NRIs may face 3-year pre-IPO realty lock-in

The government is planning to plug another potential source of foreign funds for the real estate sector. Non-resident Indians planning to invest in real estate projects ahead of initial public offers could face a three-year lock-in along with foreign institutional investors (FIIs). The government is planning to introduce a lock-in for pre-IPO FII investors in realty companies in bid to prevent a possible real estate bubble. The restrictions are also aimed at checking sudden flight of capital.

By putting a lock-in period for NRIs, the government could also effectively discourage the promoters' own funds coming into the company through the NRI route. Indian promoters are generally known to use NRIs as fronts to get their own money abroad invested in their companies. A lock-in period might act as a deterrent for promoters bringing such funds through the NRI route.

The government is likely to amend the Foreign Exchange Management Act to make all pre-IPO investments face a three-year lock-in, a government source said. However, the other conditions such as minimum capitalisation and area of development will be limited to foreign direct investments.

Real estate companies which are planning to hit the capital market will have to tweak their plans to meet the proposed norms, expected to be notified shortly. Some real estate companies that have sought permission for making pre-IPO placement to FIIs have been told to wait till the government finalises the foreign investment norms for the real estate sector.