The government has relaxed the norms for allowing foreign direct investment (FDI) in the construction development sector. It is expected the move will boost affordable housing projects and smart cities across the country.
At a Cabinet meeting chaired by Prime Minister Narendra Modi on Wednesday, the minimum built-up area required to attract FDI was reduced from 50,000 sq m to 20,000 sq m, while the capital requirement was decreased from $10 million to $5 million.
Also, an investor will now be allowed to exit on completion of the project or after three years from the date of final investment, whichever is earlier.
However, the government might allow repatriation of FDI or transfer of stake by one non-resident investor to another before completion of a project. Proposals in this regard will be considered by the Foreign Investment Promotion Board on a case-to-case basis.
The proposal was moved by the Department of Industrial Policy & Promotion, under the commerce ministry, to attract more foreign investment in the construction and real estate sectors.
According to an official statement, at least $5 million in FDI will have to be brought in within six months of the commencement of a project-the date of approval of the building/layout plan by the authority. Subsequent tranches can be brought in till 10 years from the commencement of the project or before the completion of the project, whichever is earlier.
Since 2005, 100 per cent FDI through the automatic route is allowed in this sector, which includes townships, housing, commercial premises, hotels, resorts and hospitals.
Though the cap on FDI remains unchanged, the government has clarified such investment isn't allowed in an entity engaged in, or proposing to engage in, real estate, construction of farm houses and trading in transferable development rights.
The relaxation in norms was hailed by industry. C Shekar Reddy, president of the Confederation of Real Estate Developers' Associations of India, said now, developers could get an alternative route of funding for their projects.
"The easing of foreign direct investment rules in the construction sector will surely provide a boost to the real estate sector and go a long way in fulfilling Prime Minister Narendra Modi's dream of creating smart cities across the country. The permission to sell completed projects to foreign investors will help Indian real estate developers get much-needed liquidity into the system," said Sanjay Chandra, managing director of Unitech.
DLF Executive Director Rajiv Talwar said, "Now, foreign investors will not be wary at all. With the positive announcements by the government and Reits (real estate investment trusts) coming soon, I do not think foreign players will hesitate in coming to India."
Between 2003 and 2013, the construction development sector received about $22 billion in FDI, 11 per cent of the overall FDI into the country during this period. However, since 2012, FDI inflow into the sector has slowed drastically. In 2012-13, it fell to $1.3 billion from $3.1 billion the previous year. During the first four months of this financial year, only $167 million has flowed into this sector.
Given the shortage of land and its high cost, the relaxation in norms is expected to help attract investment in new areas and encourage the development of plots for serviced housing. It would also help create affordable housing in the country and develop smart cities, the official statement said.
In case of construction development projects, a minimum floor area of 20,000 sq m will have to be developed, while for the development of serviced plots, there is no criterion on this front. The Indian entity investing in the project will only be allowed to sell plots for which trunk infrastructure, including roads, water supply, street lighting, drainage and sewerage, have been developed.
In completed projects, 100 per cent FDI under the automatic route is allowed for operation and management of townships, malls/shopping complexes and business centres.
Projects using at least 60 per cent of the floor area ratio/floor space index for units of carpet area not exceeding 60 sq m will be considered affordable housing projects. For the economically weaker category, 35 per cent of the total units should be constructed with a carpet area of 21-27 sq m. Such projects may have a mix of economically weaker section, low-income group, higher-category dwelling units and commercial units. However, servant quarters along with the main unit would not be considered units for economically weaker sections/low-income groups under an affordable housing project, the statement added.
Projects committing at least 30 per cent of the total cost for low-cost affordable housing would be exempted from the minimum built-up area and capitalisation requirements, with a three-year lock-in period, Finance Minister Arun Jaitley had said in his Budget speech for 2014-15.
Akash Gupt, executive director, PricewaterhouseCoopers India, said, "Relaxation in minimum area and capital conditions will result in increased mergers and acquisitions and private equity investment in this space due to lower risk and better returns on smaller projects. It will also result in better developments in urban centres, where space has always been a constraint, as it was difficult to develop a 50,000 sq m project."
BUILDING IT BETTER
- Minimum built-up area reduced to 20,000 sq m from 50,000 sq m
- Capital requirement has been reduced to $5 mn from $10 mn
- Investor can exit after completion of the project or after three years from date of final investment
- Investor can transfer stake to another before completion of a project, subject to FIPB clearance
- Move a boost for affordable housing and smaller projects, as well as smart cities