The finance ministry has reportedly turned down a proposal by the Department of Policy and Promotion (DIPP) that had suggested doing away with the mandatory three-year lock-in period for FDI in the real estate sector. The ministry’s point of view is that a lock-in acts as a deterrent, checking speculation and protecting the sector from the sudden flight of capital. This could be particularly true at times of an unprecedented crisis, such as the global meltdown in 2008, when foreign institutional investors pulled out nearly $5 billion worth of equity investments between September and October 2008. For sure, there is a big difference between portfolio investments or hedge fund money coming into the stock market and money that is being channelled into the development of projects that by nature are of a much longer gestation. However, the ministry’s contention is that despite the correction after the meltdown, real estate prices were not eroded to the extent that values of some other asset classes were, largely because the lock-in prevented investors from sending their money back home.

The ministry may have a point. After all there’s no running away from the fact that there could have been some volatility in real estate prices had investors been allowed to repatriate their investments. However, given the fact that there is tremendous interest in the Indian real estate market and that most of the investments are of a long-term nature, how much money would have flowed out, is debatable. According to one estimate, nearly $20 billion worth of foreign investment has come into the Indian market since FDI was first allowed. So, in any case, imposing a lock-in on the original investment, which is between $5 million for a joint venture and $10 million for a 100% subsidiary, depending on the structure of the entity, should not bother long-term investors. As of now, it appears that the lock-in will be imposed on a rolling basis—in other words, the investment amount will be locked in for three years. That may seem harsh but again, shouldn’t hurt too much. All that investors would need to do at their global investment committee meetings is to point out that the Indian government has shifted the goal post. But that shouldn’t really make anyone too uncomfortable about putting in money to work in India given its reputation as one of the world’s top business destinations.

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