Foreign debt still seeping into realty 

Foreign debt, banned in real estate, is finding its way into property firms as bankers and lawyers help builders cobble together new deals to raise money.
Even though foreign loans better known as external commercial borrowings are not permitted in construction, property firms have spotted a mechanism where the debt can be provided by foreign institutional investors (FIIs) registered with Sebi. No rules are broken and the deals, involving a three-way transaction, come across as normal private placements in the corporate bond market.
The process begins with a real estate company placing nonconvertible debentures (NCDs) with a local entity, such as a non-banking finance company (NBFC). The next step involves listing the debt security, soon after which an FII steps in. Once the NCD is listed on a stock exchange, the NBFC offloads the paper to a foreign fund. Since FIIs cannot invest in unlisted debt, the NBFC warehouses the NCD till the paper is listed and then recovers the money by selling the debentures to a foreign fund.
The two transactions are part of a back-to-back deal struck between the firm issuing the NCD, the local NBFC and the FII. At least four developers three from Mumbai and one from Bangalore have raised over Rs 1,000 crore in the past few months through this route.
It does not directly violate the Press Note on foreign investment in property, and such FII investment is within the overall corporate bond ceiling applicable to foreign funds... but its against the spirit of the regulation, admitted a senior banker who has advised one such NCD issue.
Indeed, a few foreign banks have made presentations to property firms on the convenience of such fund-raising which has become more attractive since the government plugged a loophole on the foreign direct investment (FDI) regulations in the real estate sector.

Economic times, New Delhi, 04-03-2010.