The government is having a relook at the policy governing pre-Initial Public Offer (IPO) sale of shares by real estate companies to foreign investors, which could see the private placement of equity being classified as investment by financial institutions.
”The Department of Economic Affairs and Department of Industrial Policy and Promotion have come around to the view that the pre-IPO sale of shares by real estate companies should be given the status of FII investment,” sources said.
The Reserve Bank of India is, however, still to be taken on board as it is sticking to its earlier stand that as pre-IPO placement is made by the promoter on his discretion it must be treated as FDI.
The central bank has argued that Foreign Exchange Management Act (FEMA) needs to be amended if FDI in real estate has to be given the status of portfolio investment.
Real estate companies, which want to encash on the boom in the sector, have been seeking FII status for their pre-offer placement as many of their existing projects do not meet tough FDI norms.
The change in classification would provide relief to many of them who have lined up IPOs. As per the earlier norms, if the real estate companies would have raised funds from foreign financial institutions they would have been classified as Foreign Direct Investment.
To qualify for receiving FDI, all their projects should comply with the regulations on size. At present FDI is only allowed in projects spread over 10 hectares and the minimum investment should be above $5 million.