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The government on Wednesday eased foreign direct investment (FDI) norms for the construction development sector, which is expected to provide a substantial boost to the sector in terms of greater foreign capital inflows.
Notifying the decision taken by the Cabinet in November, the Department of Industrial Policy and Promotion (DIPP), the nodal agency for all FDI policy, said foreign developers would now be allowed to exit a project only after completion or after completing the basic trunk infrastructure such as roads, water supply, street lighting, drainage and sewage.
Earlier foreign developers were not allowed to take out the invested amount before three years from completion of minimum capitalisation. However, now the foreign firm can take its money out or transfer its stake to another non-resident company before completing the project on approval from the government.
“The relaxation of the lock-in period comes as a major relief for the industry. The new rules allow FDI in smaller projects, which is a big relief. Besides, by doing away with the lock-in period, the government has now made the norms much simpler,” said Akash Gupt, executive director at PwC. In a significant step, the government also allowed foreign investors to invest in completed project for "operation and management."
In other words, 100 per cent FDI under the automatic route can now come in projects that have been completed by way of townships, malls and shopping complexes, and business centres. This was not allowed earlier.
"The notification eases foreign investment rules in India's construction sector, which has been troubled by problems such as paucity of funds and regulatory bottlenecks, said Sachin Sandhir, global managing director, emerging business, and managing director, South Asia, RICS.
Projects in semi-urban and peripheral locations of Tier I cities or locations in Tier II and Tier III cities could also take off at this scale, as land prices in these regions and the total capital investment requirement were attractive, he said.
Besides, under the new policy, the DIPP has also reduced minimum area requirements. Unlike the previous policy, foreign real estate developers can now invest in construction development projects having a minimum floor area of 20,000 sq meter. Earlier the requirement was 50,000 sq meters of built-up area. Similarly, the capital requirement was decreased from $10 million to $5 million.
"This is an extremely positive step and virtually meets most of the demands made by the industry. Moreover, by permitting transfer of stakes between two non-resident companies the government has literally opened the floodgates for FDI in the real estate sector," said Punit Shah, co-head of tax at KPMG.
Between April 2000 and September 2014, the construction development sector received about $24 billion, constituting 10 per cent of the overall FDI into the country during the period. However, since 2012-13, FDI inflow into the sector has slowed drastically. In 2012-13, it fell to $1.3 billion from $3.1 billion the previous year. It again declined to $1.2 billion in 2013-14. During the first six months of this financial year, only $568 million has flowed into this sector.
