Curbs likely on VC funds for realty

The government is reviewing norms for investments by foreign venture capital funds in real estate, after the Reserve Bank of India coming round to the view that such funding is helping create an asset bubble in the sector.

There is a view in the government that such funding in the sector should be stopped completely, sources close to the development said.

Venture capital funds do not invest directly in real estate projects. Instead, they put their money in private equity firms, which, in turn, invest in the sector. A total of 35 private equity funds are reported to have invested in the Indian real estate sector and another 10 are said to be poised to do so. Many of them have kitties swollen with money from VCs.

The government had recently clamped down on the use of external commercial borrowing by real estate companies in order to check capital inflow, which, it feels, is fuelling inflation in the country.

With stock market sentiments too turning against the sector, real estate developers were looking at private equity funds as their last hope. But that source too could suffer if the proposed clampdown on venture capital funds takes place.

However, this is not without opposition. The government, having undertaken a review of the norms governing pre-IPO (initial public offer) allotments to foreign institutional investors by these companies, is seen to be choking the flow of funds.

The softer view is that real estate should be redefined to exclude integrated townships, hospitals and educational institutions, to insulate them from a burst of the perceived bubble.

Under current norms, foreign venture capitalists invest in real estate through private equity firms in the form of foreign direct investment.

While market regulator Securities & Exchange Board of India has cleared the decks for registration of such VCs, the Reserve Bank of India has opposed their operation and not allowed them to open foreign exchange accounts. If the Reserve Bank gives the green signal, such investments will be clubbed under institutional investments.

Internally, the Reserve Bank is reworking the definition of real estate and is likely to propose exclusion of educational trusts and hospitals.

Earlier, in a communication to the government, it had pointed out that foreign venture capital funds' investments in real estate companies assumed the nature of institutional investment. It had also asked whether real estate qualified as a sector that needs promotional funding.

Besides, the Reserve Bank is concerned that such investments push up real estate prices, thus helping in the creation of an asset bubble.