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FinMin gives 'realty check' for FII portfolio


FinMin gives 'realty check' for FII portfolio

Last updated: March 22 2007
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  • FinMin gives 'realty check' for FII portfolio

    In a move that has major ramifications for foreign institutional investors (FIIs) and real estate companies, the finance ministry has concluded that all pre-IPO placements to FIIs by realty players should adhere to foreign direct investment (FDI) regulations applicable to the sector. This means that all such investments would be subject to three-year lock-in, minimum capitalisation of $5 million and development of at least 10 hectares of land.

    A detailed proposal to this effect has been sent by the finance ministry for the consideration of the Cabinet Committee on Economic Affairs (CCEA). The finmin stand—based on inputs provided by the Reserve Bank of India (RBI)—has the potential to slow down FII investment in realty companies.

    It runs counter to the view of Department of Industrial Policy and Promotion (DIPP) and Securities and Exchange Board of India (Sebi) that pre-IPO placements should be considered as portfolio investment. All FII investment should flow in through the portfolio management scheme, DIPP had said during discussions on FDI in real estate.

    Nearly half of the over $4-billion foreign investments flowed into real estate in 2006 was through private placements. If CCEA endorses North Block’s rview, all forms of private placement or preferential allotment by real estate companies would be covered under the FDI stipulations.

    The RBI has opined that pre-IPO FII investments cannot be treated as portfolio investment. Under the Foreign Exchange Management Act (Fema), FII placements were originally envisaged as broker-intermediated transactions on the stock exchange and, therefore, formed part of portfolio flows. This is not the case anymore since regulations have been liberalised over the years to enable FIIs to invest in unlisted securities and private placements which are in the nature of FDI.
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