The government on Monday tightened guidelines for companies using the preference share route to raise foreign investment. This will likely curb flow of funds into the realty sector. The guidelines, which took effect on 30 April, treat non-convertible, optionally-convertible or partially-convertible preference shares as debt and require foreign investment through them to meet the norms for external commercial borrowing (ECBs). The move to treat non-convertible or partially-convertible preference shares as debt was dubbed “retrograde” by Goldie Dhama, principal consultant, PricewaterhouseCoopers.
ECBs have stringent end-use guidelines; in real estate, they restrict investments to integrated township projects. Some foreign investment into real-estate sector comes through preference shares, said an analyst at a realty consultancy, who did not wish to be identified. The guidelines also said that convertible preference shares would be treated as equity and would be included in calculating foreign equity for sectoral caps.