India Regulatory Buzz


ECB tag for preference shares
The Economic Times

The finance ministry has announced that all foreign funds raised by Indian companies through the issue of ‘partially convertible’, ‘non-convertible’ and ‘optionally convertible’ preference shares will be treated as debt and will be subject to guidelines applicable for external commercial borrowings (ECBs). Significantly, the ministry has also announced that `convertible preference’ shares will be considered as share capital and should be taken to calculate foreign equity. This will prevent companies, especially in sectors like telecom and insurance, from bypassing the sectoral caps on foreign equity. Convertible preference shares offer the benefit of being converted into ordinary shares on terms and conditions fixed at the time of the issue of such shares.

While the communiqué makes no mention of real estate companies, it’s quite evident that the directive is aimed at tempering fund flow into real estate, with property prices going through the roof. In the past two years, several real estate companies have issued instruments like optionally and partially convertible preference shares to foreign banks and international funds. FDI in real estate jumped 400% to $700 million in 2006. Since such inflow was treated as equity’, money flowed in under the FDI automatic route. This will stop now. From now on, such funds will be treated as ECBs. This will make it difficult for developers to access these funds since ECBs are allowed only in large real estate projects and the conditions are far more stringent than FDI. Besides, it will cap the interest rate that builders can offer to foreign financiers. Overseas fund-raising under the ECB route is allowed only for integrated township development on a minimum of 100 acres of land. In real estate projects, a large portion of money is required for land acquisition, which is classified as working capital. But end-use restrictions like not allowing ECB money to be used for working capital will also take away its attractiveness. With RBI making it difficult for banks to lend to builders, the latter have been offering 12-15% interest on preference shares. Foreign banks, in turn, use the debt side of their balance sheet to borrow from the international money market at 5-6% to earn a fat spread.

FDI status for FIIs in real estate pre-IPOs

Business Standard

The government proposes to treat the investments by foreign institutional investors in pre initial public offers (IPOs) of real estate companies at par with foreign direct investment (FDI). The FII investments in the pre-IPO allotment of real estate companies will have a lock-in period of three years, in line with the FDI norms. This means the investments cannot be withdrawn before three years. The lock-in period of three years is currently applicable to FDI in real estate. The changes will be notified by the Securities Exchange Board of India through changes in its regulations for the foreign institutional investors. It is believed that the decision on granting FDI status was taken to clamp down on foreign investments in real estate.

ECB norms tightened: foreign debt door shut on realty

The Economic Times

Hit by the sustained price rise in the economy, the government has taken steps to restrict the flow of foreign funds into the country by tightening norms to raise debt abroad. While smaller companies will find it difficult to raise loans under the new norms, the window for foreign borrowings will now be completely shut for real estate companies. The changed guidelines for external commercial borrowings (ECB) have lowered the cap on interest rates at which the companies can raise loans abroad. Every year, the government fixes the maximum interest rate at which a company can raise credit overseas. The interest rate ceilings have been lowered from


200 basis points (bps) above Libor to 150 bps above Libor for loans with 3-5 year maturity. For debt with a maturity exceeding five years, the ceiling has been lowered from 350 bps above Libor to 250 bps above Libor. The new ceilings will be applicable to companies raising debt under the automatic route as well as those raising it under the approval route.

Cess to fund housing for weaker sections

The Economic Times

A new cess is proposed to be levied on the home loans. Under the National Housing and Habitat Policy a new ‘safety fund’ is proposed to be created. Housing finance companies (HFC) and commercial banks may have to contribute one percent of their annual incremental home loans to this fund. The fund is aimed at providing affordable housing to the economically weaker section (EWS). The mandatory contribution by home loan institutions will increase borrowing costs. This in turn would lead to a further rise in interest rates of home loans. The fund is proposed to be set up under the aegis of the National Housing Bank (NHB). All HFCs and commercial banks will be asked to contribute to the proposed fund. The move is expected to be implemented by the end of the current year. The centre will contribute an initial corpus of Rs 500 crore into the fund. The banks and HFCs would be required to contribute one percent of their incremental or additional home loans disbursed during the year.

Developers to face scrutiny on disputed property

The Economic Times

Developers acquiring disputed land will be penalised. The urban development ministry plans to scrutinise all land deeds of properties acquired by builders. On finding any discrepancies, the ministry will refer it to the judiciary for taking punitive action against such buyers. The proposal is a result of a recent trend where builders are buying disputed land and properties at a discounted value and use illegal means to settle property disputes. However, the government is in favour of more stringent scrutiny of land titles than coming out with any specific legislation to curb the practice.



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