To a question on Kochi Metro

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                              Wednesday, December 19, 2012
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   1. IIFCL to stand guarantor for Rs 1,500 cr project loans
   2. Smart cities under JNNURM-II: Kamal Nath
   3. Affordable housing should be granted infrastructure status
   4. Highway project lenders to get charge on receivables
   5. Realty JV only if local firm holds 25%
   6. Limited takers likely for ECB booster to cheap housing
   7. 'Holding of rates to put further pressure on realty sector'


IIFCL to stand guarantor for Rs 1,500 cr project loans
The Hindu Business Line,
December 19, 2012

India Infrastructure Finance Company (IIFCL) is planning to guarantee around Rs
1,500 crore under credit enhancement scheme to a few projects of Larsen & Toubro
(L&T), Kalpataru Power and JP Associates during the current financial year.

A senior IIFCL official on conditions of anonymity told Financial Chronicle that “We
are in discussion with L&T for its Bharuch-Baroda road project, Kalp-ataru Power for
its Jhajjar (Haryana) power transmission project and with JP Group for their one
hydro power project in Uttar-akhand. All put together II-FCL plans to guarantee
aro-und Rs 1,500 crore worth of projects under credit enh-ancement sch-eme for the
current financial year.”

The credit enhancement scheme provides partial credit guarantee to enhance the
ratings of the projects’ bond issue, and also provide long term funds from untapped
sources like insurance companies and pension funds towards infrastructure sector.
IIFCL guarantees up to 50 per cent of the project cost, while Asian Development
Bank (ADB) provides backstop guarantee to IIFCL’s underlying risks.

IIFCL has so far provided credit enhancement to only one project — GMR’s
Jadcharla road project, which is being developed by GMR J Expressways in Andhra
Pradesh. IIFCL is providing guarantees to cover 24 per cent of the project cost —
which is around Rs 316 crore in principal, excluding the interest amount.

The government has been looking at various options to fund the projects in the
infrastructure sector since banks have reached their exposure limits and there is not
enough head room left for them to fund the new projects or to refinance the costly
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borrowings. The credit enhancement scheme is seen as increasing the credit
worthiness of the companies and also helping them get lower interest for their
bonds. The funds can also be used to repay the costly debt and refinance the debt at
lower cost, added the official.

SK Goel, chairman of IIFCL, on Monday said the company’s loan book is very strong
and they have target of Rs 30,000 crore loan book for this financial year. It has
already reached the Rs 27,000 crore mark and the remaining Rs 3,000 crore can be
easily achieved in the three-month period since the sanctions are already in place. It
plans to raise Rs 1,500 crore with a green shoe option of retaining up to Rs 10,000
crore.
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Smart cities under JNNURM-II: Kamal Nath
The Hindu Business Line,
December 19, 2012

India’s new cities may soon boast of several smart features like IT-enabled transport
and carbon neutral status.

“Under Jawaharlal Nehru National Urban Renewal Mission Phase-II, every State will
have atleast one smart city,” Urban Development Minister Kamal Nath said in an
interactive session at the 85th Annual General Meeting of FICCI.

He said the new cities, particularly those with population of half a million to one
million, will have a host of information technology enabled services, like transport
and other utilities.

For better planning of cities, Nath also mooted creation of a special municipal cadre
to ensure that local bodies have dedicated staff to carry out plans specific to the
urban areas.

The Minister observed that in some towns a veterinary doctor was being asked to
manage a municipality, an area of which he had no clue.

He said in JNNURM—II, the Centre was considering giving grants to only those
states which establish a municipal service.

Currently, in the absence of a dedicated cadre, municipal bodies are borrowing
services of other administrative services on deputation basis, which could be changed
if the local bodies have their own cadre.

To a question on Kochi Metro, Nath said the people of Kochi have to decide who they
want to build the metro rail in their city.
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The Delhi Metro Rail Corporation will provide all the support to Kochi Metro, But
Kochi Metro has to build itself, the Minister said adding that he was surprised to see
people of Kerala wanting DMRC to do the job.

