infrastructure development and finance, by increasing the credit rating of the bonds and debentures issued. This will consequently help Indian infrastructure companies to gain better access to domestically available debt facilities.
Such a comprehensive policy is aimed at affording the necessary stimulus to the Indian infrastructure sector.
Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.
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