GDR/ADR route unlikely for realtors

Real esate companies are likely to be barred from issuing American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). The reason: it may be difficult to enforce the conditions attached to foreign direct investment in real estate, particularly, the stipulation that investors must lock in their investments for a minimum period of three years.

This condition, which would be appliable to foreign institutional investments as well has been introduced to artificial inflation of prices and sudden flight of capital in this sector. The RBI is particularly cautious about the nature of capital invested in this sector, as it is easy to build up asset bubbles that could prove dmamaging for the entire economy.

The government is expected to come out with guidelines for pre-IPO placement in the realty sector soon. ADRs and GDRs are completely fungible and can change hands and defeat the verystipulation of the lock-in period which is present in the FDI guidelines. In fact, the government may keep a three-year lock-in period for even foreign institutional investment (FII) which comes in through the pre-IPO route.

Real estate is a sensitive sector for which the government has put in place certain conditions for FDI such as a three year lock-in period, minimum capitalisation of $ 5 million for joint ventures and $10 million for wholly-owned subsidiaries and development of at least 10 hectares of land. Though the government had fully opened FDI in real estate in 2005, it imposed these restrcitions because of the sensitivities involved with the sector.

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