DIPP faces finmin roadblock over lock-in for FIIs in real estate cos

The Department of Industrial Policy and Promotion’s proposal on FII investment in realty is all set to face opposition from the finance ministry when the Cabinet considers it for approval. DIPP in a note to the Cabinet has proposed that pre-IPO placement to FIIs should not be subject to the three-year lock-in applicable to foreign direct investment in the sector.
It is understood that DIPP decided to go ahead with the proposal, which is a part of the annual FDI review exercise, despite finance ministry reservations. The finance ministry has consistently held that FII investments routed through private placements ahead of a public offer should be treated on par with FDI. DIPP has circulated a note which is expected to be taken by the Cabinet soon.
The government allows up to 100% FDI in real estate projects with certain conditions like a three-year lock-in on investments, minimum capitalisation of $5 million and development of at least 10 hectares of land.
North Block and RBI are against treating FII investment in a company prior to a public offer as portfolio investment. They want FDI guidelines and sectoral conditionalities to be followed in letter and spirit.
Sources said though the Foreign Exchange Management Act (FEMA) did not prescribe any restriction on FII investment in sectors where 100% FDI is permitted, the guidelines could not be applied mechanically to a sector like real estate where the FDI policy prescribed certain conditionalities. This is especially in the backdrop of the concerns expressed by RBI.
The central bank, worried over a possible build up of an asset bubble due to large inflows of foreign funds, now wants the government to allow FDI into the sector only after clearance from the Foreign Investment Promotion Board (FIPB). It even wants government to restrict private equity flows into the sector.
FDI inflows into real estate in April-July 2007 stood at $627 million, compared to $38 million in FY06 and $467 million in FY07.

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