Press Note 2 of 2005, which deals with foreign direct investment (FDI) in the real estate sector, imposes a three-year lock in foreign investments. It states:
Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB
The question that arises is whether a foreign investor is prohibited altogether from selling its investment during the lock-in period or whether it is prohibited from selling the investment to Indian residents only. Although the provision is not entirely clear, the use of the word “repatriation” would suggest that sales to Indian residents and the consequent outflow of foreign exchange during the 3-year period is prohibited. In that case, there is nothing preventing a foreign investor from selling the investment to another foreign investor during that period as there is no repatriation of foreign exchange from
A report in the Economic Times a few weeks ago suggests some divergence of views among the regulatory authorities:
Foreign investors in Indian real estate cannot sell their stakes to another foreign investor before three years, the Foreign Investment Promotion Board (FIPB), the body that clears such proposals, has said.
With this, FIPB has overruled a provision in FDI policy that exempts foreign players from the rule in cases where fund transfer is from one non-resident to another. Till now, this three-year lock-in was applicable only on foreign investment in real estate and not on investors.
The FIPB view is contrary to the stand taken by the department of industrial policy and promotion (Dipp), the nodal agency that formulates FDI rules in the country. Dipp’s view is that a foreign investor can repatriate funds if it offloads its stake to another foreign investor as the actual investment in a project would remain intact and only its ownership would change. However, FIPB has ruled that an investor can’t sell its investment even to a foreign player before the end of three years.
The FIPB appears to have adopted a conservative view of the provision. In any event, there is always the fallback option of approaching the FIPB for specific approval to waive the lock-in period.
Hat tip to Bhushan Shah for sending in the link to the news report.