Foreign realty funds face regulatory bump

The Reserve Bank of India's view that the foreign realty funds would create a bubble in the sector has resulted in blocking of $ 4 billion worth of proposals.

Close to 20 foreign venture capital investors (FVCI) have applied to the Securities and Exchange Board of India (Sebi) but no permission has been granted to any of them. Over a dozen Indian entities have incorporated companies in Mauritius and Cyprus to float these funds.

While giving a nod to such investors, Sebi consults the RBI as it involves inflow of foreign funds but the latter has informally expressed its reservations on the issue.

"Since regulatory approval is not forthcoming for floating a FVCI, we may have to take the FDI (foreign direct investment) route to invest in the real estate sector," said one of the entities which filed an application to float such a fund last year.

The government has allowed FDI in real estate sector with certain caveats. These venture capital funds focus on real estate and real estate intensive businesses.

They invest in urban infrastructure like hotels, shopping malls, large-scale residential complexes in new townships, infotech parks and special economic zones.

Over a half a dozen domestic realty funds have been set up so far with a corpus of over Rs 3,500 crore. The existing players include Housing Development Finance Corporation, Kotak Mahindra, Pantoloon, and Anand Wrath among others.

Banks and financial institutions, domestic corporates and high net worth individuals invest in these closed-ended funds that have lives between five and seven years.

"None of the proposed overseas funds which have explicitly stated that they would play in the real estate sector has got the regulator's nod. However, some of the foreign funds floated by domestic institutional which have not used the word `realty' to describe the nature of the funds have got the permission. These funds are heavily investing in real estates," said an industry source. Investment in real estates is a permissible activity under the venture capital regulations.

The RBI has recently directed banks not to lend money to any real estate project unless all permission from all relevant regulatory authorities are in place.

This has slowed down the flow of bank credit into the sector. The banking regulator has done this to stymie speculation in the "sensitive" sector.

However, its reservation about the FVCI has not gone down well with the industry. "If funds flow both in terms of debt (bank loan) and equity (venture capital) is choked, it will sent the supply and fuel further price hike of real estates," said an analyst.