Realty Inc may get to keep all foreign funds for 3 yrs

Realty Inc may get to keep all foreign funds for 3 yrs
The Economic Times, July 20, 2009, Page 1

Centre May Interpret FDI Rule In Local Cos’Favour

Sugata Ghosh MUMBAI

HECTIC lobbying is on to bring about a small change in the way a rule on foreign investment in property is interpreted—a change that could backfire on overseas investors but rescue several Indian realtors.

It will not require a Cabinet decision or a new Press Note issuance by the government. All it calls for is a simple government clarification—one that could make or break many players in the local property market that has attracted around $20 billion in the last five years.

According to the foreign direct investment (FDI) regulations, a foreign investor has to bring in a minimum $5 million to participate in a JV with an Indian developer while the rest of the money can be brought in at a later stage, may be in tranches.

Incidentally, the March ‘05 Press Note 2, which spells out the FDI rules, says: “Original investment cannot be repatriated before a period of three years from completion of minimum capitalisation.”

Till date, the interpretation has been that the 3-year lock-in applies only to ‘original’ or ‘minimum’ investment of $5 million and not the entire money that the foreign investor puts in.

For instance, if a foreign fund invests $100 million, the interpretation has been that it can recover and repatriate up to $95 million before 3 years while the balance $5 million can be repatriated only after 3 years.

But not any more, something the government would soon specify.

“We are expecting a change....There have been representations to the government to clarify that the repatriation rule and the lockin should apply to the entire investment and not just the initial capitalisation of $5 million,” said a large shareholder of a top property firm.

The change could mean a boom to at least 30 Indian real estate groups, large and small, which had sold put options to foreign investors to bring in FDI through fancy deals.

But grappling with a cash crunch, slow demand and soft property prices, these developers are today not in a position to honour these options. And even if they can cough up the amount, they want to avert a large payout.

Under the circumstances, if the government spells out that the entire investment of the foreign investor is locked in for 3 years, the foreign investor will not be able to exercise the option immediately. This will give several cash-strapped property developers the time to organise money.

PRESENT SCENE

The 3-year lockin clause is being extended only to the ‘original’ or ‘minimum’ investment of
$ 5 million in a realty JV, and not the entire amount a foreign investor brings in

THE DEMAND

Indian realty cos now want the govt to clarify that the repatriation and lock-in rule should apply to the foreign entity’s entire investment

THE IMPACT

At least 30 Indian realty groups stand to gain. If total investment is locked, a foreign investor will be unable to exercise the put option sold to it. Also, Indian cos will get time to raise funds & avoid distress sales

FUTURE LOCK

Many experts think the new interpretation must not be applied retrospectively.