On July 22, 2010, the Reserve Bank of India (RBI) announced that
it will put in place a scheme to allow eligible borrowers in the
infrastructure sector to refinance Rupee loans from domestic Indian
banks with external commercial borrowings (ECB) from foreign
lenders via take-out financing arrangements. Prior to RBI's
July 22nd announcement, end-use restrictions under ECB
guidelines prohibited Indian borrowers from using ECBs to refinance
domestic Rupee loans. The new scheme will limit permitted ECB
take-outs to new projects in the sea port and airport, roads
(including bridges) and power sectors.
To put in place permitted take-out financing, the Indian corporate
will be required to enter into a tripartite agreement with the
domestic bank and overseas ECB lender providing for the take-out of
the domestic Rupee loan within three years of the commercial
operation date (COD). The scheme will allow both conditional and
unconditional take-out financing, provided that the scheduled
take-out date is included in the agreement.
Under RBI/2010-11/124 Circular No. 4 (the
"Circular") issued last Thursday, ECB
take-out financing will be subject to a minimum average maturity of
not less than seven years and a 100 bps per annum cap on fees
payable to the take-out bank. The Circular also provides that the
domestic bank should otherwise comply with the existing extant
norms related to take-out financing, and that on take-out, the
residual loan would be considered ECB and should be designated in a
convertible foreign currency (and all other extant norms relating
to ECB complied with). The parties will also be required to adhere
to prescribed ECB reporting requirements. Finally, under the
Circular, domestic banks and financial institutions will not be
permitted to guarantee take-out financing and the domestic Rupee
loan provider will not be permitted to carry any obligation on its
balance sheet after the relevant take-out event.
The new scheme for ECB take-out financing will only be available
for ECBs under the "approval" route. Under current ECB
guidelines for "automatic route" transactions (not
requiring prior RBI approval), eligible borrowers may borrow ECBs
up to US$20 million per year with a minimum average maturity of
three years and may borrow ECBs up to US$500 million per year with
a minimum average maturity of five years. As the new take-out
financing scheme will be available only to "approval"
route transactions, we anticipate that this will largely impact
large scale infrastructure projects, in particular situations where
foreign lenders may be reluctant to provide initial stage financing
with a high degree of completion risk. In such cases, Indian
infrastructure developers under the new scheme may obtain higher
all-in cost Rupee loans with some assurance of lower cost long-term
ECB take-out financing from foreign lenders. It remains to be seen
whether foreign banks will view the 100 bps per annum cap on
commitment fees for ECB lenders as too restrictive.
Nevertheless, the new take-out financing scheme is likely to be
seen as a welcome development by foreign credit providers in the
Indian infrastructure sector, especially as it follows RBI's
February 12, 2010 and March 2, 2010 Circulars creating
Infrastructure Finance Companies (IFCs) and broadening the
definition of the infrastructure sector for purposes of ECB
borrowing. As India continues to focus on expanding foreign
investment in the infrastructure sector, we would not be surprised
to see further developments from RBI in this area.
This Client Alert provides a general summary of the proposed
changes to the ECB guidelines under the Circular. However, the
rules surrounding lending and ECBs in India are complex. This
summary does not include all of the detailed rules contained in the
proposed scheme. Companies should consult their Indian counsel
concerning the application of the rules to any particular set of
O'Melveny & Myers LLP routinely provides
advice to clients on complex transactions in which these issues may
arise, including finance, mergers and acquisitions, and licensing
arrangements. If you have any questions about the operation of the
applicable statutory provisions or the case law interpreting these
provisions, please contact any of the attorneys listed on this
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