Sensing the need to increase the vigil on the foreign direct investment (FDI) in real estate and pharma, the government is planning to shift these two sectors from automatic approval system to the FIPB route.
This implies that pharma players intending to set up their Indian subsidiaries or buy stakes in Indian companies in these sectors will have to take prior nod of the foreign investment promotion board under the finance ministry.
In case of pharma, the government wants to put it on FIPB route in the context of recent spate of takeovers in the pharma sector and the impact of that on the domestic medicines market. 100% FDI is permissible in the sector.
As for the real estate sector, the department of industrial policy and promotion (DIPP) is of the view that it should take immediate steps to limit hot money flowing into the sector. Moreover, the government would also audit real estate projects for which the FDI is being brought in as it has received complaints of realty players diverting funds to projects including buying agriculture land for which FDI is not approved.
These key changes would be incorporated in the bi-annual FDI policy review due in April.
Since real estate companies are not allowed to raise external debt, there are reports of them using hy-brid instruments like compulsory convertible debentures and offshore special purpose vehicles for borrowing abroad and then funneling the funds to the parent in India as FDI.
RBI wants real estate removed from the list of sectors where FDI can come in through the automatic route. At present, up to 100% FDI is allowed in realty projects. on automatic route with certain conditions like a three-year lock-in on investments and minimum capitalization of $5 million.