Macro Economy

Bank lending to infrastructure projects gets a push

KR Srivats New Delhi | Updated on February 18, 2014 Published on February 18, 2014

More funds Most infrastructure projects are executed through special purpose vehicles, which rely on the strength of the holding company for their borrowings. - K MURALI KUMAR

Corporate Affairs Ministry clarifies on new company law

Banks can continue infrastructure lending to special purpose vehicles on the strength of the guarantees or security provided by a holding company.

The Corporate Affairs Ministry has for now removed a recent legal barrier that sought to thwart infrastructure lending by banks.

It has clarified that a holding company can (without any limit) give guarantee or provide security for loans made by a bank to a subsidiary company.

This move will particularly benefit infrastructure lending by banks, say bankers.

This dispensation, however, will be temporary in the sense that it would be available only till a provision (Section 186) in company law is notified, according to a Corporate Affairs Ministry circular.

After the enactment of the new company law, it was felt that infrastructure lending by banks could be affected as the new law placed restrictions on provision of loans or guarantees to a subsidiary company by a holding company.

This is because most infrastructure projects in India are executed through special purpose vehicles route and bank lending to such vehicles are on the strength of the guarantees of the holding company.

Most SPVs don’t have a track record and therefore rely on the strength of the holding company for their borrowings, it was pointed out. “The Corporate Affairs Ministry move will help banks to continue their lending to infrastructure after taking corporate guarantee of holding company,” V Kannan, Chairman and Managing Director of Vijaya Bank told Business Line.

Even for borrowing towards working of overseas subsidiary or joint ventures, corporate guarantees of parent are taken, Kannan pointed out.

Relief for bank financing

The move will only bring relief where a bank finances a subsidiary on the basis of guarantee or security given by the parent company, Lalit Kumar, Partner, J Sagar Associates, a law firm, said.

It will not apply to cases where a parent company wants to itself extend a direct loan to its subsidiary, he said.

“This circular has been released to facilitate smooth bank financing to a subsidiary,” Kumar added.

Temporary move

The move will be a huge relief for companies as well as banks, said Dolphy d Souza, Senior Partner, SR Batliboi & Co. However, this will be temporary because under the new company law (Section 186 which is not yet notified), overall 60 per cent (paid-up capital, free reserves and securities premium) or 100 per cent (free reserves and securities premium) limits would apply for loans/guarantees given by a parent to subsidiary, he said.

Published on February 18, 2014
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