Published & Updated as on - 2010-03-09
Foreign
debt, banned in real estate, is finding its way into property firms, as bankers
and lawyers help builders cobble together new deals to raise money.
Even
though foreign loans, better known as external commercial borrowings (ECBs),
are not permitted in construction, property firms have spotted a mechanism
where the debt can be provided by foreign institutional investors (FIIs)
registered with Sebi.
No rules are broken and the deals,
involving a three-way transaction, come across as normal private placements in
the corporate bond market. It begins with a real estate company placing
non-convertible debentures (NCDs) with a local entity like a non-banking
finance company (NBFC) to borrow.
The next step involves listing
the debt security, soon after which an FII steps in. Once the NCD is listed in
the stock exchange, the NBFC offloads the paper to a foreign fund. Since FIIs
cannot invest in unlisted debt, the NBFC warehouses the NCD till the paper is
listed and then recovers the money by selling the debentures to a foreign fund.
The
two transactions are parts of a back-to-back deal struck among the NCD-issuing
firm, the local NBFC and an FII. At least four developers, three from Mumbai
and one from Bangalore, have raised over Rs 1,000 crore in the past few months
through this route.
“It does not directly violate the Press
Note on foreign investment in property, and such FII investment is within the
overall corporate bond ceiling applicable to foreign funds....but it’s against
the spirit of the regulation,” admits a senior banker who has advised one such
NCD issuance.
Indeed, a few foreign banks have made
presentations to property firms on the convenience of such fund raising that
has become more attractive since the government plugged a loophole in the
foreign direct investment (FDI) norms in real estate.
In the
past few years, FDI worth billions of dollars came in, as overseas investors
subscribed to equity and quasi-equity products, often with put options, sold by
real estate firms which were starved of bank finance. But a chunk of this
inflow was based on an interpretation that the three-year lock-in on FDI
applied only to the “original” amount brought in and not the full quantum of
FDI in a project.
Many investors took advantage of this: an
offshore fund, which decided to pump in $25 million, split the inflow, first
bringing in $5 million, the minimum amount, and the balance $20 million
subsequently. The understanding was that the lock-in applied only to the $5
million and not the $25 million.
This flexibility in
interpretation disappeared after the government clarified last year that the
full amount, irrespective of whether the money comes in tranches, would be
locked in for three years. The move, which came as a jolt to several foreign
investors, paved the way for the more recent NCD route that’s catching on among
local developers.
Source: ET 4/3/10 |