Rising foreign fund inflows in the real estate India sector has the Central Bank worried which has led it to ask the government to allow FDI into the sector only after the clearance from Foreign Investment Promotion Board (FIPB). The immediate steps the RBI wants to embark include real estate struck off from the list of sectors where FDI can come in through the automatic route.

The RBI aims to contain the inflow/investments from routes like participatory notes (P-notes) and private equity. However, the general feeling is that restricting FDI and removing the sector from the automatic list, may not be taken well by foreign investors.

The market watchdog, Sebi is currently in the process of restricting P-note flows. The government has sided with it. The real estate sector in India has caught substantial investor attention ever since FDI was allowed into the sector in 2005.

Alleviating RBI’s concerns is the fact that the sector has witnessed inflows of $627 million, in the first four months of the current fiscal that seem out of character, as against $38 million in FY06 and $467 million in FY07.

The fear is that some of the FDI could be ECB disguised as FDI. At present, up to 100% FDI is allowed in realty projects in the automatic route with stipulations like a three-year lock-in on investments and minimum capitalization of $5 million.

Real estate companies have reportedly resorted to instruments like compulsory convertible debentures and offshore special purpose vehicles for borrowing abroad and then directing the funds to the parent in India in the garb of FDI.

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