The Reserve Bank of India (RBI) has stopped clearing applications from several real-estate companies that were hoping to tap overseas investors ahead of their plans to launch domestic initial public offerings (IPOs).
The decision by the central bank, which could have a dampening effect on IPOs from real-estate companies, stems from confusion within the government regarding foreign investment in the real-estate sector.
A person familiar with the situation said RBI, which had earlier been clearing proposals by Indian real-estate companies for firm allotment of equity to foreign portfolio investors on a case-by-case basis, has now decided wait until the Union cabinet takes a clear view on allowing foreign institutional investors (FIIs) to be treated as distinct from foreign direct investment (FDI.)
RBI has cracked down as it suspects some real-estate companies are classifying foreign direct investors as foreign portfolio investors. Portfolio investors, or FIIs, can sell their stake after a year, while foreign direct investment in a company is locked in for three years, making the FII route an easier one to get foreign investment prior to a domestic IPO.
Two government officials confirmed the move to Mint.
“Since the concerns (were) raised by the Reserve Bank on the matter, we have been given to understand that there is a go-slow approach on all the applications of real-estate companies pending for listing on the bourses,” a top government official, who did not wish to be identified, said. Another official said that at least one real-estate company, which had been waiting on its proposal for a firm allotment, has withdrawn its application. The identity of that firm could not be ascertained.
The industry ministry, the nodal department dealing with foreign direct investment, has circulated a cabinet note seeking clarification on the treatment of foreign investment in real estate. The ministry is itself in favour of treating FDI and FII separately.
“We are of the view that the present stipulation under the Foreign Exchange Management Act of placing FDI under Schedule I and FII seperately under Schedule II should continue,” an industry ministry official said.
The RBI rules on FII provide a window that permits real estate companies to undertake a private placement of shares before an IPO. Such private placements bring in definite capital but also help reinforce the subsquent public offering in the minds of domestic retail and institutional investors. Because of the misuse, RBI’s contention now is that such private placement investments should be treated as FDI while the industry ministry, the nodal department for FDI policy, feels that RBI should continue to treat them as FIIs.
While treatment as an FII allows the company to lock its capital for only a year, the Press Note 2 (2005), which covers FDI in real estate, lays down that the original investment cannot be repatriated before a period of three years from the date of obtaining all statutory clearances.
The Press Note also lays down a minimum capitalization of $10 million for wholly-owned subsidiaries and $5 million for joint ventures with Indian partners. Further, the funds have to be brought within six months of the commencement of the business of the company.
Officials said the capital markets division of the finance ministry supported the contention of the central bank, while the department of economic affairs was yet to submit its views on the cabinet note.
The real-estate sector has been in turmoil in recent months as many listed companies have seen their share prices plummet.
Seven real-estate companies have filed with the stock market regulator seeking approval for public offerings of their shares.