The government has said companies can use proceeds from external commercial borrowings to invest in the real-estate of other domestic companies. However, the funds cannot be used to acquire stakes in those companies.
The finance ministry has taken the position on a query made by a foreign bank operating in India. The bank had approached the ministry to clarify if the purchase of assets, including land and machinery of an Indian company on a going concern basis by a subsidiary of a foreign company, would construe an acceptable end-use of external commercial borrowings.
The government has said the use of external commercial borrowings for buying physical assets of a domestic company is an acceptable end-use of such loans. But, at the same time, the proceeds cannot be used to invest in the equity of the company.
The interpretation is significant because the government had relaxed the use of external commercial borrowings for investment in all areas except the capital market and real-estate. Even in the case of the former, the Centre recently relaxed the rule partially.
It issued a notification saying proceeds from external commercial borrowings as well as those from ADR\GDR and FCCB could be used to buy shares of public sector companies in the course of their disinvestment. But the restriction on investment in real-estate continued.
At present, the government allows foreign direct investment to build integrated townships, but with a minimum investment cap of Rs 100 crore. This has been done to encourage foreign direct investment in new properties instead of companies paying higher premium for properties in prime locations.
The finance ministry clarification means that while a company can buy assets, it will not be allowed surrogate transfer of ownership by using the proceeds from external commercial borrowings.
While the finance ministry
