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Shaji Vikraman

NEW DELHI, Jan. 20

THE Government is considering a proposal to lift the ban on use of proceeds from `external commercial borrowings' (ECBs) for investment in real estate and property development, signalling a major policy shift.

The Finance Ministry has flagged off the proposal, which was discussed at a recent meeting of the high-level committee comprising senior officials from the Ministry and the Reserve Bank of India.

A final view will be taken only after the Finance Minister's approval, according to officials here.

The current ECB policy does not permit the end-use of ECBs in only two areas — stock market and real estate.

The ban on investment in these two segments was specifically incorporated in the policy over five years ago under the directions of the then Finance Minister, Mr P. Chidambaram.

Since then, especially after the East Asian crisis, the Government and the RBI have been crowing about this factor, saying that such a ban had helped the country avoid hiccups even as several banks in East Asia with huge exposure to the real estate sector had been badly hit.

One reason for the rethink on allowing `foreign currency borrowings' (FCBs) into real estate and property development is the recent Government decision to allow 100 per cent foreign direct investment (FDI) in the development of integrated townships and business complexes.

Under this new policy, the overseas companies and joint venture companies will have to develop a minimum area of 100 acres. The minimum capitalisation norm for such companies has been pegged at $10 million with a three-year lock-in period.

Obviously, the investment for such projects cannot be entirely financed through equity. The proposal to permit ECBs for financing such projects has to be viewed in this context.

If allowed, such ECBs for this sector will also have to adhere to the minimum five-year maturity norm imposed by the Government.

The current ECB policy says that under no circumstances should the ECB proceeds be utilised for investment in stock market and speculation in real estate.

Promoting township development and urban infrastructure facilities, including roads and bridges and mass rapid transport systems, do not constitute speculation in the normal course, say those supporting the easing of norms. After all, these funds are fungible, says an official.

In most of the South-East Asian countries, there is no specific ban on ECBs for financing real estate.

In India, the RBI and the Government have so far been very circumspect on the issue of exposure of banks to financing of real estate, both domestic and foreign.

Therefore, there have been end-use restrictions on ECBs. If the Government decides to relax the end-use restrictions, it will be only for the realty sector. Investments in stock markets through funds borrowed from abroad will continue to be banned, officials say. The Government has also decided not to relax the five-year minimum maturity norm for borrowings of $10 million and above, they say.

Over the last few years, the external debt management policy of the RBI and Government has been marked by a tight lid on short-term debt.

During 2001-02, ECB issuance has been on a low-key owing to the negative impact of the withdrawal of the exemption on withholding tax coupled with the soft interest rates prevailing in the domestic markets.

Total ECB approvals so far during this period have been well below the $2-billion mark.

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