The Corporate Affairs Ministry has removed a recent legal barrier that sought to thwart infrastructure lending by banks. The move will allow banks to continue their infrastructure lending to special purpose vehicles on the strength of the guarantees or security provided by the holding company.
The ministry has further clarified that a holding company can (without any limit), give guarantee or provide security for loans made by a bank to a subsidiary company. However, the latest Ministry circular will only bring relief where a bank finances a subsidiary on the basis of guarantee or security given by the parent company.
India’s infrastructure sector has been troubled for quite some time now with banks facing increasing difficulties in recovering loans made to the sector. 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, while most SPVs don’t have a track record and therefore rely on the strength of the holding company for their borrowings. The enactment of the new company law placed restrictions on provision of loans or guarantees to a subsidiary company by a holding company, putting a hurdle for the financing. The new move will particularly benefit infrastructure lending by banks.