Participatory Notes (P-Notes): Good or Bad?

The India Street Analysis

By Sundaramurthy Vadivelu

What are (Participatory Notes) P-Notes?

P-Notes are financial instruments or contracts that are issued by FII’s to investors and hedge funds who wish to invest in India stock markets, but who are not registered with SEBI (Securities and Exchange Board of India).

This is similar to American Depository Receipt; Though the US investor buys the Indian stock by paying US dollars, he never gets the stock credited into his demat account. Instead it remains as depository share, which can be traded like a stock.

How are P-Notes regulated?

According to the statistics available at the SEBI web site, there are 109 registered FII’s as on today, of which 34 Issue P-Notes. FII’s who issue/renew/cancel/redeem P-Notes need to report details about the P-Notes on a monthly basis not later than 7 th of the following month. FII’s investing/subscribing to the P-Notes -- are required to report on quarterly basis.

SEBI has given some guidelines as to who can invest in P-Notes:

• Company incorporated according to the local laws in the country of registration

• Financial institution, such as bank which is monitored by a central bank

• Securities or futures commission

• Member of a recognized stock exchange

According to SEBI Chairman M Damodaran, 25 to 30 per cent of the foreign investment is through issuance of participatory notes.

Proposal by SEBI:

On October 16, the SEBI made a proposal to tighten the regulations for P-Notes. On October 17, trading at the Indian stock markets were halted few minutes after opening as the Nifty plunged to hit the 10% lower circuit limit. This was only the third time trading was halted for one hour in the last 3 years. After resumption, the Nifty gradually recovered from the day’s low and closed at 5559, losing about 1.92%. For those who are interested in candlestick patterns, a “hammer” was formed today at the top of an uptrend.

The Finance Minister, Palaniappan Chidambaram clarified on television channels that SEBI would attempt to moderate foreign fund inflows. The SEBI Chairman said later that “the proposal to bar sub-accounts from issuing participatory notes will help make the system more efficient and transparent.” He was also of the opinion that if an entity has exposure in stocks, the pressure on the market would be less in the event of a downtrend since stocks need not necessarily be sold; but exposure in derivatives, with stocks or indices as underlying assets would be critical in case the market falls, more selling may take place to minimize the losses.

Business Standard has reported that HDFC has the highest P-Notes holding (14.2 per cent) followed by ICICI Bank (9.1 per cent).

The P-Notes will not be banned, however. The FII’s do some proprietary trading and they issue the P-Notes within themselves. By moderating the P-Notes, FII’s will be required to register with SEBI so that their underlying assets can be estimated.

Are the P-Notes being discussed for the first time?

No. The SEBI investigated P-Notes in 2001 stock scam and based on the recommendations of a joint parliamentary committee on the stocks scam, the government banned few overseas corporate bodies from operating in the primary and secondary markets.

In 2003, a technical committee with representatives from SEBI, Reserve Bank of India and Finance Ministry was set up to look into the P-Notes issue.

The Hindu Businessline reported in 2005 that the RBI was concerned about the FII fund inflow through P-Notes.

Is this really a crisis to Indian stock markets?

No. FII money is certainly needed for the Indian stock markets. Without FII’s one could not have thought about the Sensex reaching 19000. With more FII’s certainly the indices are poised to reach higher levels.

However, the regulators’ concern about the genuiness of such inflows is certainly a valid one. SEBI has all the interest and authority to add, amend or modify regulations to the investing and trading procedures at Indian stock markets. So, their action too, should be welcomed, since this will protect the interests of the investors.

Where does the Indian retail investor stand?

The Finance Minister said, “Do your homework or trust someone who can do it for you”. In a market that has been rallying non-stop, definitely retail investors are at a risk since their money is hard earned and they don’t possess the flexibility the FII’s have.

We have mentioned in our weekly and monthly reviews that the market appears to violate the technicals and hence the investors need to be cautious. Though the P-Notes issue is an old one, the market has overreacted to it.

Sundaramurthy Vadivelu

LABELS: BSE, SENSEX, SEBI, PARTICIPATORY NOTES, P-NOTES, NSE, NIFTY

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Top three business news stories this week

By Vipin Agnihotri

The India Street is always interested in giving you detailed information regarding Indian business scene. Below find top three business news this week.

Indian government going all out to woo investments in manufacturing business

In my opinion, Indian government is working overtime to woo investments in the manufacturing business. First and foremost, it was a policy to promote Petroleum, Chemicals, and Petrochemicals Investment Regions. According to sources, now Indian government is planning to extend it to the entire manufacturing sector, by setting up mega manufacturing hubs.

