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September
26, 2006
Reality
check for FVCIs
The Indian government has
reportedly asked the Reserve Bank of India ("RBI") to
approve the long-pending applications by prospective investors for
registration as an FVCI, wherein the investor had indicated
that it wishes to invest in the Indian real estate sector or in
companies dealing in real estate. Some of the FVCI applications
with similar investment objectives were not being approved for
over 6 - 8 months, since the RBI did not seem comfortable with
FVCIs investing in this sector, with possible reasons being that
such investments may not be consistent with India's foreign direct
investment ("FDI") policy for the real estate sector. The
directive may have been issued since such delays were sending
wrong signals in the marketplace and contrary to the general view
was that the Indian government was actively promoting foreign
investment in the country.
Applications for
registration as an FVCI are to be submitted to the Securities and
Exchange Board of India ("SEBI") under the SEBI (Foreign
Venture Capital Investor) Regulations, 2000. However, as part of
the approval process, SEBI internally requires the approval of the
RBI, before SEBI finally grants the registration. In recent times,
FVCI applicants that were not investing in the Indian real
estate sector were required to give an undertaking to the RBI that
they will not invest in the real estate sector and that their
non-real estate investments will comply with the FDI policy. It is
only upon submission of such an undertaking that RBI was willing
to grant its approval to SEBI. Incidentally, in April 2004, SEBI
had removed the real estate sector from the negative list
prescribed under the third schedule of the FVCI Regulations,
thereby allowing FVCIs to invest in this sector.
Implications:
TThe Indian real estate
sector has been generating considerable interest among foreign
investors in recent times. In light of the so-called embargo, the
only route available for foreign investors for investments in the
Indian real estate sector is the FDI route, wherein the investor
can invest up to 100%, subject to compliance with the conditions
and restrictions (including minimum capitalization requirement)
placed under Press Note No. 2 of 2005. However, assuming that RBI
may now allow FVCIs to invest in the Indian real estate sector,
this is likely to open up a new investment route for potential
foreign investment in this sector.
Whether the RBI is likely to
prescribe any specific conditions and/or restrictions for FVCIs'
investment in this sector, remains to be seen. It also needs to be
ascertained whether the additional benefits that are generally
available to FVCIs over FDI (for example, exemption from entry and
exit pricing norms, exemption from lock-up post initial public
offering, etc.) would continue to be available to FVCIs investing
in this sector. Clarifications may also be necessary with respect
to the applicability of Press Note No. 2 of 2005 to investments
made by FVCIs in this sector.
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Source:
The Economic Times, Mumbai edition, September 25, 2006
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