Govt mulls easing FDI rules for construction development

DIPP wants sector activity to include townships, infrastructure and housing

In a bid to bring foreign money to the cash-strapped realty sector, the department of industrial policy and promotion (DIPP) has moved a Cabinet note seeking relaxation of riders on foreign direct investment (FDI) in the construction development sector. The move comes after FDI in real estate dropped 57 per cent year-on-year in 2012-13 .

At present, 100 per cent FDI is permitted through the automatic route in the sector, which includes townships, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level built-up infrastructure.

DIPP has also sought to reduce to 20,000 sq mt  the minimum carpet area in class-I cities with a population of more than 100,000 against the requirement of 50,000 sq mt built-up area at present. The built-up area is sought to be replaced with carpet area, as the latter can be objectively measured.

Considering the acute shortage of land in urban areas as well as exorbitant costs, DIPP has also sought to reduce the minimum requirement for land for a serviced housing project to five hectares from 10 hectares. The department also further proposed that the minimum paid-up capital in wholly owned subsidiary of foreign partners be reduced to $5 million, from $10 million at present. In the case of joint ventures, $5 million minimum capital is required even now.

Companies would, however, need to bring the entire amount within six months of commencement of the project (the date on which the building plan is approved by the statutory authority). There is no clarity at present as to when the commencement of the project be counted from.  

The note also says it has decided to change the nomenclature of the sector so that what is sought to be allowed is the activity of construction development. This will be an over-reaching term, which would include townships, infrastructure and housing. Earlier, the definition was specified.

It also noted there would be a lock-in period of three years for the repatriation of FDI from the sector. The three years will be counted from the date of completion of minimum capitalisation and receipt of each subsequent tranche, respectively. However, the department also said that the investor may be permitted to exit earlier on receipt of completion occupancy certificate issued by the competent local authority or with prior approval of the Foreign Investment Promotion Board (FIPB). The current proposal only says the investor can exit before three years with FIPB’s approval. With investors proposed to be allowed to exit earlier on receipt of completion occupancy certificate, there would be an incentive for players to complete the projects.

The note proposed to prohibit Indian investees from selling undeveloped plots, where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available.

The construction development sector received about $22 billion of FDI in 2000-2013, 11 per cent of the country’s total FDI during the period. However, since 2012, FDI in the sector has slowed down drastically. In 2012-13, it was down to $1.3 billion against $3.1 billion in the previous year.

For the first four months of the current financial year, only $167 million has flowed in this sector.