“With the advent of globalization and liberalization in real estates and construction industries, it is essential to have in place a comprehensive legal framework not only to minimize the disputes and risks attached, but also to encourage global investors”.
- Hon’ble Mr. Justice P. Sathasivam, Chief Justice of India
Over the years the Indian construction industry has seen tremendous growth. This growth can be associated to various factors such as multinational entrepreneurialism, buoyant local stock markets, robust economy-changing demographics and the overall emergence of India on the global stage.
Consequentially, with improved living standards, there came a growing need for sophisticated commercial spaces and increasing demand for improved housing. This in turn led to policies which encouraged steady supply of power and efficient transport infrastructure, which in turn provided a boost to investments in the construction industry, and made it an attractive sector to both domestic and foreign investors and developers. To maintain consistent growth, foreign investment is crucial for India. The Indian Government has clearly indicated its intention to create an environment, friendly to foreign investors by allowing foreign direct investment (FDI) up to 100 per cent in 2005 in townships, built-up housing and construction development projects with the liberalization of FDI regulations. Also, the recent decision of Indian Government of opening up retail in multi brand will not just benefit the retail industry but will also push up the demand for commercial real estate throughout the country.
According to statistics available with Department of Industrial Policy and Promotion, Construction development (including townships, housing, built-up infrastructure & construction-development projects) sector has attracted a cumulative foreign direct investment worth US$ 22,007.67 million from April 2000 to February 2013. FDI flows into the construction sector for the period April 12 - February 13 stood at US$ 1,260 million. Needless to say, the Indian Construction Industry is an integral part of the economy.
The Indian Government in 2005 liberalized the “FDI Policy” in relation to township, housing, built-up infrastructure and construction development projects by allowing FDI upto 100% under automatic route with the objective to ensure that the foreign investment in these areas would create new employment opportunities and add to the available housing stock and built up infrastructure.
The consolidated FDI Policy effective from April 1, 2013 issued by Indian Government followed the liberalized view adopted in previous policy, with the objective to promote the participation of the foreign investors in construction cndustry which in turn would have far reaching impact on Indian Economy. Certain conditions were laid out subject to which investments were to be made. The conditions are:
- Minimum area to be developed under each project would be (a) in case of service housing plots, 10 hectares; (b) in case of Construction development projects, built up area of 50,000 sq. mts. and (c) in case of combination project, any one of the above two conditions would suffice.
- Minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within 6 months of commencement of business of the company.
- Original Investment cannot be repatriated before a period of 3 years from completion of capitalization.
- The investor may exit earlier with the prior approval of the Government through FIPB.
- Atleast 50% of the project to be developed within 5 years from the date of obtaining all statutory clearances.
- The investor/investee company cannot sell undeveloped projects.
- The project to conform to the norms and standards of Local Body Concerned.
- The investor/investee company is responsible for all the necessary approvals including layout plans, infrastructural facilities as per the prevailing laws.
- The Statutory Body approving the building plans would monitor the compliance by the developer.
- The Hotels and Tourism, Hospitals and SEZ projects have benefits not attracting conditions as to minimum area of development, capitalization and time frame.
- The Investments made by NRI in any of the Township, Housing, Built Up, infrastructure and Construction Development Projects also does not attract conditions as to Minimum Area of Development, Capitalisation and Time frame.
- FDI in any form is prohibited in Real estate business. FDI is not allowed in a partnership or proprietary concern if it is engaged in real estate business. Even investment by a Non Resident India or a Person of Indian Origin in such partnership or concern is not allowed.
Impact of FDI in Multi Brand Retail Trading on Indian Construction Industry
The Indian Government vide notification dated September 20, 2012 allowed 51% FDI in multi brand retail subject to certain conditions. It can be expected that FDI approval in multi brand retail will have far reaching impact on the real estate sector as well.
- The direct impact of FDI in multi brand retail on the Real estate sector would be increase demand for commercial space in the states where the state government agrees to permit foreign retailers.
- The indirect impact of the investment in multibrand
retail would be the demand for the residential space. It can be assumed that the foreign investment in multi brand retail sector will generate employment and thereafter, the need for residential apartments for employer and employee will rise.
One of the conditions laid down by the Indian Government which can have potential impact on the real estate sector is related to “backend investment”. The notification stated that:
“At least 50 percent of the total FDI brought in shall be invested in 'backend infrastructure' within three years of the first tranche of FDI, where 'Back-end infrastructure' will includes capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will includes investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, and agriculture market produce infrastructure etc.
Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure”.
The creation of backend infrastructure proposes investments in resources such as cold storage and warehouses. Presently, very few Indian players operate cold-storage chains or warehouses. An appealing chance may be generated in such a situation, where foreign retailers are likely to approach developers to create and own backend infrastructure.
The financial year of 2013-2014 can prove to be a defining moment for India’s contrution industry. Liberalization of policies and a deliberate attempt made by the Indian Government can open several doors to the construction companies. Opening up of FDI in relation to township, housing, built-up infrastructure and construction of development projects by allowing FDI upto 100% under automatic route was the first step towards promoting the participation of the foreign investors in construction industry. Needless to say that, further growth in the construction industry looks hopeful.
“The link between infrastructure and economic development is not a once and for all affair. It is a continuous process; and progress in development has to be preceded, accompanied, and followed by progress in infrastructure, if we are to fulfill our declared objectives of generating a self-accelerating process of economic development.”
- Dr. V. K. R. V. Rao [noted Indian Economist, Early 1980s]