Finmin not in favour of FII status for realty FDI in pre-IPO period

The finance ministry is not in favour of granting foreign institutional investor (FII) status to foreign direct investment (FDI) received through private placement of equity in pre-IPO period by the realty sector.

Even though the finance ministry is holding consultations with RBI, Sebi and the Department of Industrial Policy and Promotion (DIPP) to evolve a consensus on the issue, ministry officials said it was not in favour of giving concessional treatment to this type of FDI on the lines of FII.

FII has a lock-in period of one year and FDI three years in the pre-IPO stage. The Reserve Bank has opposed reducing the lock-in period of this kind of investment in pre-IPO stage.

Finance ministry officials also said since in the pre-IPO stage, prices were not market determined, it might not be fair to reduce the timing of the lock-in period. It could lead to unfair gains, they said.

Leading real estate players, who want to encash on the investors' increasing appetite for realty sector stocks, have been seeking FII status for their pre-offer placement as many of their existing projects are not meeting tough FDI norms.

According to officials, if the investors want to book profit in the booming real estate sector by investing at the pre-IPO stage, they should be ready to wait for at least three years, the lock-in period for the FDIs. Otherwise, they would be making quick gains as there was a high possibility that they might get stake in the pre-IPO stage at very concessional terms, the officials said.

In a way, the finance ministry has sided with RBI so far as lock-in period of investment is concerned in a pre-IPO period. Concerned over high valuations of real estate stocks, the RBI has taken a tough stand that the pre-issue private placement through FDI could not be treated at par with portfolio investment and should not be provided the exemptions enjoyed by FIIs.

According to officials, SEBI has just conveyed to them that its role became important once companies plan capital market route.

Under the existing norms, FDI is permitted in realty projects, which involve a minimum area of 10 hectares or 50,000 square metres, a minimum capitalisation of $10 million for wholly-owned subsidiaries and $5.5 million for joint ventures, and a lock-in period of three-years for repatriation of profits.

At present, a majority of the projects of any real-estate company does not comply with FDI norms.

FIIs are currently allowed to invest in real estate companies through the secondary market but they cannot invest in pre-IPOs or IPOs or follow on public offers (FPO).

Officials, however, said, this was not the final view of the ministry and it would take some time to come out with final words on the matter as consultations with RBI, SEBI and DIPP were on.

If everyone agrees on views regarding the matter, the finance ministry would convey it to DIPP. Otherwise, the matter could be decided by the DIPP, they said.