Forex Flows: Is it turn of FIPB to act now Date:12/11/07

Basic policy measures announced by SEBI on October 25 th 2007 includes easier registration for FIIs & inclusion of Proprietary Sub Account 'read Individual investors of Foreign origin' in the process. It has also announced that it shall remain 'sensitive' to FIIs or funds which have Indian Fund Managers or less than a year of Track record. If the measures are implemented in spirit, we might see money of 'Anonymous Investors' including funds that have been defining our capital markets by making entry through 'back channel' having to go out of action. This means Indian managements which may have been playing in market using their 'expert knowledge' (read insider information) of listed companies & using their horde of black money stashed in foreign shores, may find going a little tougher. However, by no means can it be stated that the 'Anonymous Funds' or the 'expert knowledge' will be out forever. In fact, availability of such funds itself gives rise to the problem. Their shall always be people with 'Insider Information' & willing to make that extra buck & the funds shall always be ready to seek higher returns even if it means parting with somewhat higher premium to come through alternate channels or in different guises.

What essentially SEBI policy announcement does is, it presents an opportunity to existing & newly registered FII investors to expand their holdings by purchasing the same from 'Anonymous Investors' who shall have to exit before making a re-entry should they wish so. The 'small investor' in India should therefore be cautious & identify sectors & companies/managements the 'Real' FIIs are comfortable with & are willing to expand their holding. Otherwise, he should be prepared to gamble for a loss. If past is any indicator of the future, Indian media has largely remained silent on the subject. Though our companies make pompous declarations on holdings by FIIs & Domestic Institutions from time to time, the actual buying & selling action of FIIs is rapid & happen away from media glare. The media seems uninterested in detailed analysis & favours leaving its audience to the 'Gyan' from our numerous unscrupulous brokers & plethora of advisors with little competency or inclination to decipher

the 'market signals'. Also, even investments made by P-note investors generally get classified as FII investments in the corporate financial disclosures & hence actual component of 'Real FII interest' in the companies is difficult to assess. It might be wise here to state that FIIs are just one of the components of market deciding valuation of stocks & not the only factor, however they have certainly emerged as the most influential factor.

Now, with SEBI done, our principle Exchange Regulator RBI has once again started to 'Coo' for some more 'regulatory activism'. This is apparently to chasten the 'FIIs' whose investments inflows didn't show signs of receding. With such noise, the 'Anonymous Investors' may feel better to make an exit at present high valuations rather than wait for stronger regulatory action that may drive down the sentiments. With all this said, it may be noted that one of the principal reasons for increased Foreign funds inflow has been India's Real Estate sector. With an economy growing steadily at 9 percent, an ever increasing beeline of MNCs to enter the country, a rising number of persons in High Income Group & a resurgent domestic Corporate sector with global ambition; all of these make FIIs comfortable in committing funds to the evergreen Real Estate sector of India. Added to this stream of investors is the 'Resurgent NRIs & PIOs community' willing to own a piece of 'Resurgent India' for both 'appreciation' & for that 'just in case situation'. Even domestic corporates (not present in Real Estate sector hitherto) have realized the 'mullah' in the business & have entered the business in various guises like SEZs, Retail, Hotels & Entertainment, office space & integrated township development etc.

The dilemma at the central bank is its desire to maintain the growth momentum,even as it wants to restrict the foreign money in Real Estate (with speculative intent) be out. Unfortunately, it doesn't find for itself, too many options other than keeping interest rates high for the Domestic Retail investor in Real Estate sector (read individual property owners). With foreign funds becoming cheaper, the FIIs may find still more of the cheap funds for their Investments. Prevailing bleak sentiments

overseas is likely to keep their cost of funds low for sometime & give enough headroom for this kind of 'India Risk'. It should be noted that money in real estate comes as FDI money under regulations of Foreign Investment Promotion Board (FIPB) as well as FII money regulated by RBI/SEBI. Any significant regulatory flip flop from FIPB might result significant credibility loss for the institution since its track record vis-a-vis competing countries is not so good. Also, the specter of speculative 'FDI' in the sector i.e. funds that have come in just to take advantage of high interest rates & rising Rupee; rather than any real investment goal seems to have tantalised RBI's call for action along with other things. As far as FII money in Real Estate is concerned, the same is because of regulatory glitch that has failed to lock in long term investment commitment for full investment value (& restriction stands only on an 'initial investment amount' of min. 5 million USD) in Real Estate. The MCA (Ministry of Company affairs) along with FIPB, RBI & other regulators can easily fix this gaping hole in the policy.

While making equity investment norms somewhat more contemporary to address the situation of speculative 'FDI', it might be advisable that the board & the government should look at the larger picture of supply side bottlenecks in the real estate sector, which has been the real cause of worry. Availability of quality real estate as per international standards is highly inadequate in the country. Under the present scenario, where demand is soaring, whatever little is 'produced' shall get 'consumed' sooner than later. Therefore, FIIs who know that large foreign players are itching to enter & take advantage of the vast Indian market feel safe making bets on urban real estate. The Indian developers are willing to offer them a comforting arm as this not only reduces project risk, but also brings them much needed funds, growth & profits. For the ordinary investor, not only the cost of land but the cost of construction has also gone up. So, we have the irony that the 'Dream House' is nowhere near the dreams of the 'Aam Admi' while the real estate sector continues to boom. It might be advisable that under the circumstances FIPB/Government should actively look at forming a 'Real Estate Investment Promotion Board' to promote & manage investment in the sector, for healthy & inclusive growth of the sector. It may also

have developers, banks, FII Representatives, NRIs & PIO Representatives as advisor should the sections desire so. The new board's charter should be to work closely with state governments to develop Townships, Industrial clusters & commercial/office space for the Ordinary class. The states should create Special Purpose Vehicles to create Townships, Industrial clusters & other needs, designed primarily keeping the Indian pocket in mind. The board can then scout for Institutions willing to 'own' the SPVs & complete the scheme in somewhat similar fashion as is happening the power sector (via Ultra Mega Power Projects). In a way, this shall replace the defunct Industrial Development Corporations & Development Authorities who have failed to keep pace with the changing times while giving reasonable profits to venturesome investors. It shall address the supply constraint to some extent & curtail speculative profiteering by FIIs & selected few in India. Who knows, if properly executed, such scheme might bring down property prices for the 'Aam Admi' a little lower just as in case of power sector, as it appears so far. A Board specially designed for Real Estate shall no doubt be in a better position to manage Foreign Investments in the sector rather than the omnibus FIPB which sees all industries as the same & has little knowledge of needs of each industry cluster for which it processes investment proposals. The Board for Real Estate investments promotions may also be allowed to process independent applications, besides soliciting investments for 'state sponsored' schemes. This shall have a pro-development bias, a better grip on the market & a tighter regulatory body to prevent speculation and result in better infrastructure creation in the country.