New ECB norms to help big realty borrowers

Last Updated: Mon, Jul 26, 2010 20:10 hrs

Real estate companies with large fund requirements will benefit the most from the easing of external commercial borrowing (ECB) norms as interest rate charged is lower in case of external borrowings in comparison to rates charged by domestic institutions.

"The easing of ECB norms will definitely help companies with large borrowing plans to get funds with competitive interest rates," Ashish Puravankara, Director, Puravankara Projects, said.

He, however, said realtors would prefer to go in for a mix of domestic and external borrowings than taking the route of ECB alone.

Government has been mulling to ease external commercial borrowing norm for real estate companies by allowing them to borrow on a whole entity level than on special purpose vehicle level.

When a company borrows on the SPV level, its fund-raising ability is less due to lower underlying asset in that particular project. But, if companies are allowed to borrow on a whole entity level by diluting the stake, it will get much more valuation due to higher underlying asset.

However, ECB route will only be allowed to those companies which have a minimum of 100 acre size of all project.

"Easing of ECB norms has both positive and negatives. While on the positive side, it enables a company to raise money at a lower rate, any default in ECB front can have negative consequences as rules are more rigid in case of external borrowing," he added.

It will all depend on the kind of developer and the type of project developed by it to opt for the ECB route, he added.

While interest rates are cheaper in case of the ECB, repayment rules are rigid.

Any default in the repayment can force a company to face legal charges. However, domestic lenders usually provide time and space in case of defaults by restructuring the loan or by deferring the repayment schedule.

"Taking a call on raising money through ECB norms will completely depend on the type of developer and his specific requirement," S Baaskaran, chief financial officer of Sobha Developers, said.

He, however, said changing ECB norm would definitely favour real estate companies with large fund requirement.

Analysts echoed similar sentiments regarding this issue.

"Real estate companies still face difficulties in raising money from domestic financial institutions. So, relaxation of ECB norms will definitely facilitate business growth," an analyst with Indiabulls Securities said.

He, however, said only large companies would be able to raise money through ECB due to strict eligibility norm for foreign funding.

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