The government is weighing the impact of a possible three-year ban on stake sale by foreign investors in real estate projects, a decision that could affect future capital inflows into the sector. Real estate developers had recently urged the government to reinterpret a provision in the foreign direct investment guidelines, so as to stop overseas investors from withdrawing their funds, beyond the minimum capital of $5 million, before three years of the initial investment.

This, they said, will help them tide over the current liquidity crisis. However, the commerce ministry is concerned that such a measure could be counter-productive. The government wants to keep the foreign investment policy as flexible as possible since the country now needs foreign capital to sustain the growth momentum. For any foreign investor, the exit strategy is as important as the entry strategy. If it is difficult to withdraw capital and redeploy it in another sector, then foreign investors could become reluctant to invest in real estate.

“We examined the proposal, but have not taken any decision and status quo continues. However, we cannot rule out any change in the future,” said an official, who asked not to be named, considering the sensitivity of the subject. The law says that in a cross-border JV in real estate, the foreign partner should bring in a minimum capital of $5 million. The funds would have to be brought in within six months of commencement of business. It also says the “original investment” cannot be repatriated before a period of three years from the completion of “minimum capitalization.”

This has been interpreted in such a way that funds above the minimum capital requirement could be repatriated within the three-year lock in period. Real estate developers now want to restrict this as the sector got badly hit by the economic slowdown and drying up of sources of foreign capital. Besides, players in this sector have very few alternative sources of funding locally.

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