Stop guarantees for corporate debt issues: RBI to banks

Barely two weeks after the country’s largest banker, State Bank of India, issued a guarantee for a Rs 4,200-crore debenture issue of Tata Motors, the central bank has come down hard on such guarantees.

In a late-evening circular, the Reserve Bank of India today asked banks to stop issuing guarantees for bonds and other debt instruments — a decision that could impact the ability of companies to raise funds through such routes.

RBI said, as per its July 1, 2008 communication, banks can give guarantees only for loans.

“Banks have, of late, been issuing guarantees on behalf of corporate entities in respect of non-convertible debentures. It is clarified that the instructions apply only to loans and not to bonds or debt instruments,” RBI said.

It added that such guarantees “...not only have significant systemic implications but also impede the development of a genuine corporate debt market.”

Sources familiar with the developments said the RBI circular would not impact the Tata Motors NCD issue as the money had already been raised. Tata Motors will use the money to pay off the debt taken for acquiring Jaguar and Land Rover (JLR) in the United Kingdom.

The debentures had got the lowest credit risk from rating agencies, based on the strength of the SBI guarantee. The bank had given an “unconditional and irrevocable guarantee” for the payment of all dues (interest, principal and applicable redemption premium) and the structured payment mechanism for the timely payment of dues to the investors.

The guarantee amount required was stipulated at Rs 4,900 crore at the beginning of the transaction and will come down over the transaction tenure with the amortisation of certain tranches.