AND, more importantly, importantly, they can avoid distress sales and hang on to higher property prices.
But some say the new interpretation, informally being spoken about by government officials, should not apply to deals that were singed before. “It (the new clarification) can have a significant impact on FDI in
real estate sector. At best, it should apply prospectively,” said Price water house Coopers financial service practice tax leader Punit Shah. “The existing FDI,” said Mr. Shah “was done on the basis of earlier interpretation.”
In the original investment documents, signed at the peak of the property boom, the builders had agreed to pay back bulk of the money after one or two years. Local builders and global property funds resorted to new financial structures that helped them side-step FDI restrictions; and more importantly bring in money that was essentially debt but could masquerade as equity.
Indian property firms
and special purpose vehicle floated by them issued a new security called compulsory convertible debentures (CCDs) to foreign funds while promoters signed a simultaneous agreement in which they agreed to buy back the CCDs after one or two years at a pre-agreed price.
Starved of institutional finance,it was a desperate, expensive and risky mechanism to bring in money. But few cared as property prices rose, real estate emerged as a new asset class and everybody thought that the boom would last forever.
Today, real estate stocks have dropped,
property buyers who were pure investors have left the market and deals are few and far between. “Since the chips are down, builders are pushing for a new interpretation of the FDI norms. In the last few years, no one objected to the rules,” said the country head of private equity firm which is looking for an exit.
While a clarification on the lock-in may not go down well among foreign funds, who would be stuck for a few more years, the government may give in to a formidable lobby.
