December 16, 2009: The government is planning to remove the lock-in on trading in capital market instruments such as global depository receipts (GDRs) and foreign currency convertible bonds (FCCBs) issued by real estate companies.

This is consistent with the government’s decision to review the three-year lock-in on FDI in real estate companies. In November, the department of industrial policy and promotion, the nodal agency for all policy on FDI, had moved a Cabinet note to remove the mandatory lock-in period for original investment in the construction industry.

Policy consistency requires that GDRs and FCCBs issued by real estate companies be allowed to be traded freely once the cap on FDI is removed. This will benefit listed builders, including such players as DLF, Unitech, Parsvnath Developers and Ansal API. So far, because of the restrictions on FCCBs and GDR issues for real estate, few players have gone in for these instruments. “Technically we can issue GDRs, but our investors will not be able to trade them on a stock exchange, hence it defeats the purpose. And since GDRs and FCCBs are capital market issuances they need to be freely traded,” said the CEO of a Delhi-based real estate company on the condition of anonymity. In January 2009, as part of the second stimulus package, the government allowed real estate companies to mop up funds through external commercial borrowings (ECBs) for integrated township projects.

The holders of FCCBs have the option to either redeem the bonds after the maturity period or convert them into equity at a predetermined price. Until then, the bonds carry a nominal rate of interest. GDRs, on the other hand, are derivative instruments that have ordinary shares as the underlying asset.

Vivek Mehra of PricewaterhouseCoopers said, “This is a welcome step. Currently real estate is the only sector with a lock-in on GDRs and FCCBs. This will provide impetus for more investments in the sector which is facing a liquidity crunch.” Unitech, India’s second-largest real estate company, has moved a proposal to raise $700 million through FCCBs. The company has also sought exemption from the Reserve Bank of India for the three-year lock-in on the grounds that since it is a convertible instrument it should be treated as debt till the time of conversion. Unitech had sought permission from the FIPB in March this year to issue Rs 5,000 crore of GDRs but put the plan on hold because of the mandatory lock-in.