“In any case, they must take a decision. Whichever way they want it, we will do it,”
Nath said.
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Affordable housing should be granted infrastructure status
Business Standard,
December 19, 2012

We are evaluating housing projects to reinvent these: Ajay Maken
Interview with Minister of Housing and Urban Poverty Alleviation

Barely two months ahead of what is being tipped as an election Budget, Union
Minister for Housing and Urban Poverty Alleviation Ajay Maken says he expects
around Rs 70,000 crore for two key housing schemes during the 12th Plan (2012-17).
In an interview with Dilasha Seth and Nivedita Mookerji, Maken discusses the plans
and goals of his ministry in the coming years. Edited excerpts:

The ministries of urban development and housing seem to have
overlapping features. How do you propose to make the ministry of
housing more relevant?
I don’t think you can compare the two ministries. They are totally different. It is like
saying power (ministry) and coal or mining and steel are one. It’s true that we both
work in urban areas but both ministries have a clear demarcation as far as work is
concerned. I received a delegation from South Africa and Brazil this week and they
appreciated the fact that we have separate ministries for housing and urban poor. We
are specifically targeting the urban poor.

We are discussing and evaluating projects to reinvent these. For instance, the
Jawaharlal Nehru National Urban Renewal Mission (JNNURM) Phase-I had basic
services to the urban poor and integrated housing and slum development
programmes. Then we had the Shehri Rozgar Yojana to create skilled and
meaningful employment. JNNURM started in 2005 and Shehri Rozgar Yojana in
1997. Concurrent evaluation have been done for all these schemes. We are in the
process of reinventing these schemes to make them more meaningful. We want to
start JNNURM Phase II and the Rajiv Awas Yojana-II in the next financial year. We
are in the process of taking it to the Cabinet for final approval.

What is the financial implication of reinventing these schemes?
We expect to get Rs 45,000 crore for the Rajiv Awas Yojana and another Rs 21,650
crore for the Urban Livelihood Mission under the 12th Plan. Overall, we intend to
spend about Rs 70,000 crore on these schemes.
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How do you think you can meet the huge shortfall in housing?
In a recent study, Prof Amitabh Kundu estimated a 18.78 million housing shortage.
We need to approach this issue in two ways — constructing new houses and making
incremental housing for those who live in congestion. We are taking up the low-cost
housing issue with the finance ministry. Affordable housing should be granted
infrastructure status so that loans can be given at affordable rates. Now, affordable
housing comes under commercial real estate (CRE).

But CRE housing should be separated from this sector for it to get benefits. Once it’s
a part of the infrastructure sector, four per cent of bank loans should be reserved as
priority loans for affordable housing.

But developers say they don’t have land for affordable housing. How do
you resolve the issue?
Most builders get land. But the advertisements you see are for HIG (higher income
group) and MIG (middle income group). The Census showed that in urban areas, 11
per cent houses are vacant, owned by people in HIG and MIG.

How is the government planning to provide housing to so many when
scarcity of land and real estate is a major problem?
There is no paucity of land if you go on the outskirts. But we would ask state
governments to be liberal with FAR/FSI (floor area ratio and floor space index) and
population density norms. In Indian cities, we have the lowest population density
and FAR norms. FSI in developed countries is in double digits. So, cities need to go
up in terms of tall buildings.

Are we not too late in doing that, as FSI and FAR should have been
thought of at the time of city planning many years ago?
We are talking about redevelopment of new townships, so we can do that. Towns
went up from 5,169 in the 2001 Census to 7,980 in 2011. Cities are also spreading.
We need to plan cities better. Land and colonisation are a state subject, so states
need to come up and discuss it with developers, so they can free land with high FSI.
Thirty-five per cent of dwelling units should be for the economically weaker sections.
So, developers need to be given additional FSI to build low-cost houses. Tax
concessions should also be given.

What’s the status of the real estate regulation Bill that has been in the
making for years?
We are on it but we will not like to comment anything at this point. But when it
comes, it will ensure greater transparency in the real estate sector. It will protect
end- users and consumers.
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Highway project lenders to get charge on receivables
Business Standard,
December 19, 2012
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In what could bolster the confidence of lenders in highway projects, they may be
given the facility of a charge on the receivables. Currently, the lenders have a lien on
the escrow account where the receivables are deposited but they hardly get to
exercise the right. From the escrow account, the sovereign dues are paid first,
followed by the cost of operation and management and National Highways Authority
of India (NHAI) premium. The banks are the last to get access to the account and the
funds get exhausted before their turn.

To make the situation easy for bankers, the finance ministry has told the ministry of
roads, transport and highways (MORTH) to redefine the term “Project Assets” in the
model concession agreement (MCA) so as to provide a charge to the banks on the
financial assets of a road project.

As per experts, such a move will help banks in treating their loans to the sector as
“secured”, a prerogative for which they, with the support of the government, is
prodding the Reserve Bank of India.

