ECB norms tightened: Foreign debt door shut on realty

NEW DELHI: Hit by the sustained price rise in the economy, the government on Friday took 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 a 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.

Companies with poorer balance sheets or low credit rating may find it difficult to raise debt at lower interest rates. Normally, companies having a sound financial track record can avail cheap credit. The move to lower the cap will thus weed out smaller companies that accounted for almost 50% of the total debt raised during April-December 2006.

And that is not all. The real estate sector, which has seen foreign inflows of about $1 billion in 2006-07, will now have to depend solely on the domestic debt market to meet its requirements. The new guidelines have barred realty companies from raising debt in overseas markets for the development of integrated townships. Till date, the government had allowed real estate companies to raise foreign funds for integrated townships developed on a minimum of 100 acres.

The government’s move comes on the heels of RBI’s measures to curb credit flows to the sector following apprehensions of overheating that could derail the economy. “The government is trying to curtail all possible routes of fund flow for the real estate sector,” Goldie Dhama, principal consultant, PricewaterhouseCoopers, said.