NRI Real Estate and Property Investment in India
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Need to Reconsider FII Norms in Real Estate
Thursday, April 12, 2007

The RBI has shown great anxiety over volatility of short term capital inflows. The move comes as a response to the ongoing debate on foreign investment in Indian property market.

The government had paved the way for FDI in real estate sector, which was earlier restricted to mega townships and settlement - through Press Note 2 (2005), thereby allowing 100% FDI in residential segment and construction projects.

Each project will have a certain minimum size, a minimum capitalization, and the FDI was locked in for a period of three years. This has put all the listed real estate companies in a situation of perplexity.

These companies are an agglomeration of different projects, some following real estate norms whereas others not. Pre-IPO investment private placement to foreign institutional investors (FII) has come up with solutions to overcome the hurdles.

These FII investments can also represent investments through participatory notes made it easier to mask FDI in real estate companies as FII investment. The RBI has suggested that pre IPO/private placement to FIIs in real estate be subject to FDI guidelines are not out of place.

The RBI also seems to be raising concerns over the destabilizing effect of such inflows, but that is a much big issue significant to all portfolio investment. There is an urgent need to reassess the restrictions on FDI in real estate. Also, the conditions should create unique problems for real estate companies.

Listing certainly possesses the prospective to improve transparency in a notoriously murky sector, but restrictions on FII investments would actually discourage it.

The RBI may continue with lock in period, it would be futile to put restrictions on projects. Putting the restriction can prevent the property developers from developing real estate projects and continue with smaller ones and float SPVs for large projects with foreign participation.

There is actually a need of simple policy wherein FDI is allowed in real estate companies independent of project specifications.

Related Readings

FII in Banks to Stay Within Prescribed Limits

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