It is worth mentioning in this regard that Manufacturing Investment Regions will be specifically designated zones over an area of 250 square km each for domestic and export-led production along with associated services and infrastructure. If experts are to be believed, the Indian government plans to ensure a minimum processing area about 40 per cent of the total designated area.

Pretty much like Special Economic Zones, the policy envisages that the hubs or zones will be built and managed by a developer or a group of developers. On the other hand, external linkages will be provided by the Centre and the state government concerned.

Foreign individuals can register directly as Foreign Institutional Investors

In an attempt to discourage the use of Participatory Notes and, in turn, bring about greater transparency in the capital markets, SEBI have decided to permit foreign individuals, companies and other investors such as hedge funds to register directly as Foreign Institutional Investors.

The pivotal factor here is that a large chunk of proportion of portfolio inflows into the country has been through the Participatory Note route. According to sources, regulatory bodies like SEBI and RBI have been concerned about the misuse of the instrument- it is felt that lots of overseas investors use this route to conceal their identities.

Allocation of spectrum takes new turn

In what can be termed as the new twist to the ongoing controversy over allocation of spectrum, Union Telecom minister A Raja has returned all 16 applications for spectrum allocation, both from existing and new players, deciding, instead, that number of committees will be formed to look into the issues raised by both the GSM and CDMA camps.

It is worth pointing that the Telecom Regulatory Authority of India has delayed its proposed recommendations on the capping of telecom service providers and other licensing regulations, citing the complexity of the issues involved.

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India Real Estate in Fragile Balance at the Moment

Dhruva Jyoti Chowdhury, Kolkata, India

Though the Indian real estate market is at present estimated to roughly US $16 billion, and has been ever growing, has been marred by various problems not only due to the Government policies, builders and the finance companies but even by the people in general who are putting in huge amounts of money to buy those properties.

While the market regulator SEBI has clearly said that it will allow registration of selective hedge funds that too at the merit of each case.

The Indian market which is expected to reach US $60 billion by 2010 and commercial real estate market would reach US$12 billion by the same time.

Shares of foreign investments in real estate will increase from current US$3.12 billion to about US$25-28 billion by 2010, matters pertaining to the horticultural planning, infrastructure development and potable water facilities remains unattended still. Another aspect of parking facilities, however, remains another area of neglect. Most of the multi storied buildings lack a proper parking facility for the apartment owners in most of the big cities.

The Indian market is mostly driven by the buoyant economy, flourishing IT/ITES sector, banking and financial, retail sector, ascending lending rates by private and public banks is also affecting the genuine buyers, investors, bankers and developers. The rates, which have increased by nearly 2 per cent in the last six months, are now having a deep impact on the coffers of the employed class.

Remember that all the establishments concerned with the promotion of real estate in the country is a cluster of groups consisting of industrial and service sectors like real estate (housing construction, construction of commercial offices, retail and industrial buildings and infrastructure projects), brokerage services, real estate finance services (mortgage banking, real estate investment), real estate operations, property management, architecture and design. And if any one of these does not goes parallel with the other or lack of planning and foresightedness, can bring immense loss to everybody concerned.

The fast development in the basic infrastructure among factors fuelling real estate boom, hold quite a promise in the group housing sector, considered the best alternative to solve the burgeoning needs of the people. Though the state government has already announced two separate multi-storied housing facilities to provide affordable houses for the urban poor, it is yet to come out with fresh schemes to cater to the needs of a large number of middle-class families wishing to have a roof over their heads. It is high time everyone get their socks up so that they do not suffer any loss due to carelessness and lack of foresight.

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India's SEBI striking the hammer

By Dhruva Jyoti Chowdhury

Kolkata, India: Securities and Exchange Board of India (SEBI), the market regulator in the country is pretty serious about clamping down on manipulation by the Indian Real estate players inflating their land banks to boost value and is unfazed by concerns that new disclosure norms will keep realty companies from tapping the market.

While addressing a seminar recently at the Tamil Nadu’s Investor’s Association, the SEBI Chairman M Damodaran opined “I believe if that is the case then they should not be there in the first place.”

