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The finance ministry has rejected a proposal by the Department of Industrial Policy and Promotion (DIPP) that had suggested dropping the mandatory three-year lock-in for foreign direct investment in the real estate sector, affecting the prospects of the sector raising funds from overseas. The finance ministry has rejected the proposal from DIPP seeking to remove this (lock-in on FDI) clause, a government official confirmed.
Responding to a draft cabinet note circulated by DIPP in November 2009, the ministry said the lock-in acted as a deterrent, checking speculation and shielding the sector from sudden flight of capital in the time of crisis, such as the global meltdown in 2008 when foreign institutional investors pulled out nearly $5 billion from equity investments between September and October.
DIPP formulates FDI policy, which is administered by the FIPB, a finance ministry wing. FDI policy has to be also compliant with the Foreign Exchange Management Act. This means the policy is administered jointly by RBI and the finance ministry. The ministry’s contention is that despite the correction after the global meltdown, real estate prices did not come down as much as those of some other asset classes. This was largely because the lock-in shielded the sector and prevented foreign players from exiting suddenly which could have led to a crash.
The central bank had initially been opposed to opening up of this sector to FDI but had relented only after the lock-in was introduced. |
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