The government has decided to go with the Reserve Bank of India (RBI) and refuse FII status to foreign direct investment (FDI) received by real estate companies through private placement of equity.

The Department of Industrial Policy and Promotion (DIPP) in the commerce and industry ministry had gone with the RBI’s view that since an element of “discretion” was involved in pre-IPO private placement, it could not be treated at par with portfolio investment and must follow FDI norms.

According to sources, the RBI has taken a view that no relaxation can be given for FDI brought in through private placement by companies, whose projects are not in compliance with the guidelines of the DIPP.

Real estate companies, which want to encash on the investors’ increasing appetite for realty sector stocks, have been seeking FII status for their pre-offer placements as many of their existing projects do not meet tough FDI norms.

The RBI has argued that the Foreign Exchange Management Act (FEMA) needs to be amended if FDI in real estate has to be given the status of portfolio investment.

The central bank and the finance ministry have been trying to keep the leash on exposure of banks to the real estate sector, which continues to attract credit.

Market regulator the Securities Exchange Board of India (Sebi) has also tightened the disclosure requirement for real estate IPOs. According to industry sources, the public issues of two major realtors, which are awaiting observations from Sebi, are unlikely to be given a go-ahead in near future since the norms need further fine-tuning.