The future of letter of credit (L/C) backed bond issues in India is in doubt after the central bank moved to ban another structure enabling Indian issuers to tap into offshore markets.

Alongside the ban, the Reserve Bank of India (RBI) issued a stern warning against using the proceeds of offshore financings in India.

Offshore ban

The RBI's latest notice has told banks that issuers are not allowed, unless explicitly allowed under existing regulations, to provide guarantees or create contingent liabilities for borrowings of offshore units, or bring offshore debt onshore.

The central bank said that any issuers or banks that did so could be penalised under the Foreign Exchange Management Act.

Currency moves

The RBI's move appears to respond to an issue by power producer, Greenko Group, which in July raised US$550 million from an offering issued by Greenko Dutch.

It used the proceeds to buy Indian rupee bonds to refinance the entire group's secured project debt.

Standby L/Cs

The RBI may be mulling the future of issues backed by standby L/Cs.

Earlier this year, the bank warned against using offshore debt backed by such L/Cs to repay rupee facilities in the wake of several companies, including Suzlon Energy (DC World News, 12 March 2013) doing just that.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.