SEBI recently tightened disclosure norms for real estate companies that want to raise money by selling shares. As per the norms, companies are allowed only to show land that they own, not the land they intend to buy in the future. Moreover, the valuations have to be based on the current market value and not on future projections. If this is materialized, the actual land acquisition will be known by the Government which will help to re- locate the land which had not been aquired by the real estate company. Damodaran also spoke on the extent to which land banks were manipulated and said the market regulator won’t allow the practice to continue anymore. Some real estate companies are inflating land bank values ahead of a public offer of shares by temporarily acquiring land from farmers for a fee and then returning the land to them after the public issue is launched, Damodaran said.

He said the farmers are paid a meager amount for signing the documents. “The first set of documents is what is made available when you build up the land bank and having raised your money, the second set of documents becomes effective. That is, on non-existent landbank you would have parted with money,” Damodaran said.

It must be mentioned here that as much as Rs 4,000 crore out of a total of Rs 20,000 crore raised through share issuances last year was by real estate developers. That pace has slowed so far this year as several initial public offerings, including that of Purvankara Projects Ltd, DLF Ltd and Omaxe Ltd, have yet to be cleared by the stock market regulator.

Even the Central Government has pulled up its socks to check malpractices in the realty sector. Recently the Finance Ministry issued a statement intending to curb demand in overheated sectors such as housing and real estate. "The intention is to constraint demand in those sectors where there are signs of what you call overheating and example of that could be real estate and housing. I think in these sectors there is reduction in demand," finance minister P Chidambaram said.

On the impact of the RBI's measures to tighten money supply in these sectors, he said these steps work with a time lag and it might take time to have its impact on the intended sectors. However, in other sectors there was no intention to reduce demand, Chidambaram said.

Furthermore, the ASSOCHAM is also playing a key role to stop malpractices by the Real Estate companies. In a recent move, the ASSOCHAM has decided to work like a watchdog over the real estate advertisements. In an effort to curb the Real Estate advertisements aimed at enticing the buyer often exaggerate or at times misrepresent reality, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has decided to propose a monitoring committee to oversee real estate advertisements. So that the prospective buyers can get only the relevant information needed and not the exaggerated one. The monitoring committee, apart from scrutinizing the advertisements may pay surprise visit to the locations where the buildings are coming up.

The buyers are pretty happy with the decision as often seen, the companies to woo its sales, tend to lose the ethics of the trade and make false declarations in the advertisements. The Indian realty sector has also paid the price for this. Often the customers move to court against these false promises made.

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Chennai Tops Real Estate

By Dhruva Jyoti Chowdhury

Kolkata, India: In the last decade, when the realty all over the country witnessed a major boom, the price rise of land in Chennai did not rise as sharply as they did in the other metros. That reputation, of being a relatively sober market, has taken a U turn now.

The realtors believe that nearly 1,000 medium and large residential housing projects are coming up within a short span and importantly the buoyant interest rates on housing loans have not dampened the market spirit. That’s the reason for which developers are now occupying even the industrial wasteland which extends from the northern to the western part of Chennai.

SSI Limited has acquired one of the oldest industrial landmarks of Chennai, the Buckingham and Carnatic Mills in Perambur, for a real estate project. SSI is building 5,000 apartments on a 70-acre plot. The 1,000 crore rupees project, with landscaped grounds is projected to change the face of the area which was once a working class suburb. Further SSI expects to build 1,000 apartments, priced between Rs.30 lakhs and Rs.40 lakhs, every year for the next five years. Integrated townships along the GST Road, on the Tambaram-Velachery Road, at Valasaravakkam, Sriperumbudur, Vandalur and at Siruseri is also on the planning list of SSI.

Added to this is the government's move to open up Foreign Direct Investment in the sector. Moreover, the Securities and Exchange Board of India (SEBI) has approved guidelines for the Real Estate Mutual Fund, a scheme to facilitate investments in real estate property which will cause prices to spiral out of control.

Growing economy, participation of foreign investors, younger age groups dominating in population and growth of service sectors have made a positive impact on the scenario of Chennai properties. A large number of NRIs have also contributed in the real estate in Chennai. In order to provide a further impetus, both the Centre and the State government has coughed up 200 crore rupees in initiating building a six lane Chennai bypass Phase II, a cloverleaf structure close to the airport that will directly connect the city to different National Highways by 2008.

The average age of prospective clients now has dropped to 28-35 years as compared to about a decade ago when planning to purchase a house was done on the verge of retirement from services. For travelers who combine business and leisure several up-market hotels have been built in recent years. Feeling the heat, international players such as Courtyard Marriott, Radisson, Hilton and Le Royal Meridien have a visible presence in Chennai while another cluster of international hotels are in the queue.

