News & Views on Indian Real Estate

Friday, July 11, 2008

Realty MFs may bypass FDI norms

Even before the globally-popular real estate mutual funds (REMF) take off here, RBI has raised a red flag. It has argued that the funds would lead to circumvention of foreign direct investment (FDI) in real estate that places restrictions on foreign investors. Although 100% FDI is allowed in realty projects on the automatic route, the conditions have to be adhered to. The banking regulator has said it amounted to indirect flow of FDI in violation of the spirit of the conditions laid down by the government. RBI now wants the government to take up the issue with market regulator Sebi which had issued the guidelines on REMFs about two months ago. As per the Sebi guidelines, REMFs can directly invest in real estate, in mortgage-backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. However, it has mandated that at least 35% of net assets of the scheme should be invested directly in realty assets. The much-awaited scheme has not found takers but some fund houses are working on the scheme. RBI’s concerns about flow of foreign investment in realty are not new. It had earlier written to the government to make Foreign Investment Promotion Board’s clearance mandatory for FDI into the sector.