In the past few years, FDI worth billions of dollars came in as overseas investors subscribed to equity and quasi-equity products — often with put options — sold by real estate firms which were starved of bank finance. But a chunk of this inflow was based on an interpretation that the three-year lock-in on the FDI applied only to the ‘original' amount brought in and not the full quantum of FDI in a project. Many investors took advantage of this: an offshore fund which decided to put in, say, $25 million split the inflow, by first bringing in $5 million, the minimum amount, and then bringing in the balance $20 million subsequently. The understanding was that the lock-in applied only to $5 million and not $25 million. This flexibility in interpretation disappeared after the government clarified last year that the full amount, irrespective of whether the money comes in tranches, would be locked in for three years. The move, which came as a jolt to several foreign investors, paved the way for the more recent NCD route that's catching on among local developers.

"There are advantages. First, there is no lock-in because the FII can sell the NCD as and when it wants. Second, the debt is secured against mortgage of assets, pledge of shares, etc. Third, unlike FDI, here the foreign investor can fund even those projects which are not FDI-compliant," said a lawyer familiar with such debt-raising. For a project to receive foreign equity or FDI, it should not have less than 50,000 square meters of built-up area, among other things. "These conditions don't come in the way when a foreign fund buys NCDs," he said. Interestingly, such NCDs have also been issued by a leading NBFC which, like property firms, are restricted from tapping the ECB market.

According to a real estate fund manager, some foreign investors reluctant to increase their equity exposure post the downturn, prefer secured debts with a decent interest return. Sebi's listing regulations extend to debentures that have been privately-placed; and, the NCDs can be listed even if the real estate company or a project specific special purpose vehicle floated by it is a private firm or an unlisted public entity.

Courtesy:- ET dt:- 04-Mar-2010

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