The rates of land being acquired vary between considerable ranges. The land on the lower side consisting of areas in Mogappair East and West is between 1500 to 1700 hundred rupees per sq.ft while the higher side is 3500- 5000 rupees per sq. ft. in areas like Besant Nagar, Nungambakkam and Mylapore.

Feeling the heat Hiranandani group a Mumbai based builder has already invested more than 2000 Crore in the last few months. Besides the ETA group, DLF and several others have already crossed the 400 Crore mark in the city. This elite group includes Chennai-based realty developer Arihant Foundations in joint venture with J P Morgan. Jain Housing and Constructions Limited have more than 3,000 dwelling units covering more than 2 million sq ft. Its current projects involve another 2.5 million sq ft apart from the other national players in realty including Ansal Properties and Infrastructure limited, K. Raheja Group, Bengal Ambuja Housing Development Limited Prestige Group.

The Non-Resident Indians are the most important property buyers in the city. This NRI constitutes the core of the ‘high value’ market in the real estate sector.

This boom is also paving way for the most ultra modern facilities in every nook and corner of the entire city. The developers also seem to be keen on the fact that the owners should get world class amenities and a quality of life that would be virtually impossible in an ‘independent house’. Swimming pools, penthouses, round-the-clock security, landscaped gardens, play areas for children, ATM-banking facility, open-air theatre, shopping arcade, swimming pools and health clubs, ATM-banking facility, open-air theatre, shopping arcade, play areas, swimming pools and health clubs since most of the projects are located on the outskirts, every need of the residents had to be met in order to make it a self-contained township.

Flats are not the only kind of dwelling units coming up in Chennai. For those who have high levels of disposable income, there are builders and promoters who offer "independent" houses, different from the bungalows of yesteryear. For instance, Isha Homes offers middle-class villas with all facilities. The project, located near the nerve-centre of the IT corridor, provides dedicated Internet connections, apart from a common sewage plant, black-topped roads and other facilities on the campus.

Ravichandran, a civil engineer, started his business in 1997 by building in the range of about 25,000-30,000 sq ft per project. In contrast, True Value Homes' Park Villa projects, a "premium project launched two years ago at Perungudi close to the IT corridor is spread over more than 5.25 acres. It consists of 288 dwelling units. Built adhering to the principles of Vaasthu Sastra, the project has virtually created a mini township.

It is now building residential complexes of 1 million sq ft. land prices in the area shot up from Rs.5 lakhs an acre to Rs.50 lakhs an acre since the past project was completed. True Value Homes, like other big property developers, is building an IT Park at MRC Nagar with a capacity of 4 lakh sq ft. The company is also planning a 100-acre satellite township near Tambaram. Experts predict that that the building activity will soon reach Mahabalipuram, about 60 kilometres from Chennai.

Looking at the vast potential of the Chennai market, The Chennai Metropolitan Development Authority (CMDA) plans to implement a `single window' system for processing building plan applications quickly. The idea is to provide a ‘one-stop shop’ for all the approvals for real estate. Even the State government is not lagging in poking its nose to fill up their empty coffers. Recent reports have indicated that Government acquired about 7,000 acres for the establishment of a satellite town outside Chennai estimated over 30,000 acres.

Presently, an apartment in Velchari, Chennai with 28800 sq ft is costing around 10,08,00,000 rupees. These are 2 And 3 Bedrooms with Power Back-up, Lift, Rain Water Harvesting, Three Phase Power Supply, Stilt +Four Floors and Covered Car Parking. A 3 Bedroom deluxe apartment in Harrington Road with 1776 sq ft, is costing around 4500 rupees per sq ft. The apartment consists of large sit out, building with swimming pool, 24 hrs security, covered car park, on the sixth floor (not the top floor).

Thirunmiyur Apartment in Valmiki Nagar is build on 1213 sq ft and is a 2 Bedroom flat on the 1st floor, with a very large bathroom, apartment complex built on 13.8 grounds (33,317sft). Very near to the sea beach is one of the best location of Valmiki Nagar, as per the builders opine. The apartment is being offered for 56 lakh.

Even the commercial spaces are not lagging far behind in this money race. A 900 sq ft basement office space in a good commercial complex in Nelson on Manikam Road is being offered for about 45 lakhs rupees. Near Arumbakkam Spencer's Daily Total 3,795sft land area with 2,876sft Bungalow, 4 Bedroom with servants quarters well designed, in good condition is available for. 1.60 Crores. (Total price for Land and Building).

