Proposed FX and Interest Rate Desk in India

---------------------- Forwarded by Mark - ECT Legal Taylor/HOU/ECT on
07/08/99 03:15 PM ---------------------------

Mark Elliott
02/23/99 10:03 AM
To: Mark E Haedicke/HOU/ECT@ECT
cc: Mark - ECT Legal Taylor/HOU/ECT@ECT, Alan B Aronowitz/HOU/ECT@ECT, Scott
Sefton/LON/ECT@ECT
Subject: Proposed FX and Interest Rate Desk in India

Mark,

Further to my e-mail to you of last week on the above subject, I have now
reviewed the due diligence which was undertaken by Enron Houston with local
Indian Counsel (Crawford Bailey & Co.) on the above topic in January 1997.
That due diligence reveals the following:

Prior Reserve Bank of India ("RBI") approval required to do business in
India: If Enron is considered to be "doing business in India" (which it
would, for example, if we had a branch or entity there) we shall require the
prior consent of the RBI under Section 29 (1) (a) Foreign Exchange
Regulation Act 1973 ("FERA") e.g. to set up the branch or entity. Please
note that at the date of the opinion from Indian counsel (14th January,
1997), Indian counsel opined that no guidelines had been set down as to any
conditions necessary to be satisfied by a foreign company in order to obtain
approval from the RBI to do business in India. This needs to be revisited as
to the requirements.

Repatriation of proceeds / Exchange Control: Please note that in the
approval which would need to be obtained from the RBI, such approval would
state whether the revenues generated in India could be repatriated e.g., to
the USA, or not. I assume that we would require such ability to repatriate
and so we shall have to ensure that the RBI approval covered it. We also
need to check if there are now any limits to such repatriation.

FX / Interest Rate dealings:

A. It would appear that if we open a desk in India for FX and Interest Rate
Products for the Enron Group (i.e., an internal Treasury Desk) to trade with
dealers in India then dealings would be required to be in accordance with
either the Rules framed by the RBI or otherwise specifically approved by the
RBI.

B. FX Products could be entered into with authorised dealers in India and
would be subject to limitations on dealings in foreign exchange imposed by
the FERA. Please note that if transactions are outside the scope of the
general rules framed by the RBI and which are not otherwise specifically
approved by the RBI this may result in a contravention of FERA. It is not
clear what are the exact ramifications of dealings in contravention of FERA;
this needs to be investigated.

C. What are the Rules of FERA (see A above)? It appears that the RBI
requires authorised dealers in India to ensure that their customers are
actually exposed to exchange risk in respect of a genuine underlying
transaction before entering into rate protection transactions to hedge their
exposure to movements in currency rates or interest rates, and authorised
dealers are required to satisfy themselves that underlying commitments are
firm and that forward cover is not being provided for merely anticipated
deals. The opinion does not state how this verification is obtained by the
dealer. It appears, however, that there was a relaxation of the Rules
shortly before the 1997 due diligence was undertaken whereby authorised
dealers could offer certain derivative products in certain circumstances to
corporates either by booking a transaction overseas or on a back-to-back
basis without seeking the approval of the RBI. These transactions are the
following:

1. Interest Rate Swaps.

2. Currency Swaps.

3. Coupon Swaps.

4. Purchase of Interest Rate CAPS/Collars.

5. Forward rate agreements.

In order to take advantage of that relaxation however the authorised dealers
are required to ensure that:

(i) The RBI has given final approval for the conclusion of the underlying
loan transactions.

(ii) The notional principal amount of the hedge does not exceed the
outstanding amount of the loan.

(iii) The maturity of the hedge does not exceed the remaining life to
maturity of the underlying loan

(iv) The Board of Directors of the corporate to have approved (a once and
for all basis is sufficient) the relevant financial limits and the authorised
designated officials who can conclude the hedge transactions.

Please note that the derivatives mentioned above concern the hedging of
underlying "loan" transactions. Hence query, e.g., whether a simple currency
swap just to hedge exposure in one currency where there is no actual
underlying loan has the benefit of any exemption - and if not, query how one
obtains the prior approval of the RBI to do this. This needs to be
investigated. If transactions cannot take advantage of an exemption we shall
need to investigate how one obtains the specific approval of the RBI to a
transaction.

