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RBI to notify proposal allowing airlines to access foreign funds
April, 20th 2012

The government on Thursday said it expects the Reserve Bank of India (RBI) to notify the budget announcement of allowing the cash-strapped Indian civil aviation sector to borrow up to $1 billion in external loans for a period of one year within seven days.

"RBI is expected to issue a relevant circular or notification giving effect to the aforesaid budget announcement within seven days," the Finance Ministry said in a statement.

Earlier, Finance Minister Pranab Mukherjee had said while presenting the union budget 2012-13 to the Lok Sabha: "To address the immediate financing concerns of the civil aviation sector, I propose to permit external commercial borrowing (ECB) for working capital requirement for the airline industry for a period of one year subject to a ceiling of $1 billion."

ECB is a financial instrument used by the government to facilitate the access to foreign funds by Indian corporations and public sector undertakings

High cost of aviation turbine fuel and sluggish market conditions have heavily bled the domestic airline sector with three listed players - Jet, Kingfisher and SpiceJet reporting heavy losses for the third quarter of 2011-12.

While the government has allowed the airlines to directly import jet fuel as actual end users thereby escaping the state value added tax (VAT), which ranges from three to 33 percent, airlines insiders claim that they require urgent infusion of funds for working capital.

According to the finance ministry statement, ECB for the sector would have a maximum limit of $1 billion with a ceiling of $300 million for individual airlines.

"This limit can be availed either in a lump sum or in tranches depending upon the utilization of the limit during the one year when the facility is available," the statement said.

The proposals of individual airlines would be considered by RBI under the approval route which is based on factors like cash flows and repayment capacity of the company.

"In order to increase access to ECBs, RBI would consider relaxation in the average maturity period for ECBs above $20 million from five to three years."

The airline industry's woes were even noticed in the Economic Survey for 2011-12 which was tabled by Mukherjee in the Lok Sabha.

The survey had said that a working group was constituted to address issues concerning the viability of the civil aviation sector had made several recommendations like rationalisation of VAT (value added tax) on ATF by state governments, allowing foreign airlines to invest in domestic carriers and to ask airlines to prepare their turnaround plans, which would be examined by the concerned departments.

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