Tougher FDI norms for housing

The finance ministry has called for tougher foreign direct investment (FDI) norms in the housing and township sector. It has also proposed stringent monitoring to ensure FDI rules are strictly followed in this “sensitive” sector.

The ministry has said a more effective monitoring mechanism could be set up jointly with the ministries of commerce and urban development to ensure FDI does not “render policy objectives in a sensitive sector of the economy with limited practical significance”.

At present, 100 per cent FDI is allowed in this sector, but with some riders.

However, there have been concerns over the lack of clarity of rules, the need to tighten these and the difficulty in monitoring these.

For instance, foreign companies willing to invest in this sector need to have a minimum capitalization of $ 10 million for wholly-owned subsidiaries, and $ 5 million for joint ventures. The funds have to be brought in six months of commencement of business. Also, the minimum area to be developed under each project is 10 hectres.

The government has also imposed a lock-in period of three years for repatriation of investments made in this sector after the minimum capitalization requirements are complete. Also, 50 per cent of the project must be completed in five years from the date of statutory clearances and the investor is not permitted to sell undeveloped plots.

The finance ministry has now suggested that rules governing repatriation of funds should be tightened to protect consumers. The ministry has suggested that a clause should be added to say that repatriation of the original investment would be permitted either in three years, which is the current rule, or after the conditions which stipulate that 50 per cent of the project is developed in five years is completed, whichever is later. It simply means that the date of repatriation could go up to even five years if the investor has not completed half the project. To ensure that rules are not violated and make monitoring easier, the departments has made it clear that the “minimum capitalization” norm for FDI in the sector would be on a project-wise basis and not at the company level.

Real estate companies looking for FDI should set up a special purpose vehicle (SPV) for the specific project and ensure that the minimum capitalization norms are adhered to in the new company floated for the project for which FDI is being sought.

The commerce ministry had earlier proposed that a holding company, implementing several real estate projects, could comply with the overall minimum capitalization requirement by aggregating the minimum capitalization of all the projects.

The finance ministry, however, said considering the weak oversight mechanism, monitoring of compliance is a herculean task and not amenable to practical implementation.

Also, the government has clarified that if the minimum capital required is brought in installments or tranches, the date of completion of the minimum capitalization norms would be reckoned to be the day of the last tranche. It is from this date that the lock-in period would be calculated.