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

Centre May Interpret FDI Rule In Local Cos Favour

Foreign investment in property may see a change that could rescue several Indian realtors.

It will not require a Cabinet decision or a new Press Note issuance by the Government. All it will call for is a simple clarification one that could make or break many players in the local property market that has attracted close to $20 billion in the past 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 Joint Venture (JV) with an Indian developer while the rest of the money can be brought in at a later point, may be in tranches. Interestingly, the March 2005 Press Note 2, which spells out FDI rules, says: Original investment cannot be repatriated before a period of three years from completion of minimum capitalisation.

Till now, the interpretation has been that the three-year lock-in applies only to the original or minimum investment of $5 million and not to the entire money that the foreign investor puts in. This may see a change. There have been representations to the government to clarify that the repatriation rule and the lock-in should apply to the entire investment, and not just the initial capitalisation of $5 million. The change could be a boon to at least 30 Indian Real Estate groups, large as well as small, which had sold put options to foreign investors to bring in FDI. These put options required the Indian promoter to buy out the foreign investor. But grappling with a cash crunch, low 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 three years, the foreign investor will not be able to exercise the option immediately. This will give several cash-strapped developers time to organise money. More importantly, it will help them avoid distress sales and hang on to higher property prices. But some feel that the new interpretation, informally being spoken about by officials in the government, should not apply to deals that were signed before.