July 30, 2010

Client Alerts

Takeout Financing permitted

under ECB Policy
The RBI has permitted the refinancing of domestic loans in certain specified infrastructure sectors by
external commercial borrowings under certain specified conditions.

The Reserve Bank of India (“RBI”) on Wednesday 22 July, 2010 issued a circular1 permitting refinancing under a
Take-out Finance Scheme (“Scheme”). Under the existing External Commercial Borrowings (“ECB”) policy,
borrowers were not allowed to refinance their existing domestic loans with foreign currency loans. The RBI has now
permitted this under certain specified conditions. Takeout financing will now be permitted as an ECB under the
approval route for refinancing rupee loans availed from domestic banks in connection with projects in a limited
number of infrastructure sectors.

Takeout Financing has been seen as necessary prerequisite for the development of infrastructure in India. This is
because domestic banks are cautious of lending to projects with a 10-12 year gestation period considering that their
longest term deposits are around 5 years. Overseas borrowers are slightly cautious with projects that involve land
acquisition and other government approvals. If domestic lenders provide support in the initial years of an
infrastructure project, the logic goes that foreign lenders would have a greater level of comfort in such
loans. Furthermore, this is also a method by which joint venture (JV) projects could possibly take financial support
from their foreign partner.

The Budget 2009-2010 originally envisaged takeout financing as a domestic measure to meet the long term financing
requirements of infrastructure projects. The budget announcement proposed a takeout financing as a scheme to be
formulated by India Infrastructure Finance Company Limited (“IIFCL”) to encourage banks and other commercial
lending institutions to advance more loans towards infrastructure projects having long gestation periods. Under this
scheme, banks would be allowed to sell their loan portfolio to IIFCL after a certain period of time thereby freeing up
capital and absolving them from their long term obligation involving three parties, the project company, taking over
institution and IIFCL.

The RBI has now permitted takeout financing by overseas lenders by amending the ECB policy to allow takeouts
under the approval route. The conditions set by the RBI include:

 The Scheme is applicable to Indian Corporates in the sea port and airport, roads including bridges and
power sectors (eligible borrowers);
 A requirement that there should be a tripartite agreement between the borrowers and the overseas lenders;
 The takeover of the loan can be conditional, which means that the foreign lender can commit to refinance
only if the project achieves certain milestones;
 The takeout has to take place within three years of the scheduled commercial operation date;
 The loan should have a minimum average maturity period of seven years;

1
RBI/2010-11/124, A.P.(DIR Series) Circular No.4
 July 30, 2010

Client Alerts

 The domestic bank financing the infrastructure project should comply with the extant prudential norms
relating to takeout financing and will not be allowed to carry any obligation on its balance sheet after the
completion of the takeout event;
 The takeout fee payable to the overseas lender shall not exceed 100bps per annum;
 Domestic banks or financial institutions are not permitted to guarantee the takeout finance;
 The loan being taken out would be designated in a convertible foreign currency and must comply with ECB
norms including other eligibility and reporting requirements;

Interestingly certain infrastructure sectors are excluded from the Scheme - telecommunication, railways, industrial
parks, urban infrastructure, mining, refining and exploration. Also the minimum three year period stipulated under
this scheme corresponds with the three year period offered by IIFCL under the domestic takeout scheme. Provided
below is a summary table providing a comparison of key terms in different refinance schemes.

ECB Policy – Take- India Infrastructure IIFCL’s Refinance IIFCL Take out
out Finance Debt Fund - Proposed Scheme finance scheme

Parties Involved Project company Project company Project company, Project company,
Taking over institution The Fund; Commercial bank Commercial bank
Lending banks or Project authority (such as IIFCL IIFCL
Financial Institutions. NHAI or a state
government in the case of
highways)
Eligible Projects Roads Road Road Road
Bridges Railways Port sectors Railways
Sea port Port PPPAC approved new Bridges
Airport Airport projects Seaports
Power sectors Metro rail Airports
Power projects Inland waterways
or any PPP infrastructure Other transportation
project projects;
Power
Urban infrastructure
Gas pipelines
SEZ Infrastructure
projects
International convention
centers
Other tourism
infrastructure projects

Eligibility linked 3 years after 1 year after Commercial Projects for which 3-4 years after
to project phase Commercial Operation Operation date bids were submitted Commercial Operation
date on or after January 31 date
2009
 July 30, 2010

Client Alerts

Domestic banks or IIFCL will take the loan

Other Features Financial institutions on its books only if it is a
are not permitted to standard asset.
guarantee the take-out
finance.
Extent of 100% 85% with contribution of 60% 75%
Refinance 10 % by Sponsors (one or
a combination of IIFCL,
SBI, ICICI, LIC, IDFC,
UTI, an infrastructure
NBFC or an investment
bank )
Tenor of Minimum average 10 Years 6 Years
Refinance maturity period of 7
years.
Fees Max. 100bps p.a. Max. 100 bps p.a. IIFCL to charge Max. 30 bps p.a.
7.85%p.a. and banks
permitted to charge a
maximum spread of
250bps p.a.

This alert is provided as an information resource. It is not legal advice and is not intended to be relied upon as
such or quoted or referred to in any public document without our express written consent. For further
information on the subject-matter of this alert, contact Vivek Durai, Partner, Atman Law Partners, Chennai at the
following email address: vivek.durai@atmanlaw.com

http://www.atmanlaw.com/publications/2010-07-30/ecb-takeout-financing-permitted/