By Yash Choudhary (ASC Solicitors and Advocates)
The Reserve Bank of India (“RBI”), through the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, bought all the previous foreign exchange regulations governing the borrowing and lending in foreign currency or Indian rupees between persons resident in India and outside in one framework. Besides, in a press statement on January 16, 2019, declared an ECB Framework (external commercial borrowing) and under the revised regulation, it reduced the ECB maturity time, increased borrowing limits and detached qualification limitations for companies wanting to borrow funds from foreign investors.
ECB can be in the form of bank loans, floating/fixed rate notes/bonds/debentures/preference shares/trade credits beyond three years, and financial lease, including Rupee denominated bonds issued overseas (RDBs).
These revised regulations have considerably eased norms for obtaining overseas funds. The scope of the ‘eligible borrowers’ has been extended to incorporate all entities eligible to obtain foreign direct investment (“FDI”). The preceding ECB framework was hampered with the unwieldy division of sectors, which had to determine if ECB funding was acceptable, and to what degree. The revised regulation does away with the sectoral limits on ECB and, therefore all eligible investors may now raise ECB up to 750 million dollars in a financial year. However, the RBI, in its progression of revising the previous regulations, has missed the prospect to carry out certain understandable changes which would have benefited the real estate sector.
The most important change that may have been unnoticed is that real estate activities fall under the negative list as set out in the ECB Framework, which means, the amounts borrowed Under ECB framework cannot be used for real estate activities. The definition of real estate activities under the ECB Framework reads: ‘Any real estate activity involving own or leased property for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate.
The policy underlying principle for not liberalising ECBs for real estate is not apparent, since real estate sector is eligible to accept FDI, and therefore it should qualify as an eligible borrower under the ECB framework. Taking a retrospective background, FDI was earlier not allowed in ‘real estate business’ plus the broking business, however, the FDI norms were amended in March 2018 to permit FDI in real estate business.
An additional issue which being faced by real estate broking companies are due to an increase in the number of loan defaults and non-performing assets. The banks have increasingly become more reluctant when it is about lending to the real estate sector. According to newspaper reports, bank lending to this sector has come down from 68% in 2013 to 10% in 2017. Nonbanking finance companies (“NBFCs”) had stepped in to offer funding at elevated rates of interest (18-21 % interest as opposed to the 11-13 % interest charged by banks). However, after recent defaults by certain major institutional NBFCs, other NBFCs have become even more unwilling to lend in general, and interest rates for the real estate sector have gone up by a further 150 basis points.
The current situation of shortage of borrowing options from financial institutions in India and the incapacity of real estate broking companies to raise ECBs, real estate犀利士 sector are looking for to determine legally compliant structures to raise funds for development of their business, as the lapse of the Government to liberalise the ECB regulations has put a serious dent in the growth projection of such companies.
For example, if a foreign real estate broker, or a company performing as an intermediary for facilitating real estate transactions is permitted to set up a wholly owned subsidiary in India. However, this subsidiary cannot borrow funds from its holding company, and is forced to raise funds from its holding company only by way of equity or quasi-equity instruments, which have their limitations, including taxation issues. This would result in an unintended restriction on the availability of liquidity for such companies, amplifying the present liquidity crunch. The revised ECB regulations have therefore weakened the development plans of real estate companies, instead of accelerating it. The question is whether this was an intentional lapse or an oversight by the regulator.
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