Wednesday, June 27, 2007

Home's where the mortgage is

When Farallon Capital Management, a U.S. hedge fund, and its joint-venture partner, Indiabulls, snapped up an 11-acre property in central Mumbai in March 2005 for $54.5 million an acre, the purchase was called an act of idiocy by local developers. A few months later, when the same joint venture offered $95.5 million an acre for a nearby property, its was the second-lowest bid.

At a time when Indian companies are looking for capital to grow, the recent Finance Ministry guidelines on External Commercial Borrowings (ECB) come as a dampener for most. The official argument for this sudden snap back is that too much money is driving up land prices. It prunes the all-in-cost ceilings over six-month LIBOR for ECB with 3-5 years of maturity by 50 basis points to 150 bps and over five-year maturity, the ceiling is 100 bps lower at 250 bps. It also bans the use of ECB for integrated townships in the fractured real estate sector and worse, it brings preference shares at par with ECB, and to be governed by ECB norms. The total country ECB limit ($22 billion at present) will also be applicable as per this analysis.

Indian companies often buy land banks at huge prices and mortgage it for funding construction cost. Now if the Govt. sets the ceiling on interest rates, the lenders will say “first you folks tell us what you can afford, then we'll have a good laugh and go on from there”….

Perhaps the Government realized its gaffe and the fact that the whole industry runs on layers of mortgage. It has now allowed a breather – albeit with too many strings and a cut off date. In India, we call it roll back....

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