The finance ministry has reportedly turned down a proposal by the Department of Policy and Promotion (DIPP) that had suggested doing away with the mandatory three-year lock-in period for FDI in the real estate sector.The ministry’s point of view is that a lock-in acts as a deterrent, checking speculation and protecting the sector from the sudden flight of capital. This could be particularly true at times of an unprecedented crisis, such as the global meltdown in 2008, when foreign institutional investors pulled out nearly $5 billion worth of equity investments between September and October 2008.
For sure, there is a big difference between portfolio investments or hedge fund money coming into the stock market and money that is being channelled into the development of projects that by nature are of a much longer gestation.
However, the ministry’s contention is that despite the correction after the meltdown, real estate prices were not eroded to the extent that values of some other asset classes were, largely because the lock-in prevented investors from sending their money back home.
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