Transcript Document

Foreign Direct Investment in Indian Real Estate
Dynamics of the Real Estate Market
Dun and Bradstreet
Chennai
March 2007
Ashwin Ramesh
Primary Real Estate Advisors
The Road so far
Press Note 4 (2001)
- FDI in integrated
township (100 acres)
- FDI in hotels &
tourism
Press Note 2
(2000)
Banks – inv. in VCF
priority sector
- FDI in IT Parks
(2002)
- FDI by NRI in
housing & RE
1999
April 2004
Amendment to
VCF & FVCI
Regulations
removing RE from
negative list
Investment
norms NRIs
relaxed
Opening of
FDI in select
projects
2001-2002
Real Estate
VCFs
2004
Press Note 2
(2005)
FDI in real
estate
further
relaxed
2005
REITs/ REMFs
Real Estate
Mutual Funds
June 2006
Regulatory framework - Press Note 2 (2005)
FDI up to 100% is permitted under automatic route
Development criteria:

Minimum 10 hectares / 25 acres to be developed for serviced housing plots

For construction-development projects, minimum built-up area of 50,000 sq
mts

In case of a combination project, any one of above two conditions would
suffice
Investment conditions

Minimum capitalization of US$ 10 Mn for wholly owned subsidiaries & US$
5 Mn for joint ventures with Indian partners

Funds to be brought in within 6 months of commencement of business

Original investment cannot be repatriated before a period of 3 years from
completion of minimum capitalization. Investor may be permitted to exit
earlier with prior Government approval.
Other conditions

At least 50% of project must be developed within 5 years from date of
obtaining all statutory clearances

Investor not permitted to sell undeveloped plots

Project to conform to norms & standards laid down by respective State
authorities

Investor responsible for obtaining all necessary approvals as prescribed
under applicable rules/ bye-Laws /regulations of the State

Concerned Authority to monitor compliance of prescribed conditions by
developer.
Press Note 2 [2005] - Unresolved issues…..

What sort of development is envisaged – Greenfield / Brownfield

Up to what stage in a project can a FDI investor participate?

What comprises ‘built-up area’?

Whether USD 5 Mn investment norm applies to each foreign investor in a
joint venture (‘JV’) separately or to foreign investors for the JV company as a
whole ?
- If two foreign partners invest in Indian JV Company: minimum capitalization
will be USD 5 million or USD 10 million ?
Press Note 2 [2005] - Unresolved issues
Contd…
 Whether lock in applies only to minimum capitalization or entire original
investment?
 When does the 6-month period for capitalization commence with respect to
projects undertaken by existing companies and how is the lock in period
determined?
– Incorporation Date - January 1, 2006
– Signing of the JV agreement - April 1, 2006
– Minimum capitalization to be completed by what date?
Press Note 2 [2005] - Unresolved issues
Contd…
– Assuming minimum capitalization completed June 1, 2006
– 1st tranche of USD 10 million brought in June 1, 2006
– 2nd tranche of USD 100 million brought in January 1, 2007
– Lock in period on what amount and for what period ?
 Whether premium on issue of shares part of minimum capitalization?
 Whether fully convertible debentures can be considered for the purpose of
minimum capitalization?
FDI vs. FVCI ….deadlock continues

Does FVCI need to follow FDI restrictions ?

Since September 2005 no new FVCIs

RBI fears asset bubble, wants to restrict capital flows into real estate

FDI Investments under automatic route pour in

Exit pricing restrictions apply, market believes they will fade away
Impact of FDI

So far, negligible
About USD 750 Million deployed

Potential, huge
Another USD 7 – 8 Billion waiting in the wings
Some recent transactions
Companies
Morgan Stanley–Oberoi Constructions
Citigroup Property InvestorsGera Developments
Och Ziff-Nitesh Estates
DSP Merrill Lynch-Mantri Developers
Morgan Stanley-Mantri Developers
Morgan Stanley- Alpha G Corp
USD Mn
152
120
60
55
65
65
Indian Realty Companies Listed on AIM
Name of the Company
Amount Raised (US$ Mn)
Unitech Corporate Parks Plc (Unitech Ltd)
360
Trinity Capital Ltd
450
Ishaan Real Estate Plc ( K Raheja Corp )
350
Dev Properties Ltd (Indiabulls Real Estate Ltd)
265
Noida Toll Bridge
50
Hiranandani Constructions Ltd
750
Impact on real estate consumers

Combined with a conducive land supply and approvals environment, and
infrastructure, FDI can create high quality real estate stock of international
specifications at reasonable prices

Better choice, better use of technology, international amenities and planning

Compared to 1991, don’t we have today much better cars, motorcycles,
telephone systems, white goods ?
Impact on developers

Professionalise

Accountable

Raise the bar

Adopt global best practices

Attain size and scale

Change their mindset

Improve or perish
Deal Structuring – Layered process

Agreement – Fund and Developer – key issues
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
Affirmative Voting Rights
Reserved Matters
Indemnification against third party claims
Debt raising
Non Compete
Liquidation Event
Dispute Resolution
Tag Along
Exit
Impact on the industry

Consolidation

Standardisation of product

Tighten and improve supply chain

Convergence of capital markets

Increased participation by the finance community – sophisticated
structuring, instruments, retail investor

Environment friendly

Westernised
First, the roadblocks need to be cleared

Land supply laws

Land Zoning and Approvals Process

Infrastructure – hard and soft

Stable policy that is forward looking
A word of caution
15 - 22 May 2006
FII Outflow (USD Mn)
% Fall in Sensex
22 - 28 Feb 2007
851
870
11
7.7
Thank You
Contact details
If you would like any further information or clarifications, please contact:
Name
Ashwin Ramesh
E-mail
[email protected]
Tel No.
91-22-2285 3032
91-98210 40267
Address: Primary Real Estate Advisors P Ltd
Regent Chambers, #107,
Nariman Point,
Mumbai – 400 021
India
Website: www.PrimaryIndia.com
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