The Reserve Bank of India (RBI) has clarified that the new norms for external commercial borrowings (ECB) do not violate the terms of Section 10D.6(1)a of the Exchange Control Manual (ECM). As per the new ECB guidelines, released recently by the government, foreign banks are permitted to provide guarantees, based on which domestic corporates can raise dollar-denominated loans.
The foreign banks can earn a guarantee fee on the transaction. It also helps the corporate to the extent that it receives an enhancement in its credit ratings, and this reduces the cost of borrowings.
But market sources said there was some confusion in corporate circles based on particular provision in the ECM which prohibits "the outflow of foreign currency" on account of guarantee fee.
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Clause 10 D. 6 (1)a of the ECM says: "Authorised dealers may grant loans and overdrafts to persons firms and companies in India against guarantees of individuals, firms and companies (including banks) outside India subject to the condition that no direct or indirect outgo of foreign exchange is involved by way of guarantee commission or otherwise."
Corporates had reportedly approached bankers to find out how they could possibly pay guarantee fees to the foreign banks if the ECM expressly prohibited payment it. However, top RBI officials told Business Standard that there is no contradiction between the ECBN guidelines and the ECM.
"The ECM is meant as the manual of authorisation for authorised dealers only," a top official said. If the terms of any transaction meet with the conditions laid down in the ECM, then the authorised dealer is not required to approach the RBI for approval, he explained.
"But under the Fera, the government and the RBI have overriding powers to sanction terms that are not explicitly provided in the ECM" the official said. If the new terms of paying guarantee fees and commission are provided for under the new ECB guidelines, then obviously they take precedence, he said.
In any case, a company going for an ECB approval for a dollar denominated rupee debt will have to take government approval, he said, 'in which case the terms of the payment of fees will stand ratified," the official noted.