To enhance the creditworthiness of infrastructure projects, the Reserve Bank of India (RBI) has allowed foreign equity investors to issue guarantees for debt raised by companies involved in these.
Such credit enhancement by investors reduces credit and default risks and helps secure funds at lower rates. Besides guarantees, credit enhancement can also be extended through additional collateral and insurance.
Credit enhancement by non-resident entities would be permitted under the automatic route and these decisions would not require the prior approval of the central bank, RBI said on Monday.
Credit enhancement is a method through which a company can improve its debt or credit worthiness. It provides reassurance that the borrower would honour the obligation. Those holding a direct stake of at least 25 per cent (for indirect foreign equity holders, the figure stands at a minimum of 51 per cent of the paid-up capital) can provide credit enhancement to Indian companies. The companies must exclusively be devoted to the development of infrastructure.
Till date, only multilateral financial institutions and government-owned development financial institutions could offer credit enhancement for domestic debt raised through debentures and bonds.
RBI has also rationalised the policy for extra commercial borrowings (ECBs). Instead of conventional debt-equity ratio, RBI would now look at the ECB liability, calculate ratio of ECB obligation to equity and excluding other borrowings and debt. The ECB liability would factor in the proposed borrowing, as well the outstanding ECB, from the same foreign equity holder lending the money.
The ECB proposals from foreign equity holders and group companies would be taken up under the approval route. Service sector units, in addition to those in hotels, hospitals and software, could also be considered eligible borrowers if the loan is obtained from foreign equity holders. This would facilitate borrowing by training institutions, research and development companies and miscellaneous service companies.
