Rule 278 of The General Financial Rules 2017 Borrowings from Multilateral Agencies
Original Rule Text
Visual Summary
CPSUs can borrow directly from multilateral agencies.
Borrowings must be for Central Government approved projects.
GOI guarantee requires borrower to pay a guarantee fee.
Executive Summary
Rule 278 of The General Financial Rules, 2017, establishes the framework for Central Public Sector Undertakings (CPSUs) to secure direct borrowings from multilateral agencies. While these borrowings are direct, their terms must be mutually agreed upon by the borrower and lender and subsequently approved by the Government of India. Crucially, if a Government of India guarantee is involved, prior approval from the Budget Division of the Ministry of Finance is mandatory. The rule also stipulates that such borrowings must be linked to projects approved by the competent authority of the Central Government. Furthermore, any GOI guarantee necessitates an agreement with the borrower for the payment of a guarantee fee, and this guarantee is limited to covering the principal amount and normal interest, with other risks, including exchange rate fluctuations, being shared between the borrower and the lender as per the loan agreement.
In-Depth Analysis of the Rule
Introduction: Rule 278 provides essential guidelines for Central Public Sector Undertakings (CPSUs) seeking financial assistance from multilateral agencies. It balances the autonomy of CPSUs in direct borrowing with the necessary oversight and risk management by the Government of India, particularly when government guarantees are involved. This rule ensures financial propriety and accountability in large-scale international borrowings.
Breakdown of the Rule:
- Direct Borrowings with GOI Approval: CPSUs are permitted to borrow directly from multilateral agencies without Government of India’s direct intermediation. However, the terms of such borrowings must be mutually agreed upon by the borrower and the lender and subsequently approved by the Government of India. If these terms include a Government of India guarantee, prior approval from the Budget Division of the Ministry of Finance is explicitly required.
- Linkage to Approved Projects: All borrowings undertaken by CPSUs from multilateral agencies must be for projects that have been approved by the prescribed competent authority of the Central Government. This ensures that funds are utilized for strategic national development objectives.
- Guarantee Fee Agreement: When the Government of India provides a guarantee for a CPSU’s borrowing, the borrower is mandated to enter into an agreement with the Government of India. This agreement specifies the payment of a guarantee fee, calculated on the principal amount of the loan drawn and the outstanding loan balance over time.
- Scope of GOI Guarantee: The Government of India’s guarantee is limited in scope. It covers only the principal amount of the loan and the normal interest. All other associated risks, including fluctuations in exchange rates, are to be shared between the borrower (CPSU) and the lender (multilateral agency) as per the terms and conditions outlined in the loan agreement.
Practical Example: Imagine ‘Bharat Infrastructure Ltd.’, a Central Public Sector Undertaking, needs to finance a large-scale national highway project. They approach the World Bank for a loan. According to Rule 278, Bharat Infrastructure Ltd. can negotiate directly with the World Bank. However, the agreed loan terms must be approved by the Government of India. If the World Bank requires a GOI guarantee for the loan, Bharat Infrastructure Ltd. must first obtain prior approval from the Budget Division of the Ministry of Finance. Subsequently, Bharat Infrastructure Ltd. would sign an agreement with the GOI to pay a guarantee fee. The GOI’s guarantee would cover the principal and normal interest, but any risks like currency fluctuations would be managed jointly by Bharat Infrastructure Ltd. and the World Bank, as per their loan agreement.
Related Provisions
Understanding Rule 278 is enhanced by examining related provisions within the General Financial Rules, 2017:
- Rule 277 of The General Financial Rules 2017 Guidelines for Grant of Government of India Guarantee: This rule provides broader guidelines for the Government of India in extending guarantees, offering context to the specific requirements mentioned in Rule 278.
- Rule 279 of The General Financial Rules 2017 Levy of Guarantee Fees: This rule details the procedures and rates for levying guarantee fees, which is directly referenced in Rule 278 concerning agreements for guarantee fee payments.
Learning Aids
Mnemonics
- BDPGF: Borrowings Directly Pay Guarantee Fees
- Borrowings are Direct (but need GOI approval for terms).
- Projects must be Approved (by Central Government).
- Guarantee requires Fee (from borrower).
