New Delhi: The window currently available to foreign institutional investors (FIIs) to buy equity of realty firms ahead of an initial public offering (IPO) is being shut.
As a result, these investors would be able to buy realty companies’ equity only during an IPO and subsequently in the secondary market. The finance ministry has concluded that if FIIs wish to invest in a pre-IPO placement of realty companies, the investment would be classified as foreign direct investment, or FDI, which is subject to a longer lock-in period.
This decision is likely to adversely impact the extent of money that realty companies can raise in the run-up to an IPO. The move, to be applied prospectively, would not impact pending applications. Five realty IPOs, including DLF Ltd’s, have such applications before the capital market regulator, Sebi.
The decision of the finance ministry, the government’s final decision maker in FII policy, will soon be formally communicated to the industry ministry, said a senior finance ministry official who didn’t want his name disclosed. A senior official of the industry ministry confirmed that his ministry is yet to receive a formal communication on the matter. The industry ministry, which is of the opinion that FIIs should be allowed a pre-IPO window, had asked the finance ministry to remove the ambiguity after the Reserve Bank of India (RBI) recently stopped clearing applications of realty companies planning to tap FIIs ahead of the proposed IPOs.
Closing the pre-IPO window of FIIs will not have a significant impact on the investments flowing into realty companies, maintains Sanjay Verma, joint managing director, Cushman & Wakefield (India) Pvt. Ltd, a real-estate consultant. Overseas investment is flowing in through private equity firms and FDI, he noted.
Others tracking the real-estate industry disagree with the finance ministry’s conclusions, saying that FIIs ought to be given a window to buy shares during a pre-IPO placement. “It is the nature of the investor that is important. FIIs have a specific role to play and if the FII invests pre-IPO, how does that role change?” asked Vivek Mehra, executive director at PricewaterhouseCoopers.
“FDI is where the person invests with management rights. So, a pre-IPO FII remains a financial investor and hence it (investment) should continue to be treated as an FII investment.”
The current law does not treat FII and FDI investments the same way. FDI has a lock-in of three years, while FIIs have a lock-in period of one year. Because of the recent boom in Indian real estate, it has attracted a lot of attention—and money—though accompanied by talk of a pricing bubble.
Once the lock-in period is increased for FIIs, pre-IPO investments in realty companies become less attractive.
RBI, which also enforces India’s foreign exchange laws, has viewed the flow of bank credit to the real-estate sector with growing concern.
The central bank is also concerned about the source of money flowing into the real-estate sector; FII roots are harder to trace than FDI.
The management rights that come with FDI make it easier to identify the origin of the money.