FDI to boost realty sec­tor

Re­lax­ations in FDI will en­cour­age in­vestors to share risks and earn higher re­turns

Hindustan Times (Chandigarh) - Estates - - HT ESTATES - He­mal Me­hta, Pranav Tu­rakhia, Tiya Jain The au­thors are part­ner, man­ager and as­sis­tant man­ager re­spec­tively at Deloitte Hask­ins & Sells LLP

The for­eign in­vest­ments in the real es­tate sec­tor in In­dia have been stag­nat­ing for a long pe­riod of time; for some in­vestors since the last cycli­cal high of 2006. The FDI re­stric­tions pre­vented for­eign out­flow of cap­i­tal for real es­tate projects that did not meet the nec­es­sary cri­te­ria such as re­quire­ment of min­i­mum cap­i­tal­i­sa­tion, min­i­mum con­struc­tion area, etc. The projects have not made progress due to a va­ri­ety of rea­sons rang­ing from scarcity of cap­i­tal to reg­u­la­tory ap­provals re­quired for con­struc­tion projects in In­dia. The in­vestors have been wary of in­creas­ing their in­vest­ments in the ex­ist­ing projects and bring them to com­ple­tion due to pol­icy paral­y­sis. Due to this, the for­eign in­flow of cap­i­tal into real es­tate sec­tor was mainly com­ing into In­dia through the for­eign port­fo­lio in­vest­ment (FPI) route via NCDs. Debt ex­po­sure to real es­tate was pre­ferred over equity par­tic­i­pa­tion due to the FDI con­di­tions in real es­tate sec­tor and the bur­den they would en­tail on the for­eign in­vestors. The re­lax­ations in the FDI con­di­tions can en­cour­age in­vestors to pro­vide the much needed fil­lip of shar­ing risk and earn­ing higher re­turns on their in­vest­ments in real es­tate sec­tor. This could also have a pos­i­tive im­pact on the sec­tor due to real es­tate be­ing a cap­i­tal in­ten­sive in­dus­try.

On Novem­ber 10, 2015, the govern­ment did away with the re­stric­tive FDI con­di­tions which pre­vented for­eign in­vestors to exit their in­vest­ments in the real es­tate pro­ject be­fore its com­ple­tion is a mas­ter stroke. The rec­om­mended changes in the FDI pol­icy dealt with the in­vestors’ long time con­cerns ef­fec­tively. The re­stric­tive FDI con­di­tions such as manda­tory de­vel­op­ment of min­i­mum floor area of 20,000 sq m per pro­ject and min­i­mum infusion of FDI of $5 mil­lion within six months have been re­moved which could fa­cil­i­tate the govern­ment’s ini­tia­tive on af­ford­able hous­ing in In­dia for all by 2022. The FDI amend­ment fur­ther states that each phase of the con­struc­tion de­vel­op­ment pro­ject would be con­sid­ered as a sep­a­rate pro­ject for the pur­pose of FDI pol­icy. This amend­ment to the FDI pol­icy will fa­cil­i­tate sim­pler en­try and exit for for­eign in­vestors linked to their risk par­tic­i­pa­tion in the spe­cific real es­tate pro­ject in In­dia.

Ear­lier, for­eign real es­tate in­vest­ments into large projects would stag­nate for large pe­ri­ods of time, due to the ges­ta­tion pe­riod of the projects and pre­vent the in­vestors from ex­it­ing in a timely fash­ion. As per the new amend­ment, for­eign in­vestors can exit and repa­tri­ate for­eign in­vest­ment even be­fore the com­ple­tion of the pro­ject un­der au­to­matic route sub­ject to the three year lockin for ev­ery tranche of for­eign in­vest­ment or af­ter the com­ple­tion of trunk in­fra­struc­ture.

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