- GOI Focuses on Principal and Normal Interest (other risks shared).
Process Flowchart
Multiple Choice Questions
1. What is the primary condition for direct borrowings by Central Public Sector Undertakings from multilateral agencies under Rule 278 of the General Financial Rules, 2017?
- A) They must always be intermediated by the Government of India.
- B) The terms must be mutually agreed between borrower and lender and approved by the Government of India.
- C) They require no Government of India approval.
- D) They are only allowed for private sector projects.
Show Answer
Correct Answer: B) The terms must be mutually agreed between borrower and lender and approved by the Government of India.
2. According to Rule 278 of the General Financial Rules, 2017, if a borrowing from a multilateral agency involves a Government of India guarantee, whose prior approval is required?
- A) The administrative Ministry/Department.
- B) The Comptroller and Auditor General of India.
- C) The Budget Division of the Ministry of Finance.
- D) The Reserve Bank of India.
Show Answer
Correct Answer: C) The Budget Division of the Ministry of Finance.
3. Under Rule 278 of the General Financial Rules, 2017, what must a borrower do if a Government of India guarantee is given for a loan?
- A) Provide additional collateral to the multilateral agency.
- B) Enter into an agreement with the Government of India for a guarantee fee.
- C) Waive all interest payments on the loan.
- D) Ensure the loan covers all exchange rate risks.
Show Answer
Correct Answer: B) Enter into an agreement with the Government of India for a guarantee fee.
4. What does the Government of India Guarantee specifically cover for borrowings under Rule 278 of the General Financial Rules, 2017?
- A) All risks including exchange rate fluctuations.
- B) Only the principal amount and normal interest.
- C) Only the interest payments.
- D) Only the exchange rate risk.
Show Answer
Correct Answer: B) Only the principal amount and normal interest.
5. For what type of projects are borrowings from multilateral agencies by Central Public Sector Undertakings permitted under Rule 278 of the General Financial Rules, 2017?
- A) Any project, regardless of approval status.
- B) Projects approved by the prescribed competent authority of the Central Government.
- C) Projects solely approved by the multilateral agency.
- D) Projects with no social or economic benefits.
Show Answer
Correct Answer: B) Projects approved by the prescribed competent authority of the Central Government.
Frequently Asked Questions
What is the role of the Government of India in borrowings by CPSUs from multilateral agencies under Rule 278 of the General Financial Rules, 2017?
The Government of India’s role is primarily supervisory. While CPSUs can borrow directly, the terms of these borrowings must be approved by the GOI. If a GOI guarantee is involved, prior approval from the Budget Division of the Ministry of Finance is mandatory.
What are the financial implications for a CPSU when the Government of India provides a guarantee for its multilateral borrowing as per Rule 278 of the General Financial Rules, 2017?
When the GOI provides a guarantee, the CPSU must enter into an agreement with the GOI for the payment of a guarantee fee. This adds a cost to the borrowing for the CPSU.
Does the GOI guarantee cover all risks associated with multilateral borrowings by CPSUs under Rule 278 of the General Financial Rules, 2017?
No, the Government of India Guarantee only covers the principal amount and the normal interest. Other risks, such as exchange rate fluctuations, are to be shared between the borrower (CPSU) and the lender (multilateral agency) as per their loan agreement.
Key Takeaways
- Central Public Sector Undertakings (CPSUs) can directly borrow from multilateral agencies, but the terms require Government of India (GOI) approval.
- A prior approval from the Budget Division of the Ministry of Finance is essential if the borrowing involves a GOI guarantee.
- All such borrowings must be for projects that have been approved by the competent authority of the Central Government.
- When a GOI guarantee is provided, the borrower must pay a guarantee fee, and the guarantee itself is limited to covering the principal amount and normal interest, with other risks being shared.
Conclusion
Rule 278 of The General Financial Rules, 2017, is a cornerstone for regulating the financial autonomy and accountability of Central Public Sector Undertakings in their international borrowing endeavors. By clearly defining the approval processes, guarantee conditions, and risk-sharing mechanisms, it ensures that these significant financial transactions are conducted with due diligence, transparency, and alignment with national development priorities, safeguarding public funds while facilitating access to global financing.