Government relaxes FDI norms for construction, real estate sector
NEW DELHI: The government eased overseas investment rules in construction to attract money into the funds-starved sector and serve its twin objectives of faster job creation and housing for all. The Union Cabinet on Wednesday approved a comprehensive proposal by the Department of Industrial Policy & Promotion (DIPP), dropping the minimum 10-hectare rule for serviced housing plots and slashing the minimum floor area for construction development project to 20,000 sq m from 50,000 sq m to be eligible for overseas investment.
It also halved the minimum foreign direct investment (FDI) amount to $5 million from $10 million and substantially eased the exit norms, raising an across-the board cheer from an industry that now hopes for bigger foreign fund flows into a sector that desperately needs money.”The government is bang on (target). We are very glad about the trunk infrastructure completion part as it will bring in asset-based FDI. This will ensure that project developers who have taken FDI are not left with more debt,” said Rajeev Talwar, executive director of DLF, India’s biggest listed developer. Trunk infrastructure refers to essential amenities such as roads, water supply, street lighting, drainage and sewerage.
The new rules will also give a boost to the 100 smart cities being planned by the government. Home buyers will also cheer the relaxation as fresh inflows raise the possibility of projects that are stuck getting completed and cheaper housing becoming available going ahead. Most housing projects are running one to two years or even more behind schedule because of the slowdown and the shortage of funds on account of elevated debt levels.
“It is an excellent move by the government and will definitely help the developers which are running late with their projects due to the funds crunch. Townships take a minimum of 10 years to be completed, so the relaxation will ensure that funds are not a problem,” said RR Singh, director-general of National Real Estate Development Council, or Naredco. The norms will come into force after DIPP issues a notification. The government has promised housing for all by 2022 and toward that end provided an incentive for affordable housing in the revamped policy.
The sectoral condition of minimum area and capital will not apply if the developer sets aside 30% of the project for affordable housing, defined as dwelling units of less than 60 sq m. Singh said finding 10 hectares of land in tier-I and tier-II cities was difficult, so scrapping this rule will encourage investors to bring in money. In its July budget, the new government had said it would relax foreign investment rules for the sector. The government is also looking to boost construction of hotels, tourist resorts, hospitals, special economic zones (SEZs), educational institutions, old-age homes and invest ments by non-resident Indians (NRIs), giving free access in these segments.
“These measures are expected to result in enhanced inflows into the construction development sector consequent to easing of sectoral conditions and clarification of terms used in the policy,” the government said in a statement. The sector attracted $1.2 billion in FDI in 2013-14, down 8% from 2012-13. The most significant incentive to foreign investment is the easier exit compared with the existing rule of a three-year lock-in after the completion of minimum capitalisation of $10 million. Under the new rules, investors will have to bring $5 million within six months of commencement of projects and the balance over 10 years or before the completion of project, whichever is earlier.
The investor can exit on completion of the project or three years after the final investment, subject to the development of trunk infrastructure. FDI can be repatriated or transferred before the completion of the project if approved by the Foreign Investment Promotion Board. “Lingering issues with respect to lock-in requirement and exit route along with the prohibitive minimum threshold for built-up area have had a dampening effect on FDI in the sector,” said Sachin Sandhir, global managing director, emerging business, and MD, South Asia, RICS.
“A positive announcement towards this end is indeed welcome and will encourage more investors to consider investing in India, if they are able to exit from the projects sooner.” The construction sector, which has a significant ripple effect on the economy, grew only 1.6% in FY14, contributing to the sub-5% growth in the year.
“Investment in the construction development sector has a multiplier effect on the economy by way of infrastructure creation; substantial employment generation over the entire spectrum from unskilled workers to engineers, architects, designers as well as financial and other supporting services,” the government said. Talwar of DLF expects the measures to lead to a revival in the sector and the wider economy.
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