Track2Realty Exclusive
When the Government of India was announcing relaxation with FDI norms a day ahead of Diwali, many analysts thought it to be a Diwali gift for 15 core sectors that could also prolong the festive spirit for the real estate sector.
However, there was more to the announcement and the