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

FOREIGN venture capital funds' (VCFs) realty dreams are stuck on Mint Street . RBI has cited concerns relating to valuation practices in the real estate sector, besides the eligibility of overseas VCFs to invest in it. The central bank had opposed investment by foreign VCFs in real estate in the past too.

The Reserve Bank has also questioned whether real estate can qualify as a promotional activity for foreign capital funds. Close to a dozen foreign VCFs have submitted proposals seeking to invest over $1 billion in the realty sector.

The meeting of the High Level Committee on Capital and Financial Markets (HLCC) on Friday, which the discussed VCF issue, also did not make much headway on allowing overseas portfolio investors to participate in the stock lending and borrowing scheme.

The high-level committee has decided to study the proposal, hanging fire for more than eight months, in greater length.

A review will now be undertaken after the exercise is completed after two months, officials said.

RBI governor heads this panel, which monitors major developments in the financial sector and seeks to co-ordinate policy responses. Chiefs of all major regulatory bodies — Sebi, Irda and PFRDA — are members of the committee.

Venture capital funding proposals were approved by Sebi last year but there has been no movement after the apex bank raised objections.

LAST YEAR, the central bank had opposed it saying they violated FDI norms, which restrict investment in realty. RBI's worries stem primarily on account of a possible build up of asset prices which could have an adverse impact on inflation and financial stability. A sustained rise in the price of real estate out of sync with the fundamental value could lead to an asset price bubble. Central banks world over are watchful of such a development and RBI is no exception. To prick such a bubble, the monetary authorities generally resort to tightening or raising interest rates to ensure a slow down.

A few months ago, RBI had sounded a caution on the dangers of a possible asset price bubble when stock prices and property prices moved up in tandem. Since then banks have been told to keep aside more capital when lending to the real estate sector and also for housing. At the back of the regulator's mind could be the economic turmoil faced by some countries including in the Far East after an asset price bubble burst. An unstated reason could be worries on the quality of capital flows.

It is not just RBI which is worried. Head of India's leading housing mortgage firm — HDFC — Deepak Parekh has also voiced his concerns regarding the heating up of property prices in major parts of the country, especially Mumbai. He reckons prices have to come down from the current highs saying that they were unsustainable and could hurt the market.

On stock lending & borrowing, while Sebi and finance ministry feel an efficient mechanism for institutional investors could reduce volatility, the central bank thinks otherwise. Allowing overseas portfolio investors to participate in such a programme could only add to volatility besides making the audit trail difficult in the context of the Know-Your-Client norms. RBI has also said t the proposal could violate the Foreign Exchange Management Act (Fema).

RBI has suggested that the scheme could instead be extended to local institutional investors only. This has not found favour with Sebi which says that such a move would result in fragmenting the market.