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FDI in real estate


FDI in real estate

Last updated: May 11 2007
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  • FDI in real estate

    In Its zeal to enforce foreign direct investment (FDI) norms in the real estate sector, the government is becoming entangled in micro-regulation that runs the risk of stifling the flow of such investments. The FDI norms for the real estate sector — framed through the Press Note 2 (2005) over two years ago — were clearly designed for the simplistic situation of single projects from unlisted companies.

    A host of restrictions including minimum project size in terms of area and a lock-in period were imposed to keep out speculative foreign capital. They did not take into account the fact that real estate companies could be listed. All problems flow from this basic issue. After labelling all pre-IPO investment or private placement to foreign institutional investors (FII) in real estate companies as FDI, the government has now decided to bar real estate companies from issuing depository receipts (ADRs or GDRs). The logic of the move is simple.

    All foreign investment through GDRs and ADRs is to be treated as FDI, which is subject to a three-year lock-in, in the case of real estate companies. Since depository receipts are tradable instruments in the overseas market they are listed, the change in ownership arising out of such trading violates the prescribed lock-in. Hence the ban. So the problem is not one of interpretation of the guidelines, which has resulted in these measures, rather one of the regulations per se, namely the three-year lock-in.

    Even if foreign equity were to move out, it would be at the expense of some other shareholder and not those who may have invested in projects developed by the company. In other words, speculation, if any, would be through stock market and not property markets. Besides, these companies are an agglomeration of various projects, some compliant with FDI norms and others not, and may find it difficult to comply with the eligibility norms. The government would do well to appreciate the varied nature of real estate sector and frame rules accordingly.
Tags: estate fdi real
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