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 face complications due to an obscure rule in India's foreign exchange laws.
Investment Details
- In May 2007, DE Shaw invested $400 million in convertible preference shares of DAL.
- The investment was part of a 'put' option agreement signed between DE Shaw and three companies controlled by DLF-promoter KP Singh's family.
- Under the agreement, the US-based fund is entitled to a fixed return of at least 27%.
Forex Law Implications
Under the 'put' option, DE Shaw is expected to receive approximately Rs 2,500 crore after forex adjustments. However, the Foreign Exchange Management Act (FEMA) classifies all equity investments with fixed returns as debt. This classification could subject DE Shaw’s investment to the guidelines governing external commercial borrowings (ECBs).
Impact on Real Estate Sector
Since ECBs are not permitted in the real estate sector, investors holding convertible stock with guaranteed returns may encounter difficulties in exiting their investments. This regulatory hurdle could potentially block the planned buyout by DLF promoters.