According to sources, the move comes after the arguments presented by the
department of financial services (DFS) that instances of the developer not submitting
the entire toll collected to the escrow account have impacted repayments to banks.

The new facility for lenders in road projects, however, will come with a rider – the
charge would be available only to ensure that such receivables and deposits on
realisation actually flow into the escrow account.

To bring in this relaxation Article 48.1 of the MCA will be amended. As per this
article, the banks have “a lien on the escrow account” and after the change in the
definition banks will have a “charge on the financial assets such as receivables”.

“Once the banks get a charge on the financial assets it will allow them to have an
extra edge and they can further lend to the sector as it will virtually turn their loans
as secured advances. Not just this, even developers will be befitted as they can get
loans with much more ease from the lenders,” said Vishwas Udgirkar partner,
infrastructure, at Deloitte.

Hobbled by delays cause by various sovereign clearances like land and forest, several
road projects have failed to meet their deadlines, while some have missed revenue
targets. This is part of a series of measures being planned by the government to ease
the fund crunch in the sector and revive investor interest.
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Realty JV only if local firm holds 25%
Business Standard,
December 19, 2012
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Foreign investors in Indian construction and housing projects will now have to give
at least 25% stake to Indian partners if they have to be treated as joint ventures and
claim the benefit of a low capital infusion norm of $5 million.

The department of economic affairs (DEA) has made this condition mandatory for
foreign investment in these projects to prevent wholly-owned subsidiaries of
international firms from acting as "joint venture entities" despite shareholding by
Indian partner/s being minimal.

Under the existing FDI policy, 100% foreign investment is allowed in "construction
development" projects that includes construction of townships and housing
infrastructure. But FDI in "real estate companies" is barred. While the minimum
capitalisation norm of $ 10 million is applicable for wholly-owned subsidiaries, only
$ 5 million capital needs to be brought in for joint venture with Indian partners in
the projects specified above.

Sources said the department of industrial policy and promotion (DIPP), the nodal
government agency for finalising the sectoral FDI policy, would soon come out with a
press note on the matter after consulting the ministry of housing and urban poverty
alleviation and the ministry of urban development.

With this move, the Centre has brought clarity in the definition of joint venture
operations in the housing sector. Several government agencies, including the Reserve
Bank of India, had raised concerns over the ambiguity in provisions, saying it could
be easily misused by investors.

In fact, in an earlier letter to DIPP, the RBI had raised concerns about overseas firms
taking the benefits of lower capitalisation available to JVs by keeping just 0.1%
equity or just one share holding with an Indian entity. Experts feel such clarification
will further plug loopholes in the sector. “It does bring in transparency in the policy.
However, we must see that not much of investment is flowing in the country and
such a policy should not discourage investor interest.

Despite all this, we expect that more reforms should take place so that more
investments comes in the country,” Anshuman Magazine, chairman & managing
director of CBRE South Asia region, said.

Sanjay Dutt, executive director, Cushman & Wakefield South Asia said, “ With this
policy, some more skin in the game has come in for local investor as he too shall now
get more ownership rights. Now, theIndian players will take their projects more
seriously.”

The RBI, in a letter to the DIPP, had said the term wholly-owned subsidiary was not
clearly defined in the FDI policy.

"While the term joint venture is defined in the consolidated FDI policy as an Indian
entity incorporated in accordance with the laws and regulations in India and in
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whose capital a non-resident makes an investment, the term WoS has not been
defined in DIPP's consolidated FDI policy,” RBI said.

The apex bank had also highlighted that according to the Indian Companies Act,
1956, even if a resident Indian holds a single share in a company in construction
development sector, such a company will be termed as a joint venture. "Accordingly,
no company in construction development sector will be treated as wholly owned
subsidiary by non-residents even if 99.99% share is held by non-residents and only
one share is held by resident,” RBI said in the letter.

The RBI had sought clarification saying that a foreign firm can avoid meeting the
higher requirement of a minimum capital of $10 million. It had also pointed that by
offering single share in the company to a resident Indian, foreign companies were
flouting norms as they treated such an arrangement as a joint venture, which
indirectly was bringing down the minimum capital requirement to $5 million.

