RBI move to clamp foreign VC investment in Real Estate
After the failed attempts to contain inflation even by restricting money supply, RBI is coming round to the view that foreign funds into real estate are creating an asset bubble. To avoid a hard landing as seen in US economy, RBI proposes curbs on foreign venture capital investments (FVCIs) funds. The central bank notes that this route has opened a parallel channel of investment thus opening a regulatory arbitrage window. Majority of such funds have their base in tax havens like Cayman Islands, Mauritius and Cyprus.
FVCIs enjoy significant benefits which are not available to domestic VCs including full tax exemptions and minimum capital base of INR50m. Besides, FVCIs enjoys full exemption from entry and exit pricing norms which are applicable to foreign investors in form of FDI, exemption from one year lock in period for sale after IPO.
All these exemptions prompted foreign funds and Indian firms to set up companies abroad (usually in tax havens), raise funds at cheaper rates and then reinvest in India. VC firms (domestic as well as foreign) usually invest in real estate through their private equity (PE) arms. Couple that with favourable interest rates and you have a perfect recipe for sky high prices. Last couple of years have witnessed unprecedented growth in real estate valuations.
However, the proposed move is not without opposition. Along with curbs on investment in real estate, RBI is also proposing discontinuation of the automatic route for FVCI investment and limit the same to nine industries only. Experts feel that the move is grossly retrograde and discourage evolution of financial and social intermediation.
Indian financial regulators have the long legacy of waking up late. By the time, damage is already done. So we have a new item to add to the long list of IPO cooking up in 90s, Harshad Mehta, Ketan Parekh, NBFC failures, Plantation schemes etc. Last year many real estate companies with little land bank, low visibility and poor execution skills tapped IPO market with high valuations only to flounder afterwards. Most of them are now trading at less than half of IPO cut off price. Industry experts reckon the current market price as fair value.
FVCIs enjoy significant benefits which are not available to domestic VCs including full tax exemptions and minimum capital base of INR50m. Besides, FVCIs enjoys full exemption from entry and exit pricing norms which are applicable to foreign investors in form of FDI, exemption from one year lock in period for sale after IPO.
All these exemptions prompted foreign funds and Indian firms to set up companies abroad (usually in tax havens), raise funds at cheaper rates and then reinvest in India. VC firms (domestic as well as foreign) usually invest in real estate through their private equity (PE) arms. Couple that with favourable interest rates and you have a perfect recipe for sky high prices. Last couple of years have witnessed unprecedented growth in real estate valuations.
However, the proposed move is not without opposition. Along with curbs on investment in real estate, RBI is also proposing discontinuation of the automatic route for FVCI investment and limit the same to nine industries only. Experts feel that the move is grossly retrograde and discourage evolution of financial and social intermediation.
Indian financial regulators have the long legacy of waking up late. By the time, damage is already done. So we have a new item to add to the long list of IPO cooking up in 90s, Harshad Mehta, Ketan Parekh, NBFC failures, Plantation schemes etc. Last year many real estate companies with little land bank, low visibility and poor execution skills tapped IPO market with high valuations only to flounder afterwards. Most of them are now trading at less than half of IPO cut off price. Industry experts reckon the current market price as fair value.
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