Further Measures to Boost Infrastructure Financing

In continuation of previous measures, the Reserve Bank of India (RBI) has taken additional steps to enable financing in the infrastructure sector.

First, the proposed introduction of credit default swaps on corporate bonds (discussed here) covers corporate bonds issued by Special Purpose Vehicles (SPV) of rated infrastructure companies “keeping in view the need for development of the infrastructure sector”.

Second, the RBI has earlier announced definitive measures to permit take-out financing through external commercial borrowings (ECBs) in the infrastructure sector. As RBI observes in its notification of July 22, 2010:

As per the extant norms, refinancing of domestic Rupee loans with ECB is not permitted. However, keeping in view the special funding needs of the infrastructure sector, it has been decided to review the ECB policy and put in place a scheme of take-out finance. Accordingly, it has been decided to permit take-out financing arrangement through ECB, under the approval route, for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects …

The take-out financing is subject, however, to several conditions including a minimum average maturity period of 7 years, fees to overseas lenders not to exceed 100 bps per annum and that the borrowing will not be under the automatic route (thereby requiring prior approval of the RBI).

Although this is a welcome development, it remains to be seen whether the imposition of stringent conditions will thwart the growth of financing in this sector. For a further analysis of these measures, please see this article on Mondaq and this discussion on CNBC.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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