Lock-in Period on NRI Investments in Real Estate Likely

To further restrict foreign investment
in real estate India ,
the Government is preparing to introduce a lock-in period for
non resident Indians who invest in projects prior to an initial public
offer.

This regulation is currently binding only on foreign institutional investors
(FIIs).
Opportunistic investments in IPOs of real estate companies and
sudden withdrawals may cause a real estate bubble, the Government fears,
and hence the precaution.

The lock-in period for 3 years on NRI
investments of the kind, would dissuade the promoter from surreptitiously
directing his money through the NRI route, as is the practice of late.
Accordingly, the Foreign Exchange Management Act would also be
amended.

Real estate companies planning IPOs would have to make
adjustments to meet the new norms which would be elaborated on
shortly.

Some companies have been asked to hold back their IPO placements
till the Government issues guidelines on foreign investment in
real estate in India.

Currently, the norms allow 100% FDI in real estate
projects but with a lock-in of 3 years, a funding of al least
USD 5 million and development of 10 hectares of land.

These regulations
apply to NRI investors and foreign investors.
The Department of Industrial Policy and Promotion and the Finance
Ministry were divided on the issue of pre-IPO placements.

DIPP
is in favour of categorizing pre-IPO placements to FIIs as portfolio
investment, while the RBI and the Finance Ministry argue in favour
of such investments being treated as FDI.

The USD 4 billion investment
that came into real estate in 2006 was through private placements.