Mumbai: The Reserve Bank of India (RBI) on Tuesday clamped down on Indian firms raising funds overseas and routing them to India through certain types of structures.

In a notification, RBI noted that some Indian firms access overseas markets for debt funds through overseas subsidiaries and associates and later route those funds back to their Indian operations.

One of the ways this has been done is through investment in rupee bonds floated by the Indian company.

Taking note of such instances, RBI clarified that Indian companies are not allowed to “issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for such borrowings by their overseas holding/associate/subsidiary/group companies except for the purposes explicitly permitted in the relevant regulations."

RBI further added that funds raised by an overseas subsidiary, associate or group company cannot be used in India unless it conforms to the general or specific permissions granted under the Foreign Exchange Management Act (FEMA) regulations.

RBI also stated that those Indian firms or their investment banks which are using or establishing structures that contravene these norms, shall be liable for penal action.

According to existing guidelines on external commercial borrowings (ECB), there are restrictions on the cost at which Indian firms can raise overseas borrowings. The “all-in-cost ceiling" is set at 350 basis points (bps) spread over six month London Interbank Offered Rate (Libor) for borrowings between three and five years. A ceiling of 500 bps over Libor is applicable for borrowings with maturity above five years. Firms also have to comply with restrictions on the end use of such funds. One basis point is one-hundredth of a percentage point.

“Prima facie, it looks like a stricture. But these norms are meant to prevent systemic risks that may occur if companies do this indiscriminately and across the board. If funds are routed easily to the Indian arm and get commingled with other funds in the balance sheet, then such foreign-raised funds may be used for all kinds of purposes which may not be allowed under present regulations," said Deep Mukherjee, senior director, corporate ratings at India Ratings and Research Pvt. Ltd, the India arm of Fitch Ratings.

Earlier this year, Greenko Group Plc, a Hyderabad-based hydro and wind power company, used an offshore entity to raise funds via US dollar bonds at a spread higher than the permitted limit. The parent company then sold the same amount of rupee-denominated bonds in the domestic market. An overseas special purpose vehicle then subscribed to the rupee bonds, effectively routing the dollar borrowings back to India.

Greenko’s $550 million of 8% debentures mature in five years and were sold at an about 631 basis-point premium over similar-maturity treasuries, according to a 20 October Bloomberg report.

Deutsche Bank AG, Standard Chartered Plc, JPMorgan Chase and Co, Barclays Bank Plc and Investec Bank Plc were bankers to the issue.

Since then, at least a couple of other companies have been mulling raising funds via such structures, said a banker who declined to be identified.

“Effectively, the circular will prevent companies from raising offshore bonds with the intent of routing the funds back to India via the issue of rupee-denominated bonds in the onshore market," said the banker quoted above.

Indian firms have been tapping the overseas bond markets actively in 2014 as easy global liquidity and improving sentiments around India have allowed them to access funds at cheaper rates. Many of these firms have raised funds via overseas subsidiaries for use in their international operations. Apart from investment grade firms, at least 10 sub investment grade firms have also tapped the overseas bond markets in 2014, raising close to $5.3 billion, Mint reported on 12 November.

However, according to the banker quoted above, borrowings via overseas units may not be broadly impacted if the funds are used for overseas operations and not brought back to India.

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