Corpsec Hotline
May 26, 2006
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.

 

You can direct your queries or comments to the authors

 

 

Source: The Economic Times, May 26, 2006

Disclaimer

The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This Hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This Hotline does not substitute the need to refer to the original pronouncements.

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Corpsec Hotline

May 26, 2006

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.

 

You can direct your queries or comments to the authors

 

 

Source: The Economic Times, May 26, 2006

Disclaimer

The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This Hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This Hotline does not substitute the need to refer to the original pronouncements.

This is not a Spam mail. You have received this mail because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a mail cannot be considered Spam if it contains the sender's contact information, which this mail does. In case this mail doesn't concern you, please unsubscribe from mailing list.

NDA Connect

Connect with us at events, 
conferences and seminars.