FDI IN­REAL ES­TATE SEC­TOR A con­struc­tive step

The FDI pol­icy change is a re­flec­tion of the fact that the Gov­ern­ment is not just hear­ing but also lis­ten­ing to the global in­vest­ment com­mu­nity

HT Estates - - HTESTATES - Ajit Krishnan

The Union Cab­i­net in a land­mark move has taken a pos­i­tive step to­wards clar­i­fy­ing and ex­pand­ing the scope of con­struc­tion de­vel­op­ment sec­tor un­der the for­eign di­rect in­vest­ment (FDI) pol­icy. The ori­gins of this pol­icy date back to 2000, which was sub­se­quently amended in 2005. The changes ef­fected in 2005 with the over­all strong growth of the In­dian econ­omy ush­ered in an era of sig­nif­i­cant flow of for­eign cap­i­tal into this sec­tor. Over­all, the sec­tor at­tracted for­eign cap­i­tal of US$ 21 bil­lion over the five year pe­riod end­ing 2010.

How­ever, in the last four years a lot of the for­eign eq­uity in­ter­est rapidly dis­ap­peared. This was driven by a slow­down in the sec­tor cou­pled with lack of liq­uid­ity, but most im­por­tantly, a lack of con­fi­dence given the mul­ti­plic­ity of in­ter­pre­ta­tions in the pol­icy and lack of clar­ity. The 2005 pol­icy had some in­her­ent la­cu­nae in the way it was drafted and had led to sig­nif­i­cant con­fu­sion. The Cab­i­net rec­om­men­da­tions an­nounced this week ef­fect­ing changes to the pol­icy are land­mark and a great first step to­wards en­cour­ag­ing FDI in this sec­tor. Some of the salient fea­tures are: There is no min­i­mum size cri­te­ria for plot­ted de­vel­op­ment projects. FDI is, there­fore, per­mis­si­ble up to 100% in an In­dian company which aims to ag­gre­gate land for a town­ship and cre­ate the trunk in­fra­struc­ture that in­cludes roads, wa­ter sup­ply and sew­er­age etc and in­vite part­ners into sub-projects. In case of projects which in­volve con­struc­tion, the min­i­mum size has been re­duced from a built-up area of 50,000 sq me­tres to a floor area of 20,000 sq me­tres. While the size re­duc­tion is a big pos­i­tive, the nor­mal­i­sa­tion of the cri­te­ria from built-up area to floor area also puts to rest doubts on how to cal­cu­late the built-up area. This is cou­pled with the fact that cer­ti­fi­ca­tion by an ar­chi­tect would be suf­fi­cient ev­i­dence of the project meet­ing this cri­te­ria. The min­i­mum size of in­vest­ment has been made a uni­form US$ 5 mil­lion, there­fore, set­ting to rest the con­fu­sion on what con­sti­tutes a joint ven­ture un­der the 2005 pol­icy for min­i­mum cap­i­tal­i­sa­tion pur­poses. The cab­i­net pro­posal now rec­om­mends that an In­dian company can re­ceive FDI for upto 10 years from the com­mence­ment of the project, there­fore pro­vid­ing more clar­ity on what con­sti­tutes “green­field” projects. The lock-in con­di­tion which was pre­vi­ously for three years has now been clar­i­fied to ex­tend upto three years from the fi­nal tranche of in­vest­ment or com­ple­tion of project. Com­ple­tion for this pur­pose means pro­vi­sion of trunk in­fra­struc­ture. It there­fore seems to clar­ify that cap­i­tal once in­vested is locked in for three years and can be ex­ited ear­lier if the project has been com­pleted. The oner­ous con­di­tion of com­plet­ing at least 50% of the project in five years and mak­ing it the re­spon­si­bil­ity of the in­vestor has now been dropped. This is a pos­i­tive change. The 2005 pol­icy also con­tained pro­hi­bi­tion on sale of un­de­vel­oped plots but the same was open to many dif­fer­ent in­ter­pre­ta­tions. The cur­rent pol­icy rec­om­men­da­tion will set to rest the is­sue and seems to have pro­vided suf­fi­cient clar­ity. To il­lus­trate, in case of a project which has many sub-projects or a town­ship project with var­i­ous com­po­nents, it is pos­si­ble for a master de­vel­oper to lay out the trunk in­fra­struc­ture and hand over t he sub­pro­jects or com­po­nents to other de­vel­op­ers to un­der­take. This will, there­fore, en­sure bet­ter cap­i­tal al­lo­ca­tion and also faster ex­e­cu­tion. This is prob­a­bly the most crit­i­cal change to fa­cil­i­tate the cre­ation of smart ci­ties and bet­ter and faster ur­ban­i­sa­tion. The pol­icy has now pro­vided a clear win­dow to ap­proach the For­eign In­vest­ment Pro­mo­tion Board (FIPB) for sit­u­a­tions seek­ing an exit prior to the com­ple­tion of the project or for trans­fer of in­vest­ment to another non­res­i­dent to seek a case spe­cific ap­proval. This win­dow did not ex­ist in the pre­vi­ous pol­icy and was a ma­jor de­ter­rent as an exit plan was not avail­able to for­eign in­vestors. Given that this win­dow has now been pro­posed, a lot would de­pend on how FIPB looks at spe­cific cases and the ba­sis and ra­tio­nale they ap­ply while grant­ing their ap­provals. It has been pro­posed that any project which has a 30% al­lo­ca­tion of project cost to­wards af ford­able hous­ing would be ex­empt from any of the con­di­tions pre­scribed and would al­low a free flow of FDI. This is a very sig­nif­i­cant and pos­i­tive pol­icy di­rec­tion. It fa­cil­i­tates and in­cen­tivises the flow of cap­i­tal to­wards the cre­ation of af­ford­able hous­ing in the over­all vi­sion for 2022 of Hous­ing for All. At the same time the pol­icy has also ad­dressed the defini-

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