FDI Norms For Real Estate Sector Made Easier By  Government

Published on: Nov 21, 2015 @ 16:35

The  Central  government  has  relaxed  FDI  (foreign  direct investment)  norms  a  few  days back in  real  estate sector  also  and  offered  greater  flexibility  to  foreign  players  to  invest in  India’s property  market  without  any minimum  threshold  for  the  funds  to  be  brought in.  To  boost the foreign  investment  in  the  cash-starved realty  sector,  It  has  considerably eased  FDI regulations to  exit  and repatriate  the  investments.

The  two  major  conditions  related  to  minimum  area  as  well  as  minimum  capitalization  have been  removed as the  real  estate  industry  has  been  facing  slowdown  for  last  2-3  years.  The earlier  cap  of minimum  20,000 sq meters  area  of  projects  for  FDI  has  been  removed  now. There  is  also  no  minimum  investment requirement of  $5  million  for  projects  in  real  estate.

Previously,  foreign  investment  in  construction  was  allowed  only  in  projects  above  20,000  sq m.  floor  area and  subject  to  condition  that  at  least  $5  million  should  be  brought  within  six months  after  commencement of  business. The  removal  of  these  caps  will  allow  foreign investors  to  invest  money  into  smaller  projects  as well.

New  rules  will  allow  a  foreign  investor  to  exit  and  repatriate  foreign  investment  before  the completion  of project  under  the  automatic  route,  provided  that  a  lock-in-period  of  three years,  calculated  with  reference  to each  tranche  of  foreign  investment  has  been  completed. Each  phase  of  the  construction  development  would be  considered  as  a  separate  project  and exit  to  be  linked  to  each  phase. Earlier,  foreign  investors  were allowed  to  exit  a  project after completing  basic  infrastructure  such  as  roads,  water  supply,  street  lighting, drainage and sewage, even  if  the  lock-in-period  was  not  met.

Now,  the  foreign  investors  can  exit  three  years  after  an  investment  is  made,  whether  or  not the  project  has been  completed,  and  if  the  trunk  infrastructure  has  been  completed,  even prior  to  that. Moreover,  the  lock-in for  transfer  of  stake  from  one  non-resident  to  another without  repatriation  of  investment  has  been  done away  with.

The  changes  in  the  FDI  policy  will  help  listed  companies  in  the  real  estate  and construction sector. Experts in  real  estate,  said  the  minimum  restriction  of  20,000  sq  metres in construction development  projects  and minimum  investment  of  $5  million  were  creating hurdles  in  foreign investments. Now,  there  is  no  bar regarding  the  project  size  and investment amount.

However,  FDI  will  not  be  permitted  in  an  entity  engaged  in  real  estate  business, construction  of  farm houses and  trading  in  transferable  development  rights (TDRs). The clarification  on  property  leasing,  especially  on leasing/renting  of  completed  assets  not constituting  real  estate  activity,  is  likely  to  have  the biggest  impact. Leasing  will  not  be counted  as  real  estate  business.

The  new  rules  state  that  rental  income  from  property  does  not  amount  to  transfer  and hence will  not  fall under  the  real  estate  business – a  sector  where  FDI  is  not  permitted. This means investments  in  completed projects,  with  the  intention  to  earn  rental  income,  is  now allowed without  any  FDI  restrictions.

Among  the  biggest  reforms  is  that  FDI  can  now  flow  in  even  after  completion  of  projects. So  far,  FDI  was allowed  only  in  new  residential  projects. But  now,  100 per cent  FDI  under automatic  route  will  be  permitted in  completed  projects  for  operation  and  management  of townships,  malls/shopping  complexes  and  business centres.

The  real  estate  sector  is  likely  to  get  some  relief  from  the  easing  of  FDI  conditions. According  to  Finance Minister  Arun  Jaitely,  these  policy  relaxations  would  address  the slowdown  in  the  construction  sector.

Removing  the  caps  on  project  size,  giving  greater  flexibility  in  transfer  of  investments  to other  overseas investors  and  allowing  investments  in  completed  projects  will  attract  more investments  into  this  sector. Real estate  developers  borrow  money  at  high  interest  costs. Now it  will  bring  in  money  in  completed  projects  and gives  them  an  exit  and  more  staying power.

Foreign  investment  was  allowed  in  large  projects,  but  it  can  now  get  foreign  investment  in smaller  projects as  well. Since  FDI  can  now  be  brought  into  the  construction  sector  in  any amount  and  for  any  size,  it  will have  a  huge  positive  impact  on  the  housing  sector,  and more  so  on  the  affordable  segment,  which  was  so far  not  a  beneficiary  of  FDI  in  any significant  manner.

Ajay Verma

Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.

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