New Delhi: A government clarification on foreign investment in real estate may help some firms tide over their current cash crunch but could adversely affect long-term investment sentiment, analysts said.
The department of industrial policy and promotion (DIPP) has made it clear that the lock-in period of three years applicable on foreign investments in realty projects—under Press Note 2 of 2005 series—is for the entire investment, against a previous understanding that it applied only for the initial investment.
“We do not know what was the interpretation previously. But the press note meant the lock-in period is applicable for the entire investment. We have already clarified that and we stand by that,” said a DIPP official who spoke on condition of anonymity.
An official of an audit firm said foreign investors who have put money into real estate projects in India have been lobbying hard for the earlier interpretation. He, too, declined to be named.
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The DIPP had clarified on its bulletin board on 15 July that “original investment means the entire investment brought in as FDI (foreign direct investment) for the purpose of taking up PN 2 (2005) compliant construction development projects which would then remain locked in for three years.” Responding to a further query, the department on Thursday clarified on its bulletin board that “the clarification posted recently (on 15 July) is the correct policy position”.
“This may help some real estate players in the short run, who are under contractual commitment to pay back to their foreign investors,” the audit firm official said.
According to the press note, the government allows FDI up to 100% in townships, housing, built-up infrastructure, and construction and development projects. Minimum capitalization of $10 million (Rs48.5 crore) is required to set up wholly-owned subsidiaries and $5 million for joint ventures with Indian partners, the 2005 note had said.
It also said that the original investment cannot be repatriated before three years from completion of minimum capitalization. However, the investor was permitted to exit earlier with prior approval of the government through the Foreign Investment Promotion Board. Previously, it was understood that original investment meant initial investment. The DIPP has now clarified that it implies total investment.
Audit firms who represent foreign investors in India consider this a negative move from the perspective of foreign investors. “With this change in interpretation, India would be perceived as high on regulatory risk. This will hit small and medium realty firms as they rely more on private equity funding,” said Jai Mavani, head of infrastructure and government at KPMG. “This will also have negative impact on investor sentiment.”
Akash Gupt, executive director at PricewaterhouseCoopers, said the change in interpretation may affect capital inflows into the sector. “Earlier, government had issued clarification through various communications that original investment means the initial capitalization. Though most of the foreign investors have a long-term exposure, it sends a negative signal. It would give investors cold feet on regulatory risk in India. They may not like to invest in such jurisdiction.”
In 2008, there were 77 private equity deals in the real estate sector, which raised $8.4 billion. In the first half of the current year till June, there were only 12 deals that together managed to raise $582 million.
Property developers are divided in their opinion on the impact of the new interpretation. R. Nagaraju, general manager, corporate strategy and planning, Unitech Ltd, said: “I do not think the lock-in period will affect genuine investors because in the real estate sector gestation periods are very long.” However, he added that there are some other investors who bring in capital by showing it as equity whereas it is actually debt. “Such investors may be impacted,” he said.
However, Kabul Chawla, managing director at realty firm BPTP Ltd, said it would have a negative impact on the sector.
Ajay Mangal, director, finance, Uppal Group, echoed a similar view. “Earlier, funds used to draw down a part of investment whenever pre-sales happened in residential projects. However, now they cannot do so.” He said developers would ultimately lose out on foreign funding in residential projects, not so much in commercial projects.
An official with a global private equity fund, who did not want to be named, said anybody who has made a short-term investment will be impacted.
“If some fund is investing with a long-term vision, then it will not have any impact because projects in any case take at least three years to be completed,” he said.
Graphics by Ahmed Raza Khan / Mint