Introduction

While recognising that investment in the real estate sector is indispensable to the economic growth of India, and as much-anticipated relief to the already cash-strapped sector, the government has simplified the norms regulating foreign direct investment (FDI) in the construction sector (including townships, housing and built-up infrastructure). FDI in this sector constitutes more than 8% of India's gross domestic product.(1)

Touted as the biggest reform in the sector since permitting 100% FDI under the automatic route in 2005, the Department of Industrial Policy and Promotion (DIPP), through Press Note 12/2015, has introduced landmark amendments to the Consolidated FDI Policy.

Overview

Under the unamended Consolidated FDI Policy, investment was subject to a minimum floor area requirement of 20,000 square meters for construction development projects. This requirement restricted the scope of FDI in real estate projects that comprised of large parcels of land, which are difficult to find in urban areas. This condition has now been removed and, henceforth, foreign investment is permitted in any construction project, regardless of size. It is hoped that this shift will boost the affordable housing market, which has not yet benefited from FDI in any significant manner. Further, Press Note 12 has removed the minimum capital requirement of $5 million which had to be provided within six months of commencement of a project in order for it to be eligible for investment.

Earlier in 2014, through Press Note 10/2014, the government took a significant step by clarifying that investment in completed projects for the operation and management of townships, malls, shopping complexes and business centres is permitted under the Consolidated FDI Policy. However, there remained ambiguity as to whether leasing or earning rent on a property fell within the ambit of 'real estate business'. If it did, the investment would fall within a prohibited sector, thus rendering the proposed liberalisation ineffective. Debate continued over whether the clarification absolved a business from being treated as a real estate business. Based on a survey report conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) on FDI in real estate, the FICCI recommended to the DIPP that FDI investors that want to invest in the operation and management of completed malls, shopping complexes and business centres be entitled to lease such projects.(2) Press Note 12 has finally laid to rest the various hypotheses by amending the definition of 'real estate business' and expressly excluding the earning of rent and leasing from its ambit, thus effectuating Press Note 10 in this context. However, Press Note 12 prohibits foreign investors from exiting a project for three years from the date of investment of each tranche of FDI. Any transfer of immoveable property or part thereof during this period is also prohibited.

Significant changes have also been made to the conditions under which foreign investors can exit construction development projects. Under the Consolidated FDI Policy, foreign investors are prohibited from exiting until completion of the project or development of the trunk infrastructure. Now, each phase of the construction project will be considered a separate project for the purposes of the Consolidated FDI Policy; however, what will constitute a 'phase' for this purpose remains to be seen. Further, the transfer of stake from one foreign investor to another without repatriation of investment will not be subject to a lock-in period or government approval.

Comment

In addition to encouraging capital inflow in ambitious government projects such as 'Smart Cities' and the 'Make in India' initiative, the government has liberalised the real estate sector in order to attract foreign investment by projecting India as an easy-to-invest destination. According to DIPP statistics, FDI in the construction sector accounted for around 9% of the total FDI in India between April 2000 and September 2015, making the growth of the construction sector crucial in terms of the Indian economy.(3) As such, the impact of the above reforms cannot to be underestimated. While it remains to be seen whether they will bring about the constructive results needed, this change in policy is certainly encouraging.

For further information on this topic please contact Dharana Joshi or Prachi Dave at Dhaval Vussonji & Associates by telephone (+91 22 6662 3535) or email (dharana.joshi@dvassociates.co.in or prachi.dave@dvassociates.co.in).

Endnotes

(1) Based on data provided on the official website of the 'Make in India' initiative.

(2) Survey report on "Impact of FDI Reforms on Indian Real Estate Sector" by the FICCI.

(3) Fact Sheet on Foreign Direct Investment, from April 2000 to September 2015, by the DIPP.

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