FDI investments in realty cos under RBI scanner

Foreign direct investments (FDI) worth USD 6 billion to the real estate sector have come under the scanner of the Reserve Bank of India. CNBC-TV18’s Priyanka Ghosh reports.

Here is a verbatim transcript of Priyanka Ghosh’s comments on CNBC-TV18. Also watch the accompanying video.

The investments made to real estates companies by foreign funds have taken the compulsory convertible debentures (CCDs) route, which means that the money staying in the books of the real estate companies as debt and after three years, it will have to convert itself into equity.

Under the Press Note 2 of 2007, a company cannot have an exit option built into these kinds of agreements, and on the contrary, most of these agreements have in fact an exit option. It means that there is a put and call option that is built into these agreements, which is not permissible because it is not an equity transaction. It is essentially debt for three years bearing an interest rate, bearing a coupon rate after which it will turn into equity.

The RBI is therefore scanning some of these agreements and documents. Several funds and developers who have received the RBI notice said they have given the regulator the details of the transactions, carried out in 2006 and 2007.

Not surprisingly, these investments were made around that time during the pre-IPO listing stage for most real estate companies and therefore they thought they would heavily leverage on the boom. With the financial situation being completely different now, they might want to exercise that call option and that would mean that the foreign direct investments will go out of the country, the reason, which is the reason why the RBI is investigating the issue.

Published on Thu, Apr 09, 2009 at 20:07 , Updated at Fri, Apr 10, 2009 at 08:33 Source : CNBC-TV18