A 2000 sq ft new apartment for Sale in Alwarpet with 3 bedrooms with balcony in every room, separate dining and drawing room is being offered for about 9000 rupees per sq ft. At present the total area under development is around 32.5 million sq. ft.

Ascendas Industrial Park 1.0 million sq. ft. Mahindra Industrial Park 0.2 million sq. ft. Ambattur 0.2 million sq. ft. City 7.3 million sq. ft. Ramavaram 3.5 million sq. ft. Old Mahabalipuram Road 19.3 million sq. ft.

Areas and Land being developed for Real Estate, at present

After labeling all pre-IPO investment or private placement to foreign institutional investors (FII) in real estate companies as FDI, the government has now decided to bar real estate companies from issuing depository receipts (ADRs or GDRs). The logic of the move is simple. All foreign investment through GDRs and ADRs is to be treated as FDI, which is subject to a three-year lock-in, in the case of real estate companies. A host of restrictions including minimum project size in terms of area and a lock-in period were imposed to keep out speculative foreign capital. They did not take into account the fact that real estate companies could be listed. The FDI norms for the real estate sector framed in 2005 were clearly designed for the simplistic situation of single projects from unlisted companies hence the government is becoming entangled in micro regulation.

Realty Investment Trusts: Mirage or Reality?

A rising India is inter alia characterised by a robust real estate sector, which is witnessing a deluge of investment in land acquisition, development and construction. The spiralling growth of manufacturing, services, retail and hospitality sectors, together with rising levels of disposable income, has fuelled the demand for various classes of real estate.

Currently, the participation of small and medium investors is restricted to the residential sector, through direct purchase of property. Higher returns from fixed income yielding commercial property are beyond their reach. This limitation of participants in the commercial sector, and the over-use of debt funding in the past with limited access to the same today, has made the industry turn to Real Estate Investment Trusts (REITs) as the next big thing.

REITs, common in several developed countries, are generally open or close-ended companies /trusts that hold, manage, lease, develop and/or maintain properties for investment purposes. They are often, but not necessarily, traded on an exchange. The value of units/stock allotted to investors is computed on a NAV (Net Asset Value) basis, as the market value of assets minus liabilities. REIT invests in real estate directly, through properties or mortgages, or indirectly through subsidiaries.

In India, a fledgling attempt at introducing REITs in the form of Real Estate Mutual Funds (REMFs) has been made, with draft Securities & Exchange Board of India (Sebi) regulations on the anvil, albeit not in the public domain. These regulations are being closely scrutinised by the Association of Mutual Funds in India (AMFI), Sebi and Institute of Chartered Accountants of India (ICAI). Valuation norms and periodicity of NAV revision are likely to be difficult problems to resolve.

Source: The Economic Times.

The author - Gaurav Taneja, is national director of tax and partner, Ernst & Young India.

DLF gets IPO nod

By Dhruva Jyoti Chowdhury Kolkata, India: The real estate giant are now coming up with a bang. DLF has got the nod from Securities & Exchange Board of India (SEBI) for its Initial Public Offering (IPO), which is expected to raise a record Rs 13,600 crore.

If all goes well, DLF’s market capitalisation is expected to be around Rs 1,05,00 crore, equivalent to $25 billion, which will place DLF at seventh position in market capitalization rankings in the world. And after the IPO, DLF Universal’s promoter KP Singh will be among the richest Indians.

The approval, which will make a way for the DLF plan to put its fist on the capital market. It is worthwhile to mention here that the company had filed a new prospectus in January this year after its first attempt came to a stand still due to certain objections over the complaints by the minority shareholders'.

DLF owned by KP Singh proposes to enter the capital market with a public issue of 17.5 crore equity shares of Rs 2 each. The post-issue dilution would be over 10% of the equity capital of DLF. While he will continue to own 87.5 per cent stake in the company. "The company could raise more than or equal to Rs 13,600 crore," a company official had said in January. The fund would be deployed to meet construction cost, land acquisition and repayment of debt.

When asked when the issue would open, the company official said: "We are on the job." Merchant bankers, however, said it would take at least a month as the issue size is big. In its second attempt, the DLF plans to raise about Rs 13,600 crore but with lesser shares being offered through the IPO, reflecting the company's increased valuation over last year. DLF last year, proposed to offer 20.2 crore-equity shares, but the prospectus containing that offer was withdrawn.

