INDIA BUSINESS WORLD - MAY - JUNE 2007
The Month that was ...

REALTORS USE TAX HAVENS TO SNEAK IN THE DOLLARS

Smart investors are often a step ahead of rule-makers. The Indian property market is no different as bankers, lawyers and financial engineers may have already found a way to circumvent the recent clampdown on the rush of foreign money into the sector. The new route maybe more expensive and difficult but it can work. Regulators fear that some Indian firms are taking advantage of the liberal norms for setting up overseas subsidiaries to float companies in tax havens with a capital of just a few dollars. This wholly owned overseas subsidiary then emerges as the new vehicle to bring in money into the property sector.

One real estate group has already done this, almost immediately after the government banned preference shares as foreign direct investment (FDI) in the real estate sector.

Till date, a local company owned by an Indian developer was issuing preference shares or hybrid securities like convertible shares to the foreign investor. The money that came in was equity masquerading as debt. A few weeks ago, the government put an end to it.

What more and more developers will now do is get the investment at the overseas level, instead of receiving the money in India. The foreign subsidiary will issue preference and convertible shares to overseas investors and then invest it in a real estate project in Gurgaon or Pune.

The foreign arm's money into India will be shown as plain equity flowing through the automatic FDI route. As a foreign entity (though owned by a local group) will issue the preference shares, there's little that authorities can do. For the overseas investor, the risk is more as the investment would be in a company in Cyprus or Dubai and not directly in the Indian project.