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No.3/10/2003-PMU
Government of India
Ministry of Finance
Department of Economic Affairs
PMU

Dated 2nd September 2003

OFFICE MEMORANDUM

Certain guidelines should be followed with regard to loans taken under bilateral cooperation, at the time of signing of loan agreements. These are given below:

1. Avoiding payment of unnecessary commitment charges
In the case of various bilateral lenders, levy of commitment charges on a project becomes applicable within a particular period (3 months in the case of Germany) of signing the loan/ financing agreement. If the separate project agreement, which deals with the implementation of the project, is signed 2 to 3 years after the signature of loan/ financing agreement (as sometimes happens), then the GoI ends up paying needless commitment charges on amounts not disbursed, since implementation and subsequent disbursement can only begin after the project/ separate agreements are in place. In order to avoid such a situation, it may be insured that all the three agreements i.e. the financing/ loan agreement as well as the separate project agreement and implementation agreement are signed at the same time as far as possible.

2. Inclusion of provision to protect the financial interests of GoI in the event of privatization of the project implementation authority:
i) For loan taken by Central PSUs with Government Guarantee
To adequately protect the interests of GoI in case of privatization of Central PSUs which have taken loans from external agencies on Government guarantee, Department of Disinvestments and the concerned line Ministries should be specifically requested on the following lines:
"In the event of disinvestments in Central PSUs having loans with Government guarantee, an opportunity should be given to Ministry of Finance for taking up the matter with the lending agency in a time bound manner to accept replacement of government guarantee by the corporate guarantee from the new owners of the company. In the event of such replacement of guarantee not being acceptable to the lending agency, the new owners should be asked to give a corporate guarantee, bank guarantee and other collateral securities in favour of GoI for the loan amount".
ii) For loans taken by the Govt. but passed on to central PSUs for project implementation
To adequately protect the financial interests of GoI in the case of privatization of central PSUs which have utilized the loans taken by the Govt. from external agencies, Department of Disinvestment and the concerned line Ministries should be specifically requested on the following lines: 
"In the event of disinvestments in central PSU which has utilized the loans given by the Govt. and the loans taken by the Govt. from external sources, the obligation to replay the loans, debt servicing, and payment of all related charges should devolve upon the new owners. In case this arrangement is not acceptable to the lending agency, the new owners will provide adequate security and guarantees in favour of GoI for the loan".
In all such cases on agreement should be entered into between the line Ministry and PSU, wherein it should be clearly provided that in the event of a change in the ownership or other status of a loan recipient, the obligation to repay the loan, interest thereon and other related charges would devolve upon the new owner. 
iii) For external loan taken by GoI for state projects with Project Implementing Agency being a state agency (other than a Govt. department) or PSU
a) State Governments should be advised to have a separate agreement with the State PSU/ agency detailing their respective obligations to the project, for debt servicing, loan repayment, and payment of other charges.
b) State Governments should be a party to the project agreement along with the State PSU.
c) A specific clause should be added in the project agreement that a change of ownership or other status of the Implementing Agency will not release the State Government of its obligation to pay the interest and repay the amount received as loan under the standard terms of funds flow from GoI to the State Government for the project. 
d) In the event of there not being a requirement of the lending agency to have a project agreement, GoI should enter into a tripartite agreement with the State Government and state executing agency to cover its obligations under the loan agreement. It should clearly spell out that in the event of a change of ownership or other status of the implementing agency, its obligation to pay the interest, to repay the loan amount and other charges to the State Government and the State Government's similar obligation to the GoI for the loan received under the standard terms of fund flow from GoI to the State Government or project implementing agency will remain binding and unchanged. The State Government's obligation for debt servicing and loan repayment to GoI should be unequivocal and independent of the debt servicing and loan repayment by the Project Implementing Agency to the State Government.

The above guidelines may be strictly adhered to by credit divisions dealing with loans under bilateral cooperation. These guidelines come into effect immediately.

Sd/-
(Vivek Mehrotra)
Joint Secretary (Admn.& Bilateral Coop.)

The Chief Secretary
Govt. of Madhya Pradesh
Secretariat, Vallabh Bhavan
Bhopal.