Take-out finance scheme for infrastructure

The current policy for external commercial borrowing (ECB), does not permit refinancing of domestic rupee loans with overseas borrowings. However, to address the special funding needs of the Indian infrastructure sector, the Reserve Bank of India (RBI) has decided to permit take-out financing via an ECB. The RBI has issued a circular dated 22 July, which governs the take-out finance scheme.

Eligible borrowers in the sea port, airport, roads (including bridges) and power sectors, can now access take-out financing for refinancing rupee loans for the development of new projects. The loans should be from a domestic bank and the take-out finance will be available under the approval route, i.e. an eligible borrower would need to apply to the RBI for it through an authorized dealer.

Conditions to be met

This scheme is subject to the following conditions:

(i) Infrastructure companies using the ECB are required to execute a tripartite agreement with the domestic bank and overseas recognized lender for either a conditional or unconditional take-out of the loan within a period of three years of the scheduled commercial operation date.

(ii) The minimum average maturity period of the loan should be not less than seven years.

(iii) The fee payable to the overseas lender must not exceed 100 basis points a year.

(iv) The domestic bank that finances the infrastructure project is required to comply with the existing prudential norms relating to take-out financing.

(v) The residual loan agreed to be taken out by the overseas lender would be regarded as an ECB and all existing ECB norms are to be complied with.

(vi) Domestic banks or financial institutions will not be allowed to guarantee the ECB upon take-out of the loan.

(vii) The domestic bank will not be permitted to carry any obligation on its balance sheets after the take-out of the loan.

(viii) The reporting arrangements, as prescribed under the ECB policy, will need to be adhered to.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.