FDI policy on equity relaxed, realty to gain

Real estate companies starved of funds can breathe a sigh of relief.

Real estate companies starved of funds can breathe a sigh of relief. Notwithstanding the RBI?s reservations, the government has decided to restore the flexibility for them in raising money through equity instruments with inbuilt options under the FDI policy. This would mean that foreign investors who retain the option of exiting with assured returns would be able to invest in Indian real estate projects.

The Department of Industrial Policy and Promotion (DIPP) had amended FDI rules on September 30, stating that if a non-resident entity/person was given a choice to convert the equity into debt, it won’t be reckoned as FDI. Since external commercial borrowings (ECB) are virtually barred in the real estate sector, this meant shutting off foreign funds for real estate projects, at a time when domestic funds are costly. DIPP’s September 30 circular said: ?…equity instruments issued/transferred to non-residents having inbuilt options or supported by options … of any type would lose their equity character and such instruments would have to comply with the extant ECB guidelines.? In a fresh circular on Monday, the department said these rules ?now stand deleted?.

A top DIPP official told FE, ?Yes, RBI had suggested us to introduce this clause but we are not in agreement with this. That is why we have deleted it.?

In this regard, DIPP had earlier written to secretary-economic affairs R Gopalan requesting RBI to hold the notification of the clause. DIPP in its letter had cited that the changes, if brought into force by RBI, would affect raising of resources from the private equity (PE) funds, which buy into the small Indian companies expecting high yields after they grow and get listed. The PE players wanted to retain an exit route, known in the market parlance as the ?put option?. But the trend did not go well with the RBI which felt it would add to the country?s external debt.

“We had asked the finance ministry to advise the Reserve Bank of India (RBI) not to notify the September 30 FDI rule as it was at the instance of the RBI that the stringent provision for overseas equity was included in the FDI policy. However, we received adverse feedback from a number of stakeholders stating it could have negative fallout, particularly for the SME (small and medium enterprises) sector.? the official added.

Besides, on Friday, DIPP had also pitched for bolstering infrastructure financing. The ministry said that the government should use part of its foreign exchange reserves to set up the sovereign wealth fund (SWF) as has been done by countries like China, Korea and Singapore. Here again, the department is at loggerheads with the RBI. I its discussion paper, DIPP highlighted that “while the Reserve Bank of India has reservations about the issue, this (SWF) option needs to be explored.”

Both the moves, show that a tough stand of RBI is either limiting options for DIPP to introduce new proposals or reserving the departments rights to facilitate funds flow to the high-growth areas of the economy.

When asked about such stands by RBI the official said, “Let RBI have reservations and suggest what they have to. We as policymakers feel that the creation of SWF needs to be done to address the infrastructure deficit of the country. We don’t function as per RBI. Industry ministry has to take care of the industry issues,” the official said, asking not to be quoted.

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First published on: 01-11-2011 at 01:11 IST