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FIIs
can invest in Real Estate IPOs
In a market place
that is hungry for anything which is in connection with real estate,
there is some good news, Foreign Institutional Investors ("FIIs")
can invest in real estate Initial
Public Offerings ("IPOs") and pre-IPO placements.
Department
of Industrial Policy and Promotion ("DIPP") under the Ministry
of Commerce and Industry has clarified that FIIs are allowed to
take part not only in the IPOs by real estate companies, but can
also participate in pre-IPO placements undertaken by such real
estate companies without regard to the Foreign Direct Investments
("FDI") stipulations since the FIIs investment is under the Portfolio
Investment Scheme and not under the FDI route.
What
this means is that FIIs will not be required to comply with the
conditions and restrictions under Press Note 2 of 2005 issued
by DIPP, which are applicable to FDI investments in real estate
sector ("Press Note 2"). Press Note 2 allows 100% FDI
in the real estate construction and development sector under the
automatic route, subject to the fulfillment of certain conditions
stipulated therein, and are primarily with respect to minimum
land size, built up area of the construction and capitalization
norms.
Analysis
The
conditions and restrictions for investment under the FDI route
are governed under Schedule 1 of the Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000 ("FEMA Regulations"), while those for the investment
by FIIs are separately governed under Schedule 2 of the FEMA Regulations.
Prior
to the above clarification, it was uncertain if FIIs could invest
in real estate IPOs or pre-IPO placements, if the project concerned
was a non-FDI compliant in accordance with Press Note 2.
In
view of the above, at the time of IPOs, real estate companies
like DLF Universal Limited, GMR Infrastructure Limited and Parsvanath
Developers Limited had approached DIPP for clarification on whether
FIIs can participate in pre-IPO placements and IPOs of such companies.
In response to which the DIPP has clarified the position by stating
that FIIs are allowed to participate in such IPOs, since, as stated
earlier, investments in such companies (by way of subscription
in IPOs or by way of pre-IPO placements) is governed under a separate
schedule to the FEMA Regulations.
Implications
The
clarification from DIPP is a positive step towards clearing the
uncertainties regarding FIIs participation in real estate IPOs.
In addition to this, such a clarification would also have a major
impact on future IPOs by real estate companies, more particularly
considering the number of such issuances as well as the size of
the offerings. Having said this, it would be prudent to wait for
the views of the Reserve Bank of India on this issue.
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You
can direct your queries or comments to the authors
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Source:
The Economic Times, May 26, 2006
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