ADR/GDR door may be shut on realty cos

NEW DELHI: The real estate sector’s ever-growing appetite for foreign capital is running into a government wall. The government is likely to bar real estate companies from issuing American depository receipts (ADRs) and global depository receipts (GDRs). It believes that it may be difficult to enforce the conditions attached to foreign direct investment (FDI) in real estate, particularly the one that requires investors to lock in their funds for a minimum of three years.

ADRs and GDRs are fully fungible and can change hands, and will defeat the very stipulation of the lock-in present in the FDI guidelines. The government may also keep a three-year lock-in for FIIs that come in through the pre-initial public offer route in bid to check artificial inflation of prices and sudden flight of capital.

The Reserve Bank is particularly wary about the nature of capital invested in this sector, as it is easy to build up asset bubbles that could prove damaging for the entire economy. The government, which recently rejected the GDR proposal of a real estate player, is expected to come out with guidelines on pre-IPO placements soon.

“As per the FDI norms, there is a three-year lock-in period for any FDI which comes in a real estate company. Under the present circumstances, it would not be possible for them to raise capital through ADRs or GDRs,” a government source said. Real estate is a sensitive sector for which the government has put in place certain conditions for FDI such as a three-year lock-in, minimum capitalisation of $5 million for joint ventures and $10 million for wholly owned subsidiaries.

Besides, foreign investments are allowed only in projects that involves at least 10 hectares of land. Though the government had opened up the real estate sector for foreign investment in 2005, it imposed these requirements because of the sensitivities involved with the sector.

The government recently tightened norms for foreign investment in the sector, saying that all foreign funds raised by Indian companies through the issue of partially convertible, non-convertible and optionally convertible preference shares will be treated as debt and will be subject to guidelines applicable for external commercial borrowings.