FDI Policy introduced for Construction Sector

The gov­ern­ment on Wednes­day noti­fied the for­eign direct invest­ment (FDI) pol­i­cy in the con­struc­tion sec­tor to stim­u­late over­seas invest­ment in real estate. While the pol­i­cy removes some of the anom­alies with regard to the min­i­mum lock-in peri­od and floor area in the ear­li­er draft cleared by the cab­i­net in Octo­ber, it does not address the issue of how the gov­ern­ment will treat projects that have already been under­tak­en under the old­er policy.

In the final pol­i­cy, the gov­ern­ment has done away with the three-year lock-in peri­od, per­mit­ting the investor to exit on com­ple­tion of the project or after the devel­op­ment of so-called trunk infra­struc­ture. The pol­i­cy now requires a min­i­mum of 20,000 sq. m of floor for a project which is a com­bi­na­tion of ser­viced plots and con­struc­tion devel­op­ment activ­i­ty. In the cab­i­net deci­sion tak­en on 29 Octo­ber, this cat­e­go­ry was required to ful­fil either the require­ment for ser­viced plots project (no min­i­mum area required) or that of the con­struc­tion devel­op­ment project (min­i­mum of 20,000 sq. m of floor area). The note also makes a change in the cat­e­go­riza­tion of an afford­able hous­ing project. Accord­ing to the final norms, a project using 40% of the floor area ratio, or floor space index, for a dwelling unit of floor area of not more than 140 sq. m will be con­sid­ered as an afford­able hous­ing project against a project using 60% of the floor area ratio for a dwelling unit of floor area of not more than 60 sq. m as in the cab­i­net deci­sion. The gov­ern­ment had eased the for­eign invest­ment rules in India’s con­struc­tion sec­tor through a cab­i­net deci­sion on 29 Octo­ber. The revised pol­i­cy, the final ver­sion of which the gov­ern­ment released on Wednes­day, sim­pli­fies rules to make it eas­i­er for investors to enter the mar­ket, sell assets or trans­fer their stakes, and repa­tri­ate pro­ceeds before the com­ple­tion of a project. The new rules include reduc­ing the built-up area require­ment for FDI in con­struc­tion projects to 20,000 sq. m from 50,000 sq. m and the low­er­ing the min­i­mum cap­i­tal require­ment to $5 mil­lion from $10 mil­lion. The gov­ern­ment per­mits 100% FDI in the con­struc­tion devel­op­ment sec­tor. “It allows FDI in small­er projects and brings the risk of cap­i­tal down as small­er projects are eas­i­er to exe­cute and dis­pose of. It makes the con­struc­tion devel­op­ment sec­tor attrac­tive and we can expect more M&A (merg­ers and acqui­si­tions) activ­i­ty in the sec­tor,” said Akash Gupt, part­ner, reg­u­la­to­ry ser­vices, PwC. “What the final pol­i­cy does not answer is treat­ment of exist­ing invest­ments in con­struc­tion devel­op­ment sec­tor which were made under the erst­while pol­i­cy. For exam­ple, if the invest­ment was made for a 50,000 sq. m of devel­op­ment area, can the investor exit on com­ple­tion of 20,000 sq. m floor area or that of the trunk infra­struc­ture? Fur­ther, if the invest­ment has been made with a com­mer­cial under­stand­ing with the Indi­an part­ner to exit post three years, will that now be locked-in till the com­ple­tion of the project?” “This is a fair­ly strong pol­i­cy. It will help bring down the cost of cap­i­tal and increase the flow of funds, there­by bring­ing down the cost of afford­able hous­ing which will get a big boost,” said P.S. Jayaku­mar, man­ag­ing direc­tor, Val­ue and Bud­get Hous­ing Corp. Pvt. Ltd. “How­ev­er, there is also a busi­ness case for allow­ing for­eign invest­ment in exist­ing projects.”

Cour­tesy: Live Mint