Background

The Government of India (Government) had announced a plan to develop 100 smart cities in India to provide better amenities in urban areas. This had set expectations rolling within the real estate industry in terms of the manner and form of relaxation that the Government was likely to propose. After much deliberation and consultation, the Union Cabinet has finally approved the proposed amendment to the foreign direct investment policy, 2014 (FDI Policy) in the Construction Development sector and has issued a press release dated 29 October 2014 (Press Release) which details the proposed changes. While the final press note by the Department of Industrial Policy and Promotion (DIPP) is still awaited to amend the FDI Policy, and associated changes to the FEMA Regulations, the proposal marks a significant change to the FDI Policy in this sector. In this newsflash, we have provided a comparative analysis of the existing policy and the proposed changes for readers to understand these changes more succinctly. In his maiden Budget, the Finance Minister had announced the Government’s proposal to relax the foreign direct investment (FDI) norms in the Construction Development sector together with allocation of INR 7,060 crore to develop the 100 smart cities. Investment in affordable housing was also intended to be encouraged.

Amendments to Existing Norms 

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The new Government led by Prime Minister Mr Narendra Modi is a strong believer of the notion that the base factors of stable growth are infrastructure and availability of affordable housing. The proposed relaxations in the FDI norms are likely to give a much needed impetus to the real estate industry which has been reeling under the recessionary effects created post the sub-prime crisis in 2008. These proposed changes will broaden the base of investors in this industry and would attract midsized funds and institutions to invest in the development of smaller projects in Tier-II and Tier-III cities. Further, the broadening of the scope to include FDI in developed projects for management and operation will ease the liquidity concerns of developers. All these factors, coupled with the availability of low cost of capital offshore will go a long way in fulfilling the Government’s desire of building smart cities and affordable homes in the country. For any queries please contact: editors@khaitanco.com