Regulators may be unaware but hedge funds are for real
What more, these deals are happening outside the radar of Indian regulators, in offshore tax havens like Mauritius.
By Sugata Ghosh, TNN |
MUMBAI: Hedge funds-those aggressive investment vehicles of the wealthy-have entered the Indian real estate market, and you may be clueless about it. These secretive international investors, known for their complex and high-risk trading strategies, aren���t exactly grabbing shopping malls and residential townships in Mumbai and Gurgaon. Instead, they are buying financial instruments that Indian property developers have sold to raise money from overseas markets.
And by doing this, they are indirectly controlling a slice of the country���s fiercely growing property market. No one knows how big the slice is, but bankers say close to 50 hedge funds are active in Indian realty papers in the overseas money market.
What more, these deals are happening outside the radar of Indian regulators, in offshore tax havens like Mauritius.
It���s not a one-to-one deal; Indian developers don���t sell securities to the hedge funds. They issue shares and hybrid instruments like optionally convertible debentures and preference shares to global real estate funds owned by big banks and Wall Street bond houses. The money that flows in to India is foreign direct investment (FDI), allowed under the automatic route. But in many cases, these foreign investors don���t hold on to the securities. They simply sell them to hedge funds, often within weeks after the FDI deal is done.
What���s fuelling the demand for the securities is the move by several hedge funds to diversify their portfolio. ���Stocks have gone up, crude is volatile and metals have hit them badly. Many hedge funds are looking for new assets, and real estate is one,��� said a banker familiar with these deals.
Though FDI regulations in real estate have a three-year lock-in period for the investor, this can be side-stepped when the deal is done overseas. The lock-in here means that if $10 million comes in, the money cannot leave India before three years; but it does not prevent the foreign investor from selling the shares or convertibles to another foreign investor (the hedge fund). The former holds the securities in several special purpose vehicles floated in Mauritius, and uses these vehicles to deal with hedge funds.
And by doing this, they are indirectly controlling a slice of the country���s fiercely growing property market. No one knows how big the slice is, but bankers say close to 50 hedge funds are active in Indian realty papers in the overseas money market.
What more, these deals are happening outside the radar of Indian regulators, in offshore tax havens like Mauritius.
It���s not a one-to-one deal; Indian developers don���t sell securities to the hedge funds. They issue shares and hybrid instruments like optionally convertible debentures and preference shares to global real estate funds owned by big banks and Wall Street bond houses. The money that flows in to India is foreign direct investment (FDI), allowed under the automatic route. But in many cases, these foreign investors don���t hold on to the securities. They simply sell them to hedge funds, often within weeks after the FDI deal is done.
What���s fuelling the demand for the securities is the move by several hedge funds to diversify their portfolio. ���Stocks have gone up, crude is volatile and metals have hit them badly. Many hedge funds are looking for new assets, and real estate is one,��� said a banker familiar with these deals.
Though FDI regulations in real estate have a three-year lock-in period for the investor, this can be side-stepped when the deal is done overseas. The lock-in here means that if $10 million comes in, the money cannot leave India before three years; but it does not prevent the foreign investor from selling the shares or convertibles to another foreign investor (the hedge fund). The former holds the securities in several special purpose vehicles floated in Mauritius, and uses these vehicles to deal with hedge funds.
ADVERTISEMENT
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
