Foreign investors are once again queuing up to pour money into India's red hot property market, with the government relaxing some of the norms. At least half-a-dozen deals worth $1billion are being finalised by Citigroup, Deutsche Bank, The Carlyle Group and Blackstone, among others, with unlisted real estate companies, as pre-initial public offering (IPO) placement.

A clarification issued by the department of industrial policy & promotion (DIPP), under the ministry of commerce and industry, has cleared the air for investments by foreign institutional investors (FIIs), foreign venture capital funds (VCFs) and private equity players.

FII investments in companies pre-IPO will be treated as foreign direct investment (FDI), as per the clarification, and the investment will have to be channelled for FDI-compliant greenfield projects only.

This has settled the differences arising from views aired by the finance and commerce ministries, and financial sector regulators. Now foreign investors will have to wait three years before exiting the company completely. DIPP has clarified that the investor will have to lock in a minimum of $5 million, in case of a joint venture with an Indian real estate player, or $10 million, in case of a wholly-owned subsidiary of a foreign investor.

The existing rules for foreign investors regarding the lock-in period is applicable for real estate sector as well. Hence, investments by FIIs, foreign VCFs and PE investors will have a minimum lock-in period of one year, if the investment occurred during the preceding 12 months before the IPO date.

This has paved way for a large number of foreign investments at the entity level. This is a complete departure from the past, when equity investments used to be all project-specific. Industry officials said leading property players are sewing up equity deals at the entity level, with greater clarity in foreign investments in the sector.

A majority of real estate companies planning an IPO are currently in talks with foreign investors. The leading players planning an IPO are Hiranandanis, Lodha Developers, Runwal group, Kolte Patil Developers and Paranjpe Schemes (Construction). "There used to be some kind of confusion in the market as far as FIIs' pre-IPO investments in real estate companies are concerned.

With the clarification issued by the government, foreign VCFs and PE funds can now invest in the real estate firms with a lock-in period of minimum one year. It will definitely boost investments in the sector," said Akhil Hirani, managing partner of Majmudar & Co.

According to investment bankers, the change in rules would pre-empt any further speculation in the real estate market, and that FIIs would not be allowed to cash in immediately in the IPO.

Earlier, DIPP and the stock market regulator Sebi were not in favour of a lock-in period and had instead suggested pre-IPO placements by FIIs be considered as portfolio investments. However, the recommendation was not accepted by the finance ministry, which, in turn, asked Sebi to put in place the lock-in on FII investments in real estate.

Leading real estate players, eager to cash in on investors' appetite for realty stocks, were seeking FDI status for their pre-offer placement since many of their existing projects were not meeting the tough FDI norms. For instance, a project needs to be at least 25 acres to be notified FDI-compliant.

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