Thursday, May 24, 2007

Restrictions on Realty VCs

The real estate sector has been on the radar of regulators for a while now. The fear of an asset bubble being formed due to increased interest in the sector, especially by the ever growing realty funds, has been sensed by one and all.

As per an article in the Business Standard, the government is reviewing norms for investments by foreign venture capital funds in real estate, after the Reserve Bank of India coming round to the view that such funding is helping create an asset bubble in the sector.

The government had recently clamped down on the use of external commercial borrowing by real estate companies in order to check capital inflow, which, it feels, is fuelling inflation in the country.

With stock market sentiments too turning against the sector, real estate developers were looking at private equity funds as their last hope. But that source too could suffer if the proposed clampdown on venture capital funds takes place.

Under current norms, foreign venture capitalists invest in real estate through private equity firms in the form of foreign direct investment.

While market regulator Securities & Exchange Board of India has cleared the decks for registration of such VCs, the Reserve Bank of India has opposed their operation and not allowed them to open foreign exchange accounts. If the Reserve Bank gives the green signal, such investments will be clubbed under institutional investments.

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