Put & call options breather to real estate PE sector

The government's move to provide a fillip to investors by allowing put and call option on contracts is set to be notified soon, but it already has real estate private equity (PE) funds excited. Fund managers say, the ruling will help unwind transactions easily and hedge risks. CNBC-TV18's Priyanka Ghosh reports.

When almost ten real estate IPOs were called off due to the stock markets turning volatile in 2011, private equity investors who had hoped to gain by exiting through the IPO route found themselves at a dead end. But now the proposed regulation to permit put and call options may just be what these investors were waiting for. Sunil Rohokale, CEO & MD, Ask Group says, “Put and call options are necessarily used in equity investments to hedge the risk because in the Indian real estate sector. Because of the approvals, the projects get delayed and the holding period of investments gets enhanced. To hedge the risk, if part of an investor's shares can be converted at a specific price and time, I think it suffices the purpose of the risk management as far as the international investors are concerned.”  While some fund managers hope that along with an easy exit route, the time and price of exit will also be predetermined, others say that the regulation will legalise the enforcement of put and call options in compulsorily convertible debentures and preference shares. However, investors will be allowed to exit at fair market value at the time of exit because the RBI will not allow a speculative transaction. Apart from unwinding a transaction, according to industry experts the proposed law is also expected to boost private equity investment in the sector, which, post 2007, has never recovered. It is also expected to aid companies to raise overseas funds at a faster pace.  According to Ernst & Young, fund managers are taking 6-7 months longer to raise funds than they did in 2006. This proposal will put FDI investments in India at par with global practice so companies are hoping that they will be able to sell the India story better.