DLF’s plan to buy DE Shaw’s stake in DAL hits roadblock

Plans by the promoters of top real estate company DLF to buy out hedge fund DE Shaw���s investment in family-owned DLF Assets (DAL) could hit a roadblock because of a little known rule in the country���s foreign exchange laws, people familiar with the matter said.

Under a ���put��� option signed between DE Shaw and three companies controlled by DLF-promoter KP Singh���s family in May 2007, the US-based fund, which invested $400 million in convertible preference shares of DAL, could exit its investment and get a fixed return of at least 27%.

As per the ���put��� option with DLF Investments, Kohinoor Real Estates and Buland Consultants, DE Shaw is supposed to get back around Rs 2,500 crore after forex adjustments, a person with knowledge of the matter said.

But the rule in the country���s Foreign Exchange Management Act (FEMA) classifies all equity investments that carry a fixed return as debt, which could bring DE Shaw investment under the purview of external commercial borrowing (ECB) guidelines.

With ECBs not allowed in the real estate sector, investors holding convertible stock with fixed returns could find their exit option blocked. ���It will be very difficult for any investor in real estate to exercise the put option with a fixed exit price for the equity because of FEMA guideline,��� a top corporate lawyer told ET NOW on conditions of anonymity.

Analysts feel this rule, which was recently clarified by the Reserve Bank of India (RBI) after it was approached in the past two months by several investors in a similar situation, could affect several similar transactions that were done in 2007, estimated to total around $7 billion. When contacted, DLF declined to comment, while an email to DE Shaw went unanswered. However, one person familiar with the matter said a team from the Indian operation of DE Shaw was due to meet the hedge fund���s global investment committee at end of this week to finalise a way forward.

DLF���s promoter family sold 9.9% in the company for around Rs 3,800 crore on May 14. The Singh family had decided to spend a large chunk of this money to buy out DE Shaw, which had originally wanted to exit its investment from DAL but has since decided to partially stay invested in the company. DAL, which buys out completed IT SEZ assets from DLF, was set up as a Real Estate Investment Trust (REIT) by DLF promoters.

DLF vice-chairman Rajiv Singh wanted to list DAL in Singapore, but following the crash in the global equity markets, the company decided not to go for a REIT listing.