Despite the severe beating, reality stocks have taken in the secondary market, the price band for the DLF issue was expected to be between Rs 550 and Rs 600 a share, said an investment banker on the condition of anonymity. As the face value of the equity is Rs 2, according to SEBI guidelines, the issue cannot be priced less than Rs 500 a share. “Since the minimum price cannot be below Rs 500, the price band is expected to be at around Rs 550-600, and the final price could be at the upper limit,” said the banker.

DLF executive claimed the Reserve Bank of India had allowed foreign institutional investors (FIIs) to invest in the company’s IPO, and the real estate major was expecting good response from institutional investors, including mutual funds, banks and insurance companies. Depending upon the success of the DLF issue, investment bankers said, another realty company, Omaxe, could enter the market.

DLF will use its IPO proceeds in part to acquire land, complete on going projects and retire debts. The company's vice chairman Rajiv Singh says that land acquisition programme will cost Rs 6,500 crore (Rs 65 billion), while the completion of on-going projects will cost about Rs 3,100 crore (Rs 31 billion). The company, at present, has loans worth Rs 4,000 crore (Rs 40 billion).

DLF Vice Chairman Rajiv Singh said that the IPO proceeds will be utilized for land acquisition, which will cost about Rs 6,500 crore and the DLF hopes to complete the construction of some on-going projects, which will take about Rs 3100 crore within a few months from now.

Singh further said that DLF retains the rights to prepay loans that the company holds to the extent of about Rs 4,000 crore. This is an overall statement of objectives. It will be decided after the exact issue size is finalized. The deployment will be decided thereafter. Principally the money is for acquisition and for completion of our projects.

When asked about the Special Economic Zones three special economic zones, which are multi-product ones in Ludhiana, Amritsar and Manesar, Singh said that. DLF have received approval to set up four special economic zones of a very large size. Three are going to be a multi purpose special economic zone and one is going to be a collection of product specific zones in Amritsar.

According to Singh, as far as the investment programme goes, no exact number is quantified as yet. The land acquisition proceedings still need to take place. DLF do estimate the total investments processing would be of Rs 40,000-50,000 crore (Rs 400-500 billion). But DLF's investment in this would be restricted to much smaller amount, which will be known after the projects are specifically conceptualized.

The start is due in Amritsar not in Ludhiana. Amrtisar is the first one, which will get off the block. We do hope that we will be able to start something physically on the ground in a few months time. We should be up and running in terms of marketing.

The DLF is also targeting 100-125 hotels in the next five-eight years while some in the next few months. But Vijay Singh declined to comment on them and said that future forecast at this juncture in an IPO process is something business hotels should be the first ones to take off. But said that substantial sites for the location of such hotels. As and when our partnership gets finalized, we will implement these projects rapidly. Some of them are going to be independent sites and many of them are going to be co-located with the other development projects of the company, whether in retail space or in IT park space.

Singh further added that there has been some kind of trouble between the Delhi Development Authority as well as the Delhi high court regarding the joint venture of the company with Indiabulls which is just a co-investment into a particular project.

When asked about the Foreign Investment Promotion Board (FIPB) clearance for the FIIs to come into the pre-IPO placement, Singh said that in pre-IPO placement, we are not contemplating any FIIs. The pre-IPO placement will only be for the domestic investors and institutions. We may be able to give you some details about this in a few days time. Only one thing I can say is, unfortunately, we are constrained in terms of making a projection at this moment in the IPO process.

RBI refuses FII status to FDI in Real Estate

Foreign Direct investments (FDI) received by property developers through private placement of equity has been denied the FII status. And the government has no issues with such a decision of the Reserve Bank of India.

Since an element of discretion was present in pre-IPO private placement, it cannot be regarded the same as other portfolio investment and must comply the FDI norms. Also, the Department of Industrial Policy and Promotion (DIPP) in the commerce and industry Ministry has decided to go with the RBI’s view.

All the real estate companies bringing FDI through private placement require following the guidelines of DIPP. Most real estate companies, which want to make a killing on the investors’ increasing craze for real estate stocks, have been looking forward to FII status for their pre-offer placements to give a push to their construction projects that do not meet tough FDI norms.

Both the Finmin and RBI are trying hard to put a cap on the exposure of banks to property market, which continues to woo credit.

State owned banks have been asked to re-balance portfolios and moderate credit growth to what the RBI calls high risk sectors like commercial real estate. Also, SEBI has also tightened the norms for real estate IPOs.