The government on Wednesday approved a proposal to relax norms for foreign direct investment (FDI) in the construction sector which would not just allow for fresh sources of money for property developers but also allow realty PE firms to exit sooner provided projects are completed.
Among the key proposals cleared by the Cabinet include putting FDI in construction under automatic approval and bringing down the minimum built-up area criterion for FDI in projects from 50,000 sq m to 20,000 sq m. Accordingly, minimum capital requirement for a realty project to attract FDI has been halved to $5 million.
These moves are in line with the Budget 2014-15 speech of Finance Minister Arun Jaitley.
It has also clarified that 100 per cent FDI under the automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.
The decision is likely to push up liquidity for developers across the spectrum. It will also go a long way in funding the ambitious initiatives of the government like affordable housing for all and smart cities across India.
The Cabinet also removed the minimum area condition of 10 hectares of land in case of serviced plots.
Investors or realty PE firms in particular can now exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure. This provides for an early exit from the project if its completed ahead as against the 3-year lock-in. Although most large projects where PE firms put in money have a longer tenure, for smaller projects the government has provided a window for faster exit.
The government said it may also permit repatriation of FDI or transfer of stake between two foreign investors, before the completion of the project. These proposals will be considered by Foreign Investment Promotion Board (FIPB), the nodal body monitoring foreign investment in India, on a 'case to case' basis.
On the flip side the Cabinet note has clarified that FDI is not permitted in an entity which is engaged or proposes to engage in only sale of land and immovable property and not its construction, involved in construction of farm houses and trading in Transferable Development Rights (TDRs).
The government has said the relaxation in minimum development area and capitalisation besides quicker exit for investors would not be applicable for hotels and tourist resorts, hospitals, Special Economic Zones (SEZs), educational institutions, old age homes and investment by NRIs.
Further the minimum development area and capitalisation will also not apply to the firms which commit at least 30 per cent of the total project cost for low cost affordable housing.
Projects using at least 60 per cent of the FAR/FSI for dwelling units of carpet area not more than 60 sqm. will be considered as affordable housing projects. In addition, 35 per cent of the total number of dwelling units constructed should be of carpet area 21-27 sqm for EWS category. Provision of servant’s quarter along with the main dwelling unit will not be counted as dwelling units for EWS/LIG under affordable housing project.
The Cabinet note observed that the real estate/construction sector witnessed steady rise in FDI from 2006-07 to 2009-10 after which the levels of inflows have been much lower. “Therefore in order to step up investment in construction development with its backward and forward linkages for many other sectors of the economy, it is felt that some liberalisation and rationalisation of the FDI policy on construction development could be the necessary catalyst to give a boost to the sector,” it said.
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