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
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-