Article by David Makarechian , Huey Yann Thong , William Miller and Anirudh Rastogi

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 circumstances.

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 alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.