ASIA NEWS: More red tape

As if there wasn’t enough bureaucracy in Indian real estate already, another ruling has been passed by the government that is sure to add to the headaches of the overseas investor.

That was the reaction of a handful of India-focused private equity real estate executives contacted by PERE after the Department of Industrial Policy and Promotion and the Ministry of Commerce and Industry passed a law dictating that foreign direct investments (FDI) would need to be ‘locked-in’ for three years.

From 1 October, all foreign direct investments made from the date of investment or completion of minimum capitalisation — whichever is later — will be affected by the new law, which was passed alongside various others relating to construction and development.

While the law will not affect real estate investments made by foreign capital sources prior to it coming into force, it is expected to push out exit timings for investments made afterwards, according to Ravi Hansoty, Asia head of Citi Property Investors.
Hansoty, who will be leaving the company shortly to launch his own India-focused fund, warned that IRRs will likely be lower as a result.

“In development deals, which constitute the majority of FDI transactions, equity is funded in tranches,” Hansoty said. “Each tranche is viewed as a separate investment so, with exits extended, IRRs will be lower.”

Hansoty singled out existing investments in development projects completed at the end of an investment fund’s investing period.  “These may have an issue, as the fund life and the lock-in period could be very close or have to go into overtime.”

Sachin Shah, founder of Samsara Capital, said: “This is taking one step forward and three steps back. It sends all the wrong messages to the investment community.  The very nature of development deals is that not all your capital is invested in one go. Some Indian government bureaucrat hasn’t thought this through.”

Shah said Samsara Capital is unlikely to be affected immediately as it has fully invested the equity of its $100 million opportunity fund, which is managed jointly with London-based Catalyst Capital, but he fears for those with uncommitted capital.

Parry Singh, co-founder of Red Fort Capital, said existing properties currently under water and in need of additional capital, were the most likely to suffer. “Any top-ups in capital would mean they are locked in for another three years.” However, he believed India’s public authorities would demonstrate flexibility in certain reasonable scenarios.

“When repatriating money after you’ve topped up, I don’t think there will be a problem to repatriate earlier than the additional three-year lock-in for the new monies — especially if the development is complete,” Singh said. “The approvals for such repatriation should be possible with procedural approval.”