Affordable housing is a segment of real estate sector that focusses towards housing for medium and low income group of the society. It includes budget housing at affordable rates. Affordable Housing sector is majorly dependent upon three key parameters being – income level of the customer, size of the unit and affordability.

The Government of India, over a past few years, has been focusing on uplifting the affordable housing sector. In September 2019, the Government had announced a special window to provide last-mile funding of INR 10,000 crore for the completion of ongoing affordable housing projects with an objective to complete the unfinished units and it was expected that similar amount will be funded by foreign investors. Further, with the objective of objective of 'Affordable Housing for All', the Government introduction the Pradhan Mantri Awas Yojana (PMAY) for urban and rural cities wherein initiatives were rolled out for the promotion of affordable housing such as lower borrowing rates, reduction in GST applicability, extension in time for completion of the project, etc. Recently, the Government also announced a new initiative for migrant workers under the Affordable Rental Housing Complexes (ARHCs) scheme (a sub scheme under the PMAY) wherein, the existing vacant government-funded housing complexes across key cities will be converted into ARHCs, and will be offered to concessionaires for 25 years to rent out the units to urban poor and migrant workers. With the focussed push for the affordable housing sector, there have been an increase in development of affordable housing projects and with that the interest of investors (including the foreign investors) has also shifted towards the affordable housing sector in India.

The developers engaged in the affordable housing sector generally look for funding options for the development of their projects both through domestic as well as foreign sources. In a typical transaction involving foreign investment in India, the two broad sources of finance includes investment through (i) equity and quasi equity instruments, which is governed by the foreign direct investment regulations; and (ii) borrowings which includes debt instruments and commercial loans, more commonly referred to as external commercial borrowings ("ECB").

ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities conforming to parameters including minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. ECBs are presently governed by the 'Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations' dated March 26, 2019 (the "Current ECB Framework"). Prior to the Current ECB Framework, raising of funds through the ECB route was governed by the 'Master Direction- External Commercial Borrowings, Trade Credit, Borrowing and lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers' dated January 01, 2016 (and as updated from time to time) ("Old ECB Framework").

Generally, in an ECB transaction for undertaking development of affordable housing projects, the developers, being low on internal cash flows, are desirous of utilising the ECB money availed from foreign lenders not only for the purposes of development of the project, but also for purchasing the land parcel on which the development of affordable houses is to be undertaken. This article focusses on the applicability of the Current ECB Framework on development of affordable houses and the issues surrounding utilisation of ECB proceeds for purchase of land parcels.

ECB in Real Estate

The Current ECB Framework provides for a negative list of end-uses. As per the said list, utilisation of ECB proceeds towards "Real Estate activities" has been prohibited. The restriction of utilising ECB proceeds towards "Real Estate activities" has been restricted for a long time under the Old ECB Framework as well. This has been a policy decision of the Government due to the risk of creation of speculative bubbles and fuelling of prices of immovable properties in India. However, the term 'Real estate' was not defined under the Old ECB Framework. Under the Current ECB Framework, the term "Real Estate activities" has been defined to mean as under:

"any real estate activity involving own or leased property, for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this would not include, (i) construction/development of industrial parks/integrated townships/SEZ (ii) purchase/long term leasing of industrial land as part of new project/modernisation of expansion of existing units and (iii) any activity under 'infrastructure sector' definition."

As per the above definition, ECB proceeds cannot be utilised inter-alia for dealing in (i.e. buying, selling and renting) commercial and residential properties, whether owned or leased. However, certain exceptions have been created in the definition which includes construction and development of industrial parks/integrated townships/SEZ (being in line with the extant rules of foreign direct investments); and any activity under 'infrastructure sector' definition.

ECB in Affordable Housing Sector as part of Infrastructure Sector

Under the Old ECB Framework, a specific exception was provided to allow developers to raise ECB for low cost affordable housing projects (subject to certain prescribed conditions) as a permitted end-use. The National Housing Bank ("NHB") acted as the nodal agency for deciding a project's eligibility as a low cost affordable housing project, and on being satisfied, forwarded the application to the Reserve Bank of India ("RBI") for consideration under the approval route.

As mentioned above, under the Current ECB Framework, the activities prescribed under the 'Infrastructure Sector', as per the definition of "Real Estate activities", are exempted from the end-use restrictions under the Current ECB Framework. 'Infrastructure Sector', within its ambit, comprises of various sub-sectors, which are provided under a harmonised master list of infrastructure sub-sectors, which is approved and updated by Department of Economic Affairs from time to time. 'Affordable Housing' was included as an infrastructure sub-sector vide the harmonized master list dated March 30, 2017.

The Harmonised Master List of Infrastructure sub-sectors, dated August 24, 2020, is the current list of infrastructure sub-sectors ("Harmonized Master List") and "affordable housing" continues to be a part of the said list. Under the Harmonized  Master List, affordable housing is defined to mean "a housing project using at least 50% of the Floor Area Ratio (FAR)/Floor Space Index (FSI) for dwelling units with carpet area of not more than 60 square meters". Accordingly, usage of ECB proceeds for affordable housing projects continues to be a permitted end use under the Current ECB Framework and the procedure to avail ECB has been relaxed by inter-alia doing away with the requirement for making an application to the RBI through the NHB.

ECB for acquisition of land parcels for development of affordable housing projects

The Current ECB Framework provides for an express permission to carry out any activity under 'Infrastructure Sector' as a permissible end use of ECB proceeds and there is no express prohibition on utilisation of ECB proceeds for acquisition of land parcels for development of affordable housing projects (as against a specific provision under the Old ECB Framework, prohibiting the utilisation of ECB proceeds towards acquisition of land). Therefore, it seems that the RBI has made a deliberate shift in the policy and has provided a relaxation with respect to any acquisition of land parcels for undertaking development of affordable housing projects, as a permissible end use. However, even under the Current ECB Framework the RBI, in certain instances, has taken contradictory views wherein it has continued to prohibit utilisation of ECB proceeds for the acquisition of land parcels for the development of affordable housing projects.

Whilst RBI has taken steps for liberalising norms by permitting usage of ECB proceeds under the Current ECB Framework for purchase of industrial land (as part of new project/modernisation of expansion of existing units), its views on prohibition on purchase of land parcels for development of affordable housing projects (which seems to be contrary in view of the specific relaxations granted for affordable housing projects, under the Current ECB Framework) creates a sense of ambiguity within the developers and foreign investors, which may adversely affect the ECB investments under the affordable housing sector.


The Government of India's focus on affordable housing through policy measures, viz., government incentive schemes, interest subsidy scheme under PMAY, tax reliefs, concessional loans etc. has provided the necessary incentive required in the affordable housing sector in India. However, there are still various road-blocks before the Government for achieving its objective of 'Affordable Housing for All' and while various initiatives have been rolled out, uncertainty still looms over the proper implementation of such initiatives.

In this regard, continuation of ECB proceeds as a permitted end use for affordable housing projects under the Current ECB Framework is a step in the right direction as this would encourage ECB inflows in this sector. However, the Government along with RBI, should undertake active measures for successful implementation of its policies for the affordable housing sector such as permitting utilisation of ECB proceeds for acquisition of land parcels for the development of affordable housing projects. This would generate confidence amongst the developers and investors and will result in fast-paced development of affordable housing projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.