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, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.