Lock-in is the new trend for investors

IN A world where capital is scarce and investors are tentative, policymakers, regulators and even companies are checking flight of capital through riders in investment contracts, at least in India. Lock-in is the name of the game: you can't cash in on your investment before a minimum period of time. Sample this: telecom regulator Telecom and Regulatory Authority of India (TRAI) mooted a three-year lock-in for promoters' equity in new telecom operators after Unitech and Swan offloaded substantial stakes in their telecom ventures to foreign companies within nine months of acquiring the licence.
    Similarly, real estate companies and even wealth managers are insisting on lock-in periods ranging from six months to three years from home buyers and investment clients to check volatility and speculative activities. Also, the government and the central bank are considering lock-in clauses on foreign fund flow into venture capital firms and bank loan securitisation to improve risk management.
    The latest trend has its roots in the collapse of financial biggies in the West, which led to a significant flight of capital from world over to safety in US treasuries, resulting in a global cash crunch and a market crash. At one point, three-month US Treasuries were trading at negative yields highlighting the level of fear in markets. With leading economists from around the world blaming the free market economy for the current global recession, regulators and policymakers are taking steps to check free flow of capital across industries and economies.
    "While the particular reasons for each instance may differ from case to case, the broad underlying consideration remains the same — providing an antidote to the uncertain business conditions," Kaushal Sampat, chief operating officer of Dun & Bradstreet India, feels. Housing developers, for example, have introduced lock-in periods for buyers in new projects to keep out speculators, who pushed prices to an unsustainable level during the realty boom that was halted in the middle of last year. Getting rid of volatility
TATA Housing is one of the companies that recently announced a lock-in period of six to eight months for its low-cost homes in Mumbai. India's biggest realty player DLF too has introduced a lock-in period of one year for re-sale and is selling only one flat to each family in its upcoming residential projects.
    Even wealth managers are creating strategic portfolios for their rich clients where they require to invest a minimum sum with a lock-in period.
    "Ultimately, lock-ins are a method of shielding a business or an individual against actions taken on impulse," Rajesh Saluja, CEO of ASK Wealth Advisors, explains. The company, sometime back, had launched a product for its high networth individual clients where they were required to invest a minimum of Rs 10 crore with a lock-in period of three years.
    The central bank is also doing its bit to fix the liquidity issues that surfaced in the current crisis through the lock-in method.
    The Reserve Bank of India (RBI) recently prescribed a minimum lock-in period for securitising loans purchased by banks. This means banks would be barred from selling the assets immediately after the creation or acquisition of assets.
    There are plans to even bring stricter norms pertaining to inflow of foreign direct investment (FDI) into trusts registered as venture capitalists (VCs). A government proposal aims to introduce a lock-in period and a minimum capitalisation stipulation for such inflows to ensure that VCs serve only this legitimate objective.
    "It (latest trend) is primarily because of the financial turmoil. The idea is to get rid of the volatility from the system and provide more stability to the economy," says Viraf Mehta, director of Mazars India, a financial advisory firm.
    Business consultants believe that at a policy level, lock-in requirements act as a counter-cyclical risk weightage in highrisk areas. This ensures there is a certain amount of predictability in an economic activity, which enables better business planning and execution. In some other instances, the notion is to restrict entry in to the market to only those players with long term growth objectives.
    "Eventually lock-ins are allowing tying down of customers over a foreseeable time horizon," says Sampat of Dun & Bradstreet.
    In the mutual fund space too, fund houses are launching more close-ended funds in the market. All four of the ongoing new schemes launched by Tata Mutual Fund are close ended.
    Lock-ins, Mr Saluja says, can be an effective method to ensure working capital (whether through the venture capital or public markets route) is available when the business needs it most. "Maintenance of this capital during the growth phase is critical to the survival of the business," he says.
    aman.dhall@timesgroup.com 

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