The government is planning to allow portfolio investment by foreign institutional investors (FIIs) in real estate companies through initial public offerings (IPO), follow-on public offers (FPOs) or private placement of shares that precede them.
This is a departure from the current policy under which FIIs can buy shares of real estate companies directly in the form of listed shares in the secondary market, or through investments in dedicated companies called special purpose vehicles (SPVs) linked to specific real estate projects. Or else, they need special permission in each case.
In a draft note for the Cabinet Committee on Economic Affairs made available to the Hindustan Times by reliable sources, the Ministry of Commerce and Industry says, "Investment by FIIs in pre-IPOs, IPOs, pre-FPOs and FPOs would be treated in the category of portfolio investment and not FDI." All investments under the Portfolio Investment Scheme, under Regulation 5(2) of the FEMA (Foreign Exchange Management Act) would be distinct from FDI, the note says. The latest move, which allows direct involvement in real estate companies as distinct from projects, is expected to benefit a number of big-ticket real estate companies such as Delhi-based DLF Universal and Omaxe Ltd.
Under the existing norms, foreign direct investment (FDI) is permitted in those projects, which meet FDI guidelines that prescribe a minimum area of 10 hectares or 50,000 sq metres, a minimum capitalization of $10 million for wholly owned subsidiaries and $5.5 million for joint ventures and a lock-in on repatriation for three years.
The government had a provision for case-by-case approvals for IPO-linked investments but permissions were denied in most cases. For instance, DLF was denied permission last July, an investment banker said.
“The department has been in receipt of a number of references from Indian real estate developers seeking clarification as to where the conditionalities for FDI in this sector would apply to investment by FII under the portfolio investment schemes in a public offer as well. While the Department of Industrial Policy and Promotion has issued clarifications on case-to-case basis, it has now been decided that a policy decision would be appropriate for distinguishing investment under the FDI scheme and that under the Portfolio Investment Scheme,” the Commerce Ministry’s note said.
However, investment in the pre- IPO or in IPO is also subject to lock-in for a period of 12 months from the date of listing, under SEBI guidelines, said a leading investment banker, who is managing some of the major IPOs of real estate companies, on condition of anonymity.