Finance Ministry Clears Path for Real Estate Mutual Funds
The cloud of uncertainty hovering over real estate mutual funds (REMFs) has dissipated. The finance ministry has rejected the Reserve Bank of India's (RBI) concerns regarding REMFs potentially violating foreign direct investment (FDI) norms within the real estate sector. The ministry countered the central bank's assertion that the REMF scheme, which the Securities and Exchange Board of India (Sebi) notified in April, contradicted existing FDI regulations.
This decision by the finance ministry is expected to facilitate the introduction of fresh investment opportunities for smaller investors eager to capitalize on the growth prospects of the real estate domain. The earlier doubts raised by the RBI had contributed to a reluctance in launching REMFs.
The RBI had previously highlighted that the scheme permitted Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) to invest in the real estate sector, a practice seemingly at odds with established policy. Consequently, the apex bank had requested the finance ministry's intervention to address this issue with Sebi.
Current FDI policy prohibits direct investment in real estate but permits investment in the construction and development sector, subject to specific conditions. These stipulations include a mandatory three-year lock-in period, a minimum capitalization of five million dollars for wholly-owned subsidiaries and ten million dollars for joint ventures, and a development requirement of at least ten hectares of land. The government had granted 100% FDI in the construction and development sector through the automatic route back in 2005, as outlined in Press Note 2 of that year.
In its response to the RBI, the finance ministry clarified that investment through REMFs could be permissible, emphasizing the absence of a direct link between the investments made by a fund and the investments of its individual investors. REMF investors hold units in the fund but do not directly influence the fund's decisions regarding asset investments. Furthermore, government sources indicate that Sebi has imposed several constraints on REMF investments.
The finance ministry also addressed the RBI's apprehensions pertaining to construction projects as outlined in Press Note 2 of 2005, suggesting that these concerns lacked substantial basis. FII investments made pre-Initial Public Offering (IPO) are categorized as FDI and are, therefore, subject to the aforementioned three-year lock-in period. The ministry further asserted that there was no valid reason to restrict NRIs from investing in REMFs, given their exemption from the conditions typically applicable to FDI in real estate.