Repatriation poses a dilemma for Indian expats

Dubai: High networth expatriate Indians are caught in a dilemma that Hamlet would empathise with.

Should they be looking for an immediate repatriation of funds from the sale of ancestral property back in India, even though the dollar has in recent times been soft?

Or should they wait until the currency and interest rate situation becomes more favourable?

The doubts relate to a provision under which the Reserve Bank of India (RBI) allows non-resident Indians (NRIs) to repatriate funds amounting to $1 million (Dh3.67 million) a year, provided these funds are from the sale of their ancestral property.

Such a regulation has been in the public domain for some time, but its use was until now limited to the very top layer of high networth Indian expatriates.

But now, with all the volatility that the dollar has gone through and the belief in some quarters that the Indian rupee is headed for a period of relative strength, NRIs are wondering if they are better off taking the repatriation route.

It coincides with a per-iod of healthy growth in Indian property values and when India's developers are acquiring large tracts of land to create apartment blocks.

It is also why the particular RBI regulation is being dusted off and looked into more intently.

"Certainly it comes as a relief to many NRIs as their ancestral properties are either getting into legal tangles or being taken over by hostile real estate agents," said Kalani M. Lal, CEO of the DIFC-headquartered KBC Aldini Capital.

Legal disputes

"To a large extent it will avoid protracted legal disputes. Considering the present-day inflation and the general trend that such guidelines are not released often, the amount set by the Indian government looks to be respectable in the short term. It will also settle many of the small amount transactions quickly and give a much required relief to the NRIs."

Investment experts believe what the Indian authorities have done is to create another option for NRIs.

Also, the government has been "pushing" for full capital convertibility for quite some time, "and one such move is the repatriation test," said Lal.

"The government will be closely watching these transactions and will draw up further meaningful macro-economic policies to take India to the next level of capital convertibility," Lal said.

For those investors expecting to take cash out, there are some factors to keep in mind.

"They should note that repatriation could take a little bit longer and there is always an income tax element to factor in," said Siddarth Razdan, promoter and chief operating officer at a start-up insurance brokerage in Dubai.

"Presently one could make around 5.5 per cent net of income tax at the highest tax bracket by investing in a fixed deposit in a bank in India.

"And as the outlook for the rupee is positive, one could also have currency gains to cheer about. Fixed maturity plans are another option which investors could explore and post-tax returns here could be higher by around one per cent.

"For long-term maturities, one would need to factor in implications of the Direct Taxes Code which is scheduled to kick in from 2012."

But as to its actual impact on India's real estate market, the RBI regulation is not expected to be significant. Domestic transactional activity continues to be robust and foreign direct investment flow into Indian property is rising.

Against the wider picture, any outflow from the sale of ancestral property would be minuscule.

"The overall impact would not be very significant in market terms — only ancestral properties in the major metros would have gained considerable value over time, and these exist in scattered isolation at best," said Ramesh Nair, managing director for west India, Jones Lang LaSalle India.

"There may be a short-term influx of supply in high-profile locations, but the valuations in these locations are not likely to be affected."

Benefits

Dubai's developers could try and leverage some benefits out of the situation. Market sources said transactions involving end-user buyers of Indian origin are still there in the local property market.

Indian investors should find attractive investment options available at the right price.

For local developers, the task is to convince them.

Prices may be cut

Developers in Mumbai may cut record-high home prices to revive flagging sales after banks curbed credit to the sector, according to the IIFL.

Registrations for home sales, leases and property transfers fell 15 per cent this quarter from the three months ended September 30, the brokerage said. "Selective price cuts" were expected in the quarter ending March, it said.

Real estate companies face rising borrowing costs and shrinking access to credit after a corruption inquiry into loans to some developers, according to Bank of America's Merrill Lynch unit and Ambit Capital.