Foreign banks have indicated their willingness to accept dilution of promoters' equity in infrastructure projects funded by them below 51 per cent during the repayment period. This move is expected to set a trend in infrastructure financing.
Banking sources said, "This 51 per cent equity holding by the promoter is not a sacrosanct figure for us. What is important to us is the debt servicing capabilities of the project."
Accordingly, the sources said, while substantial dilution by the project promoters to book an equity rate of return was fully acceptable to them.
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However, the banks have said that such equity dilution would be allowed during the tenor of the project debt only if there is a management contract in place with a team acceptable to the creditors.
This move by foreign banks is in complete contrast to the stance taken by domestic financial institutions (FIs).
FIs like IDBI, ICICI and IFCI have said that project promoters would have to hold an equity stake of 51 per cent during the debt repayment phase as one of the conditions for being eligible for term loans for either port, road or water projects.
Under the existing guidelines, project promoters need to hold 51 per cent equity only during the construction phase and are permitted to dilute to 26 per cent during the operating and maintenance phase.
Institutions like IFCI which arranged the debt funds to the Adhani Port have already said that promoters of the port would have to hold the 51 per cent equity during the debt repayment period of 10 years and dilution would be permitted only after this period.
The move by foreign banks comes close on the heels of their being allowed to provide guarantees for raising rupee denominated project debts by infrastructure projects, an area which has been the exclusive domain of domestic banks and financial institutions.
Foreign banks have already begun pitching for debt funding road, port and water projects either for rupee funding or for foreign currency funding, especially in projects where there are hedge mechanisms in place.
For instance in the case of port projects , there is already a cash flow by way of vessel earnings in the form of foreign currency and in container projects, container handling charges have already been permitted to be denominated in foreign currency equivalent units as these have been treated as part of the vessel related charges by the Tariff Authority for Major Ports.
For road projects, a 25 per cent weightage is expected to be provided for foreign currency fluctuation for working out the tariff/toll escalation rates.
Foreign banks, like ANZ Grindlays, Stanchart and Hong Kong and Shanghai Banking Corporation along with ICICI have provided a combination of foreign currency and rupee debt. Of this $ 45 million (about Rs 193 crore) was foreign currency and the remaining Rs 280 crore was denominated in domestic currency.