HDFC is 73% foreigner

India’s credit policy which still have not allowed ECB and foreign funds in Real Estate, enters from back door.

By Dr Sanjay Chaturvedi

India’s biggest housing finance company and pioneer in introducing housing finance in India in 1977, Housing Development Finance Corporation Limited (HDFC) is 73.32% foreigner. Foreign Institutional Investors (FII) holds 58.37 % and FDI – FI holds 14.95 % equity shares in the company. According to the statutory statement filed with various authorities and compliances, HDFC, India’s largest financial institute and Non Banking Financial Company is governed by foreigner. The market capitalisation of HDFC in Housing Finance Sector is Rs. 10,01,254 million.

Conservative policies of RBI and exchequers which do not want Real Estate open for foreign investments for various reasons including south Asian crises, is now having contradiction in its own frame work. According to Tenth Five Year Plan which states in its para 7.6.65 “But the stumbling block is the fear that foreign investors may repatriate all the profits. These apprehensions are fuelled by the fact that the Southeast Asian financial crisis was partly the result of short-term investments in the real estate sector in these countries leading to flight of capital. To guard against this, a minimum lock-in period of three years must be fixed on investments and care should be taken to ensure that no long-term investment is funded by short-term capital. Source Planning Commission: Tenth Five Year Plan 2002-07, pp. 839, 840.”
Housing finance is long term investment business, where housing loans are been given for 20 years and more. Where as short term borrowings or public deposits sometimes mis match the Assets Liability ratio. The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.

Above two hundred industries are dependent on real estate industry and the sector is second largest employment generator. What will happen if over night FII decide to walk out of the company after satisfying FDI norms imposed by RBI? The FDI inflow in the country in Real Estate Sector already reduces. In 2009-10p, net inflow of FDI was US$ 2191 m and in 2010-11 it was recorded just US$ 444 m which is almost 80% decrease on year on year basis.

There are 356 housing finance companies registered with National Housing Bank and out these on 14 companies are availing refinance facilities. Rs.4000 crores refinanced availed by these 14 housing finance companies. Inspite of the fact that interest rates have increased almost 100 times, housing finance sector have recorded a growth of 15.7% with a cumulative figure of disbursement of Rs.3,66,889 crore.
NBFCs-ND-SI which were facing problems of liquidity and ALM mismatch in the existent economic scenario were permitted, as a temporary measure, to raise short-term foreign currency borrowings under the approval route, subject to certain conditions.
In view of the funding inter-linkages between NBFCs, mutual funds and commercial banks, when the contagion from the global financial crisis created selling pressures in the stock markets in India, the liquidity needs of the system as a whole had to be addressed by the Reserve Bank. The ripple effect of the US and European markets led to heavy redemption pressure on mutual funds, starting in September 2008, as several investors, especially institutional investors, started redeeming their investments in liquid funds/money market funds. Mutual funds are major subscribers to CPs and debentures issued by the NBFCs, besides CDs issued by banks. With the mutual funds facing redemption pressures and difficulties in rolling over the maturing investments, one of the prime sources of funds available to NBFCs dried up and, hence, there was no market for rollover of maturing short-term instruments floated by NBFCs for having regular access to market funding. Apart from this, there were reports that the liquidity crunch also made banks reluctant to lend to NBFCs. This heightened the perception that NBFCs were facing severe liquidity constraints. To ascertain the ground reality, a study involving discussions with a large number of NBFCs-ND-SI was initiated. The NBFCs are next after Mutual Funds, market peers are predicting.
The discussions centered on the immediate issue of liquidity constraints faced by the NBFCs and their experience with the measures taken by the Reserve Bank to ease the situation. The focus areas for discussions were: (i) the profile, composition and maturity pattern of assets and liabilities; (ii) liquidity issues/constraints faced by the companies; (iii) measures taken for mitigation of such constraints; (iv) feedback on the easing measures taken by the Reserve Bank; (v) business strategy/plans of the NBFCs in the immediate future, including substitution of short-term funds, possibility of downsizing the balance sheet and growth plans; and (vi) real estate/capital market exposures.
It emerged from the discussions that based on their liquidity sensitivity to the changing market conditions, NBFCs could be categorised into four groups. The first group of companies had financed assets with long-term liabilities and small amounts of CPs and had no asset-liability mismatches, as they mainly had short-term assets and also back-up lines of credit. They constituted the largest group and covered nearly three fourths of the total assets of companies under discussion. Another minority group had asset-liability mismatches but these companies had foreign parents from whom funds could be received. This group represented only 2.0 per cent of the total assets of the NBFCs. The third group of companies had financed assets with a mix of short-term CPs and bank funds and had a mismatch within tolerance limits. They had around 6.0 per cent of the total assets of the NBFCs. The last group of companies had long-term assets and short-term liabilities and was facing liquidity problems. These companies accounted for 17.0 per cent of the total assets of the NBFCs.
The Reserve Bank acts as a banker to the Central and the State Governments in terms of provisions of sections 20, 21 & 21 (A) of the Reserve Bank of India Act, 1934. The Reserve Bank carries out the general banking business of the Governments through its own offices and branches of public sector banks and a few private sector banks (viz. HDFC Bank Ltd., ICICI Bank Ltd. and the Axis Bank Ltd.) which act as the Agency Banks.
Housing Finance Companies have certain obligations under the Prevention of Money Laundering Act, 2002 (PMLA) including reporting of large cash and suspicious transactions to FIU-IND as Cash Transaction Report (CTR) and Suspicious Transaction Report (STR) according to RBI.