Speculative transactions are void: Please note that transactions entered
into for purely speculative reasons would be void pursuant to Section 30 of
the Indian Contract Act 1872. Indian counsel opines that provided the rate
or currency derivative transaction is entered into in respect of hedging or
protection against an actual underlying then the transaction would be valid.

Capacity and Authority: It appears that Enron would also have to ensure that
the transactions were covered by its objects' clause and similarly that our
counterparties' objects' clauses covered the products in which we wish to
deal - there is no third party protection against entities dealing outside
their capacity. Furthermore, in relation to authority to enter into
transactions, it would appear that we would need to authorise certain Enron
officials to enter into specific transactions through Board Resolutions or
Powers of Attorney and that we would need to check our counterparties'
documentation in this regard.

Derivatives and Borrowings: If we were to establish a company in India, we
would be subject to the Companies Act 1956 in relation to limitation on the
quantum of monies which it could borrow. Any borrowing in excess of
stipulated limits would be required to be sanctioned by the members in the
company in general meeting. Accordingly, in relation to derivatives'
transactions incidental to the borrowing of monies in foreign currency, one
would need to ensure that the underlying borrowing itself was sanctioned by
the members of the company in general meeting. The power to borrow itself,
must be exercised by a full meeting of the board of directors.

Collateral: It would appear that charges taken over collateral provided /
received, for example, in relation to obligations under an ISDA Master
Agreement where the cash charged was situated outside India, would be legal,
valid and binding, as against the liquidator of an Indian counterparty in its
insolvency; however, the approval of the RBI to the creation of the charge,
pledge or mortgage would be necessary in the first instance. The due
diligence does not state how such approval would be gained nor does the due
diligence consider outright transfers of collateral (e.g., under English law)
rather than charges over the collateral nor does it deal with collateral
situated locally in India; these issues need to be checked.

Choice of Law and Arbitration: It would appear that Indian entities may
enter into agreements (e.g., ISDA Masters) governed by New York or US law and
it would appear that provisions for arbitration would work.

Insurance business: Indian counsel opined that interest rate/FX derivative
transactions would not be categorised as insurance business in India.

Income Tax: Please note that if an Enron entity, or a branch of an Enron
entity, was set up in India or if Enron appointed an agent there to undertake
such business, then any income arising to the Enron entity / branch in India
from a derivative transaction would be subject to Indian Income Tax. Please
note however that there are Double Taxation Agreements with USA, UK and
Singapore with India. However, no details of rates of taxation or further
explanation of the mechanics of the Double Taxation Agreements are given in
the opinion.

Gross-Up Clauses: Contractual gross-up clauses re withholdings (e.g., the
standard gross-up clause in the ISDA Master) would need to be approved by the
RBI. Indian counsel does not state how this is achieved.

Close-out netting: Whilst it appears that the netting concept of an ISDA
Master Agreement would work according to Indian counsel, the existing due
diligence is slightly ambiguous in that it states that an official liquidator
or official assignee of an Indian entity would be able to disclaim
unprofitable contracts which Indian counsel opines would mean the net sum
(e.g., if our Indian counterparty owed us a balance on a close-out against
them in their insolvency). This needs to be revisited with Indian counsel.

Oral Contracts: Please note that in relation to oral contracts, whilst it is
possible to sue upon an oral contract in India, it is not possible to take
any steps for the purpose of enforcing any judgement obtained except with the
permission of the RBI under section 47 of FERA. Indian counsel does not
state how such approval this would be obtained and how long it would take to
obtain.

Mark, I suggest that we should have a brief discussion concerning the above
before I take any further action on the above.

Kind regards

Mark

Apart from obtaining the consent from the RBI to set up a branch or a
subsidiary in India, and then to obtain the permission to repatriate to the
US any proceeds of such business, there did not appear to be any other trade
control or other laws which would inhibit Enron's ability to do business in
India.