RBI not to clear 30 foreign VCFs

Says FinMin is reviewing FDI, portfolio investments by FIIs in realty sector.

The Reserve Bank of India (RBI) has decided to put on hold approvals for about 30 foreign venture capital funds (VCFs) wanting to invest in the real estate sector.

At a recent meeting of the high level coordination committee of regulators on capital markets, the RBI clarified that no approvals for VCFs will be issued since the Finance Ministry is reviewing the policy for investment in the realty sector for both foreign direct investment (FDI) and portfolio investments by foreign institutional investors.

The RBI's clarification was in response to a query by capital market regulator Securities and Exchange Board of India (Sebi), which had sought information on applications by at least 30 foreign VCFs for clearances under the Foreign Exchange Management Act (FEMA). Sebi has already granted registrations to these VCFs, sources said.

Among the measures suggested to curb investment flows from VCFs into real estate, RBI suggested restrictions on investments by VCFs in sectors that are already developed and booming.

The central bank was also of the view that FDI in real estate be brought under the approval route. Such investment is currently under the automatic route for large projects.

The RBI has suggested that there should be end-use restrictions for investments by foreign VCFs. Sources said RBI has been reluctant in approving investments by foreign VCFs in any sector and not just in the real estate sector because of concerns on foreign capital inflows.

RBI has been finding it tough to manage the large foreign capital inflows into the country. The central bank has been absorbing foreign currency inflows to check the rupee's appreciation, but has ended up adding to the liquidity in the system.

Abundant rupee liquidity poses risks of higher inflation as it adds to the already high money supply. The year-on-year increase in money supply (M3) as on January 4, 2008, was 22.4 per cent against 20.8 per cent a year earlier and much higher than the central banks target of 18 per cent.

According to data released by Dow Jones VentureOne and Ernst & Young, VCFs invested more than $777 million in 57 deals for entrepreneurial companies in India during the first three quarters of 2007.

This was nearly five times the $158 million invested during the first nine months of 2006 and more than twice the annual investment record of $320 million set in 2005.