The cloud on real estate mutual funds (REMF) has lifted. The finance ministry has brushed aside RBI’s concerns of REMFs violating foreign direct investment (FDI) norms in the realty sector. North Block has said the central bank’s concern stating that REMF scheme notified by Sebi in April contradicted FDI norms was unwarranted.

The finance ministry view could pave way for the launch of new investment avenues for small investors keen to tap the real estate sector’s growth potential. The doubts raised by RBI added to the hesitation in REMF launches.

Highlighting that the scheme allowed NRIs and FIIs to invest in real estate sector in conflict with the policy, the apex bank had asked finance ministry to intervene and take up the issue with Sebi.

The FDI policy prohibits investment in real estate but allows investment in construction and development sector with conditions like a three-year lockin , minimum capitalization of five million dollar for a wholly-owned subsidiary and ten million dollar for joint ventures, and development of at least ten hectares. The government had allowed 100% FDI in the construction and development sector on the automatic route in 2005 under the Press Note 2 issued that year.

In the reply to RBI, the ministry has stated that investment through REMFs could be allowed as there was no linkage between the investments made by a fund and its investors . REMF investors only own units in the fund and don’t drive its investments decisions on assets. Moreover, Sebi has prescribed several restrictions on investments by REMFs, government sources said.

The concerns expressed by RBI with regard to construction projects (as per Press Note 2, 2005) also did not hold much water as FII investment in pre-initial public offer are treated as FDI and face a three-year lockin , they said. There was no case for restricting NRIs investing in REMFs as they had been exempted from conditions applicable to FDI in the real estate sector.