Realty FDI, FII vague on pre-IPO stakes

OVERHAUL OF FOREIGN INVESTMENT NORMS

Even as the delinking of foreign direct investment (FDI) and foreign institutional investor (FII) norms in construction-development projects is likely to increase the flow of equity-based capital to real estate companies, experts say it not clear if the relaxation applies to pre-IPO (initial public offer) investments by FIIs.

The government yesterday approved a clarification that FIIs under the Portfolio Investment Scheme (PIS) would be outside the purview of Press Note 2 (2005) for construction-development projects.

Before this, FII investments in the sector were subject to FDI norms as prescribed by Press Note 2 (2005), which mandates a minimum land area of 10 hectares in case of housing plots and a minimum built-up area of 50,000 sq metres in case of construction-development projects.

The guidelines also stipulate a minimum capital of $10 million for wholly-owned subsidiaries and $5 million for joint ventures with Indian developers. These also talk of a three-year lock-in and mandatory investment inflow within six months of the start of the company.

Analysts said the move would lead to more foreign funds buying stocks of Indian real estate companies. Sources said between April and September last year, FDI worth $1 billion had flowed into the real estate sector.

"The delinking is an encouraging development. However, we still need to know if the clarification is applicable to pre-IPO investments, where it was prohibited. If pre-IPO investments by FIIs are included in the relaxation, it will encourage mid-segment institutional capital inflows and increase real estate companies' access to capital," said Ajit Krishnan, partner, Ernst & Young.

"Though FIIs have been investing in realty stocks like other stocks, there was a debate whether they should be subject to the lock-in and the investment threshold, leading to confusion. Now they can invest freely as the government has come out with a clarification," said Balaji Rao, managing director, Starwood Capital, a US-based private equity company.

"Industrial parks were outside the FDI norms for some time, so there is no significant impact here," Rao said.

Hardeep Dayal, chief executive of a recently-listed property company, Kolte Patil Developers, said: "It is a mere clarification and means no change for the developers since the PIS is only for secondary market transactions."

Sources said the Department of Economic Affairs was objecting to the inclusion of pre-IPO investments in the clarification.

The department was of the view that the FEMA (Foreign Exchange Management Act) already made a distinction between registered FIIs participating in pre-IPO private placements and those purchasing shares from the stock markets.

It believed that the FEMA regulations of 2000 permitted foreign investment under the FDI as well as the PIS route.