Realty companies will have to hive off commercial projects

Realty companies will have to hive off commercial projects

The government may not allow real estate developers to own commercial projects such as malls in the same company that develops projects for which they have accepted foreign investment, a business daily reported.

The issue came up two weeks ago when the Foreign Investment Promotion Board took up an application from Vatika, a New Delhi-based real estate company, seeking to retain projects that do not comply with FDI guidelines for the real estate sector.

The board deferred a decision and asked the department of industrial policy and promotion (DIPP) to examine it. A senior DIPP official quoted in the report said the proposal cannot be approved as it is outside the purview of FDI guidelines.

“Instead, the realty companies will have to set up an SPV to manage such projects,” the official added. In case DIPP refuses permission, it is possible the Vatika proposal may be rejected by FIPB as well. Their decision would set a precedent for other developers, most of whom are finding it hard to meet FDI guidelines while expanding their project portfolio.

“Approval of the proposal would translate into exemption from Press Note 2 that lays down minimum capitalisation and minimum size of projects for being eligible to accept FDI,” the Dipp official said. The government has also specified a three-year lock-in period for such ventures.

US-based Wachovia Corp has invested in Vatika through subsidiary WDC Ventures. According to the Vatika proposal, funds from WDC Ventures would be exclusively used for developing projects within the parameters of FDI rules. However, Vatika had some projects before accepting FDI which it wants to retain.

Explaining the company’s move, a senior executive at Vatika said it was targeted towards increasing the company’s valuation. “A higher valuation naturally would have given the company an edge in raising funds from private investors or capital market, as and when it approached them,” the official added.