The Reserve Bank of India (RBI) has reviewed its policy relating to external commercial borrowings (ECBs) for low-cost, affordable housing projects. Through AP (DIR Series) Circular 61, issued on 17 December, the RBI provided guidelines for developers and builders, housing finance companies (HFCs) and the National Housing Bank (NHB) for the use of ECBs, up to an aggregate limit of US$1 billion in the financial year 2012-13, to invest in low-cost housing projects and finance prospective owners of low-cost affordable housing units, respectively. The circular makes clear that the ECBs cannot be used to acquire land.
The guidelines were issued and made effective following an RBI notification on 27 November which amended the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) (Third Amendment) Regulations, 2012, to allow developers and builders, HFCs and the NHB to use ECBs for these housing projects.
Under the circular, a low-cost, affordable housing project is defined as one in which at least 60% of the permissible floor space index will be for units with a maximum carpet area of up to 60 square metres. Slum rehabilitation projects are also eligible under the low-cost housing scheme provided they meet the criteria set by government authorities administering such rehabilitation.
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Eligibility criteria
The parameters under the extant ECB policy with respect to minimum average maturity period, all-in-cost ceilings, etc., will apply to ECBs used for the purposes above.
To fulfil the eligibility criteria, developers and builders must: (1) have a proven financial track record; (2) be registered as a company under the Companies Act, 1956; (3) have a minimum of five years’ experience in undertaking residential projects; (4) have no record of defaults on financial commitments to banks, financial institutions, etc.; and (5) ensure that projects undertaken are free from litigation and conform with the provisions of the master plan or development plan of the area. In addition, developers and builders must have on record all necessary clearances obtained from various bodies for their projects.
HFCs must: (1) be registered with the NHB and operate in accordance with its guidelines; (2) have a minimum paid-up capital (as per the latest audited balance sheet) of not less than ₹500 million (US$9 million) and minimum net owned funds (NOF) of not less than ₹3 billion for the past three financial years; (3) ensure the ECB is within the HFC’s overall borrowing limit of 16 times its NOF; and (4) ensure their net non-performing assets do not exceed 2.5% of their net advances. Additionally, the maximum loan amount that HFCs can sanction to an individual buyer will be capped at ₹2.5 million, subject to the condition that the cost of an individual housing unit cannot exceed ₹3 million.
The circular permits the NHB to obtain ECBs for on-lending to developers that satisfy the eligibility criteria in order to further aid small developers and builders that are unable to raise ECBs directly.
Developers, builders, HFCs and the NHB are not permitted to raise foreign currency convertible bonds under this scheme.
Procedure to use ECBs
The NHB will act as a nodal agency between the borrower and the RBI, first deciding if a project is eligible and then forwarding applications to the RBI for consideration under the approval route. When applications are forwarded, the NHB will advise the borrower to approach the RBI to obtain the ECB through its authorized dealer in the prescribed format.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
