All realty cos may get ECB access for townships

All realty cos may get ECB access for townships
The Economic Times, December 14, 2009, Page 19

As Of Now, Only Companies Which Are Purely Into Integrated Townships Of Specified Size Are Eligible For ECBs

G Ganapathy Subramaniam ET NOW

THE Reserve Bank is considering a proposal to allow real estate companys to access external commercial borrowings (ECBs) for integrated townships even if they deal with other types of real estate projects.

As of now, only companies which are purely into integrated townships of specified size are eligible to access ECBs as the RBI was keen to make sure that funds are not diverted to other projects.

Real estate companies have argued that setting up a special purpose vehicle (SPV) for integrated townships entails higher costs. Flagship companies have a credit rating which is obviously better than what a new SPV can get, they have emphasised.

To ensure that ECB funds are not diverted, real estate companies have said that ECB proceeds can be kept in a separate bank account and all accounting for this money can be done separately. A source in RBI confirmed the proposal from real estate companies on condition of anonymity, but declined to go into the details.

An escrow account for this purpose is what realty companies have proposed and they are willing to undertake strict accounting specifications to prove that ECB proceeds are used only for integrated townships.

RBI was not willing to consider any relaxation earlier, but the issue is under discussion now after the central bank re-imposed an all-inclusive interest ceiling for ECBs recently. Since SPVs cannot borrow at rates as fine as the parent entities, real estate companies have argued, integrated townships would be deprived of funding from this window. In the case of ECBs with tenure of three to five years, RBI has said that interest paid should not exceed 300 basis points above Libor.

“It is a win-win situation for real estate companies as well as overseas lenders,” said Anil Kumar, CEO and deputy MD of Ansal API. “Real estate companies can get long term funds at competitive cost and lenders will be able to do business with real estate companies even if they are not dealing exclusively with integrated townships,” he said.

ECB proceeds for integrated townships has been allowed to promote infrastructure development. The government has specified that such townships should be built on a minimum area of 100 acres. Detailed guidelines have been provided by the department of industrial policy and promotion (Dipp) through press notes meant to lay down guidelines for foreign direct investment (FDI) in real estate. “Ceiling on borrowing cost is a major factor for real estate players. Even though ECBs can be used for integrated townships, realty players have not been able to use this window,” said a senior executive from a leading real estate firm who did not wish to be quoted.

The RBI has recently decided to allow real estate companies to access ECBs till December 31, 2010 for integrated townships. Originally, this facility was available only till the end of 2009.

In 2007, when there were apprehensions that the economy was overheating, a number of restrictions were imposed on funds flowing into real estate. The RBI felt that a real estate bubble was building up. When the financial sector meltdown hit the global economy last year many of these restrictions were eased. With liquidity becoming abundant now and signs of economic revival visible, the government is looking at tightening the norms once again.