Realty Inc may get to keep all foreign funds for 3 Yrs in nation Centre May Interpret FDI Rule In Local Cos'Favour

HECTIC lobbying is on to bring about a small change in the way a rule of foreign investment in property is interpreted - a change that could backfire on overseas investors but rescue several Indian realtors.

It will not require a Cabinet decision or a new Press note issuance by the government. All it calls for is a simple government clarification - one that could make or break many players in the local property market that has attracted around $20 billion in the last five years.

According to the foreign direct investment (FDI) regulations, a foreign investor has to bring in a minimum $5 million to participate in a JV with an Indian developer while the rest of the money can be brought in at a later stage, may be in tranches.

Incidentally, the March '05 Press Note 2, which spells out the FDI rules, says: "Original investment cannot be repatriated before a period of three years from completion of minimum capitalization."

Till date, the interpretation has been that the 3-year lock - in applies only to 'original' or ‘minimum' investment of $5 million and not the entire money that the foreign investor puts in.

For instance, if a foreign fund invests $100 million, the interpretation has been that it can recover and repatriate up to $95 million before 3 years while the balance $5 million can be repatriated only after 3 years.
But not any more, something the government would soon specify.
"We are expecting a change…. There have been representations to the government to clarify that the repatriation rule and the lock-in should apply to the entire investment and not just the initial capitalization of $5 million," said a large shareholder of a top property firm. The change could mean a boom to at least 30 Indian real estate groups, large and small, which had sold put options to foreign investors to bring in FDI though fancy deals.

But grappling with a cash crunch, slow demand and soft property prices, these developers are today not in a position to honour these options. And even if they can cough up the amount, they want to avert a large payout.
Under the circumstances, it the government spells out that the entire investment of the foreign investor is locked in for 3 years, the foreign investor will not be able to exercise the option immediately. This will give several cash-strapped property developers the time to organize money.