The government is looking at relaxing external commercial borrowing (ECB) norms for real estate companies to help them raise overseas debt on more comfortable terms. The idea is to let the parent realty company raise ECBs directly. Currently, ECBs are restricted to special purpose vehicles (SPVs) floated by the companies for specific projects.
The relaxation will also come with the caveat that companies must compulsorily open exclusive escrow accounts for the ECB proceeds to ensure they are utilised for the projects earmarked for them.
However, ECBs will continue to be open only for those real estate companies which have a minimum 100-acre size for all their projects. As per current rules, these companies are allowed to tap the ECB route for township projects through the SPVs.
The government hopes that the new conditions will satisfy the Reserve Bank of India (RBI), which wants a close watch on the end use of ECBs raised by real estate companies.
Leading real estate firms have been demanding this change for some time, since parent companies command better credit ratings than those of their SPVs.
?Based on their sovereign rating at the entity level, companies can easily raise debt abroad, and that too, at a cheaper rate of interest.?
Raising money at the SPV level is cumbersome and costlier, as it is difficult to get good ratings for SPVs,? a government official involved in the process said.
An official at a leading Delhi-based real estate company said: ?It is easier to raise debt at the parent company level. It is unrealistic to assume that overseas financial institutions would know about our various projects, say a 1,120-acre township SPV in Gurgaon, but they would surely know about our listed companies from our statutory filings.??The parent company?s image can be ascertained from the company website and from industry experts, whereas it is difficult to get details of SPVs,? said an executive with a Mumbai-based real estate company which has a large order book and land bank.
The central bank is concerned over the possibility of companies diverting ECB proceeds, particularly to small projects. The shift in the government?s thinking seems to have happened because it feels that such concerns can be addressed if a mechanism is put in place to monitor end use of ECBs.