FII in Real Estate may face 3 year lock-in

The Finance Ministry has proposed a three year lock-in for investments made by foreign institutional investors (FIIs) in real estate firms through pre-IPO placements to check speculation in the booming sector.

Such a regulation, which brings FIIs on par with foreign direct investments (FDI), would require a change in FII norms and market regulator SEBI is expected to amend regulations in this regard shortly.

The regulator is expected to take up the issue of amending SEBI (FIIs) Regulations, 1995 at its next meeting scheduled in Mumbai on June 30, said official sources.

Finance Ministry has supported the views of Reserve Bank, which wanted a lock-in period for FIIs as part of its strategy to curb the rising speculations in the real estate sector, the sources said.

The government may also have to amend Foreign Exchange Management Act to put in place the lock-in, they said.

Earlier, the Department of Industrial Policy and Promotion (DIPP) and SEBI had recommended that pre-IPO placements by FIIs must be treated as portfolio investment and should not face a lock-in.

Sources said Finance Ministry has rejected the views of DIPP and SEBI, and has asked the regulator to amend rules making it mandatory for real estate firms to have a three-year lock period for FII investments through pre-IPO placements.

In the meantime, real estate companies which had sought permission for pre-IPO placements with FIIs had been asked to wait as guidelines had not been firmed up, the sources said. Although FIIs investing in real estate sector through pre-IPO placement are likely to face a three-year lock-in, they may be exempted from other conditions such as minimum capitalisation and area development that are applicable to real estate FDIs, the sources said.

With rising property prices, the sources said, Finance Ministry and RBI want to put curbs on FII investments in the sector, claiming that a lock-in period would prevent building up of a possible real estate bubble.

The government has allowed up to 100 per cent FDI in realty projects with conditions like a three-year lock-in, minimum capitalisation of five million dollars and development of at least 10 hectares of land.

At least seven realty, construction and infrastructure companies, including Omaxe, have lined up offers to raise a total of over Rs 6,000 crore from the market.

Although RBI has put various restrictions on real estate firms to raise funds overseas, many companies mopped up funds by promised hefty returns to foreign investors through investments ahead of IPOs.

As per industry estimates, nearly half of the over four billion dollars of foreign investment that was pumped in the real estate sector la