The Reserve Bank of India (RBI) has allowed multilateral agencies and government-owned institutions ba-sed

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overseas to stand guarantor to the domestic debt raised for the development of infrastructure companies.

“This will enhance the borrowing capacity of the Indian infrastructure finance companies and enhance the capacity of the domestic entity making up for lack of any guarantors in the country, increasing the opportunity for infrastructure development in the country and bring in a steady flow of foreign capital into the sector,” according to a senior banker.

Companies such as L&T Finance, GMR Infrastructure, JP Associates, GVK group and Reliance ADAG and Tata group that are engaged in infrastructure development can get their loan guarantees from any multilateral institutions like the World Bank, Asian Development Bank or African Development Bank, KFW Foundation based in Germany, and any country-specific institutions owned by the government. This implies to debt raised through capital market instruments like debentures or bonds.

At present, the ECB guidelines provide for guarantees on plain vanilla products such as securitsation of receivables, derivative products and collaterised debt, by foreign entities. Now it will be extended to structured products like debentures and bonds.

In a circular issued late on Tuesday, the RBI stated that the debt raised through issue of capital market instruments, such as debentures and bonds, by Indian companies engaged exclusively in the development of infrastructure and by the Infrastructure Finance Companies (IFCs) could be guaranteed by non-resident entities.

“The guarantee or the credit enhancement will be permitted to be provided by multilateral/regional financial institutions and government-owned development financial institutions and the underlying debt instrument should have a minimum average maturity of seven years. Prepayment and call/put options will not be permissible for such capital market instruments up to an average maturity period of seven years,” the circular stated.

“It is an indirect way of regulating volatile flows into the sector, leading to any asset price bubbles in the sector,” the banker added. The cost of the guarantee for the domestic financial institutions will be restricted to a maximum 2 per cent of the principal amount involved. If the domestic institution fails to pay up, the guarantor has to meet the liability.

“Indian companies involved in infrastructure development were finding it difficult to raise sizeable amounts unless there were guarantees provided by some multilateral agencies. With this relaxation, they will be able to raise money domestically and outsource the credit risk,” a senior Societe Generale official said.

manjuab@mydigitalfc.com