Worried over the substantial inflows of foreign funds into the real estate sector, the central bank has asked the government to allow FDI into the sector only after the clearance from Foreign Investment Promotion Board (FIPB).
At present, up to 100% FDI is allowed in realty projects on automatic route with certain conditions like a three-year lock-in on investments and minimum capitalisation of $5 million.
RBI wants real estate removed from the list of sectors where FDI can come in through the automatic route. RBI wants inflows routes like participatory notes (P-notes) and private equity contained. The market regulator Sebi is currently in the process of initiating moves to restrict investments coming in through P-notes.
Sources said the government, which has completely backed Sebi’s action to restrict P-note flows, may now not relent on other suggestions, especially restricting FDI. Also removing one sector from the automatic list, will be seen as a retrograde measure by foreign investors.
The reason for RBI’s concern stems from the fact that the sector witnessed a huge quantum of inflows in first four months of the current fiscal, surpassing the total inflow for the past two years. The FDI inflows in April-July, 2007, stood at $627 million, compared to $38 million in FY06 and $467 million in FY07.
The sector has witnessed substantial investor interest ever since FDI was allowed into the sector in 2005. There are also fears that some of the FDI could be ECB masquerading as FDI.
Since real estate companies are not allowed to raise external debt, there are reports of them using instruments like compulsory convertible debentures and offshore special purpose vehicles for borrowing abroad and then funnelling the funds to the parent in India as FDI.
This is not the first time, RBI has written to the government on the rising inflows into the sector. It had communicated its concern to the government last year as well. But, then it had not suggested any measures for a clamp down.
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