In May, the government decided to stipulate a three-year lock-in for pre-IPO allotments by real estate developers to FIIs, thus treating these investments on a par with foreign direct investment.
FDI in real estate attracts an identical lock-in, ensuring that these investors can sell only after three years, thereby curbing speculative short-term capital inflows.
The Securities and Exchange Board of India is yet to notify the lock-in for FIIs. The government has also banned use of external commercial borrowings in real estate by withdrawing the permission granted to companies developing integrated townships.
The government, however, is not in favour of having a lock-in for FII investments in real estate IPOs, as such investments are treated as short-term portfolio investments.
The RBI, on the other hand, is learnt to be holding up clearance under the Foreign Exchange Management Act for FIIs to invest in IPOs of real estate companies, said sources close to the development.
The ceiling for FII investment is 24 per cent but can be raised up to the FDI limit, subject to permission. 100 per cent FDI is allowed in development of integrated townships on at least 100 acres of land.
Sources said the RBI is of the view that in the absence of a lock-in period, IPO allotments could provide an alternative route for short-term investments by FIIs in a sector that has already seen 50 to 100 per cent price increases in major cities over the past two years.
The RBI fears that excessive foreign capital inflows could inflate prices in the real estate sector further. The central bank has suggested that if the pre-IPO route carries a lock-in period, the same stipulation should be made applicable to IPO allotments as well.
The RBI proposal does not refer to FII investments after shares of real estate companies are listed. Some real estate firms already have FII investments amounting to as much as 30 per cent of their paid-up capital.
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