Bar on overseas loans for realty projects may go

Bar on overseas loans for realty projects may go
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First Published: Wed, Jun 06 2007. 12 35 AM IST
Updated: Wed, Jun 06 2007. 12 35 AM IST
The government will revisit its recent decision to stop companies borrowing abroad for real estate infrastructure projects in July because it expects to get a better sense of whether the central bank’s inflation-fighting efforts are working by then. The government decided to block the ECB route for real estate infrastructure projects to help the Reserve Bank of India slow down the growth of money supply which took inflation to a two-year high.
“A high-level committee on external commercial borrowings will take a look at the policy in mid-July. It’s a temporary measure (the decision to block ECB route for real estate infrastructure),” said a seniorofficial of the finance ministry who did not wish to beidentified.
In a few weeks, the government would get a better sense of inflation levels and interest rate trend which would help it decide if ECBs should be opened for realty companies again, the official added.
Final data on ECBs comes with a lag of more than a month. When the high-level committee meets next month, it would also be able to access accurate data on the extent of overseas borrowing in therecent past for real estate, the official said.
ECB inflows surged in 2006-07 on the back of investment demand, touching $9.1 billion between April and December 2006. In 2005-06, ECB inflows were $2.72 billion.
Realty companies were allowed to raise money through ECBs provided the end-use was restricted to the development of integrated townships spread over at least 100 acres.
Data on the extent of ECB inflows to realty companies is not available and a senior executive of a realty company, who did not wish to be identified, said “it was not so much.”
“Not much money came in through the ECB route from pure lenders,” said Avinash Narvekar, partner at audit firm Ernst & Young.
Interest payments to creditors attracts witholding tax, explained Narvekar, while equity investors’ annual returns come after dividend distribution tax has been paid out on a company’s post-tax profits. Given the tax angle, shutting theECB window might not have made a significant difference to inflows into real estate,he added.
The government chose to close the ECB route as part of a larger policy shift which would allow RBI room to slow down growing foreign exchange inflows, which added to money supply and stoked inflationary pressures.
Inflation rate fell to 5.06% for the week ended May 19, the lowest level recorded in the last eight-and-a-half months.
“If inflation falls below 5% and stays there for four to five weeks, they (RBI) will feel comfortable,” said D.K. Joshi, the principal economist at credit rating firm Crisil Ltd. Joshi expects inflation to moderate by the second half of the current financial year.
“With free capital inflows, RBI cannot handle both money supply and the rupee’sappreciation,” said Joshi, explaining the government’s current dilemma.
Foreign exchange inflows add to money supply as RBI buys dollars and sells rupees in an effort to maintain the exchange rate. In the next stage, the central bank sells bonds and sucks out money (in rupees) to regulate money supply. Recent inflows have increased the difficulty in money supply management, which led to the government using restrictions such as the ban on ECBs to slow down foreignexchange inflows.
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First Published: Wed, Jun 06 2007. 12 35 AM IST
More Topics: Money Matters | Real Estate |