Tata Motors escapes RBI curbs on bank guarantees

Concerned that big banks like State Bank of India guaranteeing debenture issues by corporate entities may send wrong signals to the market, the Reserve Bank of India has recently put a blanket ban on the banks giving such guarantees, and has sought a strict compliance on its directive.

The central bank's directive on 22 May comes on the heels of Tata Motors raising Rs4,200 crore through an innovative non-convertible debenture issue guaranteed by banks.

Clarifying that a direction has been in place for quite some time that banks cannot guarantee non-convertible debentures or bonds issued by corporate entities, the RBI had to again issue a notification to all the commercial banks in the country in this regard.

The directive will not affect the Tata Motors issue, but it will prevent other companies from taking the same route to raise funds. Officials from both RBI and Tata Motors have reportedly said that the directive will not impact the Tata Motors issue, which ''has already been completed''.

Behind the scenes, the Tata NCD issue appears to have generated an intense drama involving India's central bank, its largest commercial bank and largest business conglomerate.

Because of SBI's irrevocable guarantee of timely payment of dues to the institutional investors, the Tata Motors bond issue had got a higher rating from credit rating agencies, ensuring lower interest rates.