New ECB norms may restrict foreign money in real estate

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New Delhi, May 21: The recent restrictions on external commercial borrowings (ECBs) aim at slowing down the inflow of foreign debt into the real estate sector, the government said on Monday. The finance ministry, in a directive issued last week, had barred companies’ integrated townships from raising ECBs. It also made it difficult for small players to raise such funds by lowering the ceiling on interest rates, thereby making it tough for smaller firms to meet credit rating requirements.

“Now that the window has been narrowed down, we hope that the flow of external debt to the real estate sector will slow down,” finance minister P Chidambaram told reporters here. However, he declined to comment on further curbs on overseas funds.

The government is apprehensive about excessive external funds raised by smaller players in the realty sector. Excessive flow of foreign funds leads to inflation, which has recently been a major concern for the UPA government. Through tightening of ECB norms, the government wants to curtail inflation as well as currency appreciation.

Although real estate companies deny taking recourse to external borrowings, according to sources, many firms have been taking the ECB route to buy land banks. In fact, debt raised by Indian companies through ECBs is estimated to have reached $24 billion during last fiscal, which is substantially higher than the internal cap of $22 billion put up by the government.