It suggested that DIPP take leaf from the provisions existing in the NBFC sector
where the cap on holding is specified for treatment as joint ventire and WoS.
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Limited takers likely for ECB booster to cheap housing
Business Standard,
December 19, 2012

RBI has allowed companies to raise up to $1 bn but hedging of costs
could make this unattractive for borrowers

Though the Reserve Bank of India has allowed real estate developers and housing
finance companies to raise up to $1 billion (Rs 5,400 crore) via external commercial
borrowing (ECB), hedging of costs could make this unattractive for borrowers.

"It looks very difficult to raise funds through this new window. Monitoring use of
funds is going to be a challenge. Also, there is a question mark over preparation and
ability for managing currency risks even through hedging," said S Srinivasaraghavan,
head, treasury, Dhanlaxmi Bank.

Added Brotin Banerjee, managing director, Tata Housing: "In the short term, it
might not be a good option, as you can also get such rates in non-convertible
debentures. Why would one take currency risks and hedging risks if you can raise
such loans domestically?"

ECB ARGUMENT

Funds raised through external commercial borrowing (ECB) could be used either for
developing low cost housing projects, or providing loans up to Rs 25 lakh to
individuals for buying units with a price tag of Rs 30 lakh or less, RBI says Experts
say in the short term, it might not be a good option, as companies can also get such
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rates in non-convertible debentures, and would prefer not take currency risks and
hedging risks However, some developers say this is a move in the right direction, as
even a three to four per cent advantage is large, if a company’s scale of operations are
big The funds raised through ECB could be used either for developing low cost
housing projects or providing loans up to Rs 25 lakh to individuals for buying units
with a price tag of Rs 30 lakh or less, RBI said in a circular on Monday.

"Even if you bring ECB, the cost of that will not be less than domestic debt because of
hedging costs. Real estate does not have natural hedging, unlike IT (information
technology), where you earn in dollars. But in sectors such as real estate, you need to
buy dollars to repay loans. In that case, you are exposed to currency fluctuation
risks," said Ambar Maheshwari, managing director, corporate finance, Jones Lang
LaSalle, a global consultant.

According to Maheshwari, if one includes hedging costs, the effective rate comes to
10 to 11 per cent. ECB comes at Libor plus 500 to 600 basis points.

J Akilan, executive director, BBVA India, a European financial group, said lenders
would first look at credit risks. Only on being convinced on this count would they get
to the pricing aspect for such transactions. The challenge is in managing currency
risk, as these projects might not have a natural hedge, sans foreign currency income.

"Though it will lead to more liquidity, there will be restriction on usage of funds and
costs would not be exponentially cheaper. You cannot use that money to replace the
existing loans, too," said Anuj Nangpal, director, investment advisory, DTZ
International Property Advisors.

However, some developers say this is a move in the right direction. Added Ashish
Puravankara, deputy managing director, Puravankara Projects: "At this point in
time, when construction finance comes at 13.5 per cent, if your scale of operations is
large, even a three to four per cent advantage is large. It is a move in the right
direction." Puravankara is also developing budget housing projects through its
Provident Housing arm.
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'Holding of rates to put further pressure on realty sector'
Business Standard,
December 19, 2012

Disappointed with the Reserve Bank of India (RBI)’s holding the key policy rates,
property developers say it will put further pressure on real estate.

“When the growth rate is coming down and government and industry are calling for
a rate cut, they should have cut the rates,” said Rajeev Talwar, executive director,
DLF, the country’s largest realtor.
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Added Lalit Kumar Jain, national president of the Confederation of Real Estate
Developers Association of India: “It is sad and unfortunate to see RBI taking such a
stubborn stand, despite economic realities of the day. It will further decelerate the
growth in real estate. We wonder if the RBI policy of causing a liquidity crunch,
leading to short supply and resultant price rise, is good for the economy or increasing
liquidity and pushing supply to bring prices under control is better.” Property
developers are facing a twin problem. Sales are declining, while the borrowing rates
for developers have risen 150-200 basis points in two years.
According to realty research firm PropEquity, the absorption of homes was down 30
per cent on a yearly basis in the September quarter in the National Capital Region
and 28 per cent in the Mumbai Metropolitan Region. “A quarter point cut would
have given a boost to the sector,” said Kamal Khetan, managing director of Sunteck
Realty, a developer based here.

Anshuman Magazine, chairman, CB Richard Ellis, South Asia, added: “We are
disappointed that RBI has kept the key policy rates unchanged. We were hoping for
some relief in the form of a cut in the CRR & repo rates, as the industry continues to
witness hard times, given the current situation. We hope the next credit policy
decision would consider reduction of CRR, which will bring in some liquidity in the
banking sector.“
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