RBI curbs FII entry in real estate IPOs

By agencies   |   Friday, 28 April 2006, 07:00 Hrs
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MUMBAI: The tricky issue of foreign portfolio investment in real estate has come under regulatory glare. The Reserve Bank of India (RBI) has thrown in a caveat on FII subscription to public equity offerings by real estate companies.

The regulator is of the opinion that such firms can sell their initial or follow-on public stock offerings to FIIs, only if the real estate projects being developed fulfill the conditions for foreign direct investment.

One of the companies planning an issuance has already dropped the idea of marketing shares of its forthcoming equity issue to FIIs while another firm has positioned itself as a construction company (one which doesn’t own the land as distinct from a real estate company) to sidestep the restriction.

The issue has boiled down to subtle differences between FII and FDI. The facts are: real estate projects can attract FDI up to 100 percent, subject to certain conditions which were spelt out by the government in April 2005. These conditions include minimum area to be developed, minimum capitalization, and no repatriation of original investment before 3 years and ban on sale of underdeveloped plots.

If a project meets these conditions, the concerned company can attract FII subscription up to 24 percent equity, and later revise it to the sectoral FDI cap, which is 100 percent in this case. However, for a company not willing to meet the stringent project conditions, the FII route could be used to overcome the rules and bring in foreign investment.

All the company needs to do is get FIIs that are registered with Sebi to invest in the IPO. This is what the RBI is possibly objecting to.

According to a senior investment banker advising a real estate issuance, “The treatment should be different. The FDI manual issued by the government says foreign investments under the Portfolio Investment Scheme are not within the ambit of FDI policy.”

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