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External commercial borrowing

The existing guidelines regulating external commercial borrowings (ECBs) by Indian corporates from non-resident lenders (including international banks, international capital markets, multilateral financial institutions, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders) impose restrictions on the end use of ECB proceeds, including limiting their use in the real estate sector.

The Ministry of Commerce and Industry, Department of Industrial Policy and Promotion had excluded the development of integrated townships from the purview of the real estate sector. Accordingly, the use of proceeds of ECBs availed under the automatic route (that is, without the need for approval), as well as the approval route, for the development of integrated townships was permissible.

Upon appraisal of the guidelines, the Reserve Bank of India (RBI) has further tightened its norms on permissible end use of ECB proceeds. The RBI has, by its circular dated May 21 2007, withdrawn the exemption granted to the development of integrated townships as a permissible end use of ECBs.

Indian corporates are now restrained from investing the proceeds of ECBs accessed under the automatic and approval routes, in the development of integrated townships, including:

  • housing;
  • commercial premises;
  • hotels and resorts;
  • city and regional level urban infrastructure facilities, including roads and bridges;
  • mass rapid transit systems; and
  • manufacture of building materials.

The implications of this prohibition assume significance in light of the country's thriving real estate business. Indian builders and developers engaged in development of integrated townships are now restrained from using the proceeds of ECBs in projects and would be entitled to access funding only through the avenue of foreign direct investment.

Shardul Thacker

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