The Reserve Bank of India has asked the government to open the doors for FDI into real estate sector only after the clearance from Foreign Investment Promotion Board (FIPB).
Currently, up to 100% FDI is allowed in realty projects on automatic route if it complies with certain conditions like a three year lock in period on investments and minimum capitalization of $5 million.
The RBI wants to take property market out of the sectors which allows FDI through the automatic route. It wants inflows routes such as participatory notes and private equity contained. SEBI is planning moves to curb funds coming through P-notes.
The government however supports the SEBI action but may not change its mind regarding other suggestions, especially restricting FDI.
Since the property market received large quantum of inflows in April-July, 2007 i.e. $627 million, surpassing the total inflow received in the last two years: $38 million in FY06 and $467 million in FY07, the concern of RBI is justified.
Since construction companies don’t have the permission to raise external debt, they are using other tools such as compulsory convertible debentures and offshore SPV for borrowing the capital abroad and then funneling the funds to the parent in India as FDI.
Source: If I recall correctly; The Economic Times.
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