Brick and Mortar – Cheer ! Relaxation of FDI rules in the Construction Development Sector

By Anupam Prasad, Partner and Anindita Ganguly, Associate

In India, Foreign Direct Investment (“FDI”) in real estate has been permitted since 2002 and was fully opened in 2005. Subject to certain conditions, FDI in the real estate sector is allowed and encouraged in hotel development, tourism, hospitality, township development, developing commercial real estate, built-up infrastructure, housing and construction projects, resorts, hospitals, educational institutions, recreational facilities, infrastructural projects at the regional and local levels and Special Economic Zones (SEZs).

The Government of India (“GoI”) allowed 100% (hundred percent) FDI in the real estate sector but with strict provisos, including a lock-in period of three years during which the investment could not be repatriated. However, pursuant to the Press Release dated October 29, 2014 (the “Press Release”), issued by the GoI, the rules pertaining to FDI in real estate have been relaxed and this has made it much easier for foreigners to invest in real estate in India.

As per the Press Release, the minimum built area for projects in which foreign investment is allowed will be reduced to 20,000 sq. mts. (twenty thousand square metres) from 50,000 sq. mts. (fifty thousand square metres) and the minimum capital investment by foreign companies has been halved from $ 10,00,000 (ten million dollars) to $ 5,00,000 (five million dollars).These relaxations will result in an increase in mergers and acquisitions and private equity investments. Also, the minimum land requirement for ‘serviced plots’ have been removed, as compared to the earlier requirement of 10 ha (ten hectares).

The revised norms have been announced by the GoI at a time when the share of construction, housing and real estate segment in total FDI had further slipped from 5% (five percent) in 2013 to below 3% (three percent), as of the current fiscal year until August, 2014. The more lenient rules will help faster completion of projects delayed by congestion of funds due to elevated debt levels and boost large scale investment in the sector. They will also encourage the development of smaller projects in areas where the availability of land is limited.

Despite this being a welcome change in the sector as it brings in more capital, the domestic buyers in the country will be negatively affected to an extent because more foreign money in realty means higher property prices. So, affordability faces a downward slope. Along with this, the GoI may permit repatriation of FDI by one non-resident investor to another non-resident investor before the completion of a project. This will lead to repatriation of profits by investors and increase in speculation in the market. Investors might start trading in properties like they do in stock and this in turn will make properties more unaffordable for the middle class.

Having said that, the real estate sector is a very critical sector of the Indian economy. After agriculture, real estate contributes the most to our economy. The main growth thrust is coming due to favourable demographics, increasing purchasing power, existence of customer friendly banks and housing finance companies, professionalism in real estate and favourable reforms initiated by the GoI to attract global investors.

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