Manoj Misra

Today's Economic Times has run this story as the top story..

________________________________________________
NRIs may face 3 year pre-IPO realty lock-in
DEEPSHIKHA SIKARWAR

TIMES NEWS NETWORK[ TUESDAY, JUNE 05, 2007 12:00:43 AM]

NEW DELHI: The government is planning to plug another potential source of foreign funds for the real estate sector. Non-resident Indians planning to invest in real estate projects ahead of initial public offers could face a three-year lock-in along with foreign institutional investors (FIIs).

The government is planning to introduce a lock-in for pre-IPO FII investors in realty companies in bid to prevent a possible real estate bubble. The restrictions are also aimed at checking sudden flight of capital.

By putting a lock-in period for NRIs, the government could also effectively discourage the promoters' own funds coming into the company through the NRI route. Indian promoters are generally known to use NRIs as fronts to get their own money abroad invested in their companies. A lock-in period might act as a deterrent for promoters bringing such funds through the NRI route.

The government is likely to amend the Foreign Exchange Management Act to make all pre-IPO investments face a three-year lock-in, a government source said. However, the other conditions such as minimum capitalisation and area of development will be limited to foreign direct investments.

Real estate companies which are planning to hit the capital market will have to tweak their plans to meet the proposed norms, expected to be notified shortly. Some real estate companies that have sought permission for making pre-IPO placement to FIIs have been told to wait till the government finalises the foreign investment norms for the real estate sector.

Up to 100% FDI is allowed in realty projects with certain conditions like a three-year lock-in on investments, minimum capitalisation of $5 million and development of at least 10 hectares of land. These conditions are applicable on all foreign investors, including NRIs.

Earlier, there were differences between the Department of Industrial Policy & Promotion and the finance ministry on the treatment of pre-IPO placements. DIPP had favoured treating pre-IPO placement to FIIs as portfolio investment.

However, the Reserve Bank and the finance ministry were of the view that pre-IPO investments by FIIs cannot be treated as portfolio investment and the FDI norms be adhered to. Nearly half of the over $4-billion foreign investments which came in real estate sector in 2006 was through private placements.

-----------------------------
Key points:

1. NRI's should keep a track on this development and see how this impact's their investment strategy.

2. Will this restriction (of 3 years lock in), really slow down FDI inflow in realty?

What's your take?

__________________
Manoj Misra

Get a different view...