Change may hit FDI in real estate

The new clarification can have a significant impact on FDI in real estate. The existing FDI was done on the basis of earlier interpretation. In the original investment documents, signed at the peak of the property boom, the builders had agreed to pay back bulk of the money after one or two years. Local builders and global property funds resorted to new financial structures that helped them sidestep FDI restrictions, and, more importantly, bring in money that was essentially debt but could masquerade as equity.

Indian property firms, and the Special Purpose Vehicles (SPVs) floated by them, issued a new security called Compulsory Convertible Debentures (CCDs) to the foreign funds, while the promoters of the firms signed simultaneous agreements in which they agreed to buy back the CCDs after one or two years at a pre-agreed price.

Starved of institutional finance, it was a desperate, expensive and risky mechanism to bring in money. But few cared, as property prices rose and real estate emerged as a new asset class and everybody thought that the boom would last forever. Today, real estate stocks have dropped, property buyers who were pure investors have left the market and deals are few and far between.

Since the chips are down, builders are pushing for a new interpretation of FDI norms. In the past few years, no one objected to the rules.

While a clarification on the lock-in may not go down well among foreign funds, who would be stuck for few more years, the government may give in to a formidable lobby.