Rediff.com« Back to articlePrint this article

Lock FDI in realty issues, says RBI

June 15, 2006 11:16 IST

The Reserve Bank of India has suggested a three-year lock-in for foreign direct investment in the real estate sector through the initial public offer route.

The central bank made these suggestions to the government recently. At present, funds brought in through the FDI route cannot be repatriated before three years, but there is no such restriction on subscriptions to IPOs.

However, if a foreign investor picks up a stake in any real estate company through the private placement route in the run-up to an IPO, there is a one-year lock-in.

The RBI's suggestions are aimed at warding off speculative investments in the real estate market, which is already reeling under an 'asset bubble'.

The central bank's April monetary policy had hinted at the bubble and raised the provisioning requirement on standard loans in commercial real estate, besides increasing the risk weight for such loans.

Sources close to the development said the banking regulator felt that it would be difficult to ascertain whether the foreign investment was being used for the development of "integrated townships", which is one of the preconditions for FDI in this sector.

"Funds are fungible and can be used for any purpose other than the proposed project. Therefore, there should be stringent norms to monitor the use of funds," the sources said.

FDI in real estate has been allowed under the automatic route. According to the RBI, like in aviation and telecom, the FDI proposal should be routed through the Foreign Investment Promotion Board and not be put on the automatic route.

In its foreign investment policy for real estate, the government has allowed 100 per cent FDI in real estate under the automatic approval route. Foreign investors can enter any construction activity, but they will have to build at least 50,000 sqm within a specific timeframe.

After the FDI policy was cleared, various international investors, including Warburg Pincus, Blackstone, Morgan Stanley Real Estate Fund, Columbia Endowment Fund, California Public Employees' Retirement Fund, Tishman Speyer Sam and JP Morgan Partners, among others are reported to have evinced interest in the Indian real estate market. Indian institutions like HDFC, ICICI Venture and Kotak Mahindra have also launched funds to invest in the real estate sector.

Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Investments Discussion Group

Anindita Dey in Mumbai
Source: source image