INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

FIIS GET RBI NOD FOR REALTY PRE-IPO FUNDING

  IN A MOVE that will impact the IPO plans of a host of real estate companies, the Reserve Bank of India has said that FIIs can participate in the pre-IPO placements of these companies. In a recent communication to the finance ministry, the apex bank has said that shares picked up by FIIs in pre-IPO placements would be subject to a lock-in of three years, which is currently stipulated for foreign direct investment (FDI). However, the pre-IPO placements to FIIs will not attract conditions laid down under Press Note 2 of 2005 which prescribes minimum built-up area and capitalisation for FDI in real estate projects.

Till now, FII participation was not allowed in pre-IPO placement of any real estate company. The question did not arise since not many real estate companies were going for IPOs and pre-IPO placements. The policy on such investments gained significance after DLF and a number of other real estate companies came out with plans for IPOs. The RBI has generally been wary of foreign inflows creating a real estate bubble in the economy.

While 100% foreign direct investment (FDI) is allowed in real estate, automatic clearance is available only to projects which adhere to the minimum built-up area and capitalisation criteria.