Skip to main content

Realty Funds: MYTH & REALITY

Ever since the Foreign Direct Investment (FDI) norms were relaxed for investments into the real estate sector, the Indian real estate market has been drawing the attention of foreign realty funds (i.e venture capital funds with a focus on investments in the real estate sector). These realty funds are essentially pooling vehicles that raise capital from a number of investors with a profit sharing model on returns.



The Indian real estate sector continues to be one of the most appealing investment avenues, despite issues such as land title, lack of rationalized stamp duty legislation and absence of specific tax incentives for realty funds. The government currently permits 100 percent foreign investment in companies engaged in the development of townships, housing, built-up infrastructure and construction development projects. However, such investment is subject to conditions contained in Press Note 2 (2005) which include conditions such as minimum built up space, minimum capitalization, lock-in period of three years, etc. There also exists a lot of ambiguity around some of the conditions contained in the said press note. Separately, under the existing exchange control regulations, no Indian company is permitted to raise debt from non-residents to be utilized for real estate activities.



Given the above constraints, realty funds which make investments into real estate companies in India invest only by way of equity or other instruments which are compulsorily convertible into equity, such as compulsorily convertible debentures or preference shares (as these are treated as FDI as per the existing policy). Under the existing regulations, pure play debt funds and mezzanine debt funds are not permitted to directly invest in real estate companies.



Another area of perceived disadvantage to the realty funds invested or wanting to invest in India is the absence of specific tax incentives for realty funds. Currently, venture capital funds investing in certain specific sectors including software, information technology, bio-technology, etc are eligible for tax relief on their income by way of dividends and long term capital gains. However, realty funds are not entitled to any such tax relief and therefore, invest either as normal investors and take benefit under the provisions of the tax treaties with Mauritius and other countries or have to rely on the normal provisions of tax laws to ensure single stage taxation.



Hitherto, the Indian real estate sector was not known to be an organized sector with good corporate governance and strict disclosure requirements. Real estate funds are good for the industry as they help in bringing organized money in this fragmented market and require the real estate companies to adhere to corporate governance and disclosure requirements.



Realty funds also provide real estate developers better access to competitively priced capital, particularly since banks are generally reluctant to lend to developers and in particular smaller and emerging players. Given the fact that a significant portion of the urban development in India is being undertaken by the private players, the presence of realty funds would boost the real estate sector in particular and the Indian economy at large. India, should take a leaf out of the book of some of the south Asian economies whose economies achieved sustainable high growth rates due to the real estate sector.

Popular posts from this blog

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Banks tweak ATM strategies

Unrestricted usage of third-party ATMs ends on Thursday The era of free ATM usage will come to an end on Thursday, October 15. Every transaction carried out on another bank’s ATM could cost an account holder as much as Rs 20 and withdrawals will face a limit of Rs 10,000, the Indian Bank’s Association has said in its guidelines. According to the guidelines, banks can offer savings-account holders five free thirdparty withdrawals every month —they can be charged from the sixth transaction onwards. Current account holders can be charged the fees, which ranges from Rs 18 to Rs 20, from the very first transaction. Most banks are convinced that charging current account and no-frill account customers from the word go is a good idea. It suggests that the usage of ATMs by current-account holders is price-insensitive. For others, banks have decided to frame their charges depending on the profile of the customer. For instance, HDFC Bank is allowing its salary account and premium customers an unl...

Women need to plan for Retirement

Plan for Retirement Online       Higher life expectancy, lower pay and fewer work years necessitate thorough planning.   Women have raced ahead of men in various fields but, when it comes to retirement planning, they tend to lag behind. Despite saving a higher proportion of their salary, compared to men, women generally do not take retirement planning seriously. Below are some of the reasons why they should: According to the United Nations Department of Economic and Social Affairs, in India, the life expectancy of women is 69 years and, of men, it's 66 years. Due to this, a woman will need an additional `55 lakh to manage her living expenses (see table).Besides, usually, women work fewer years compared to men to take care of children and family.Further, a recent study by Korn Ferry Hay Group shows that women in India earn 18.8% less than men. Not to mention, a higher life expectancy can also mean higher medical expenses as the likelihood of health ailments such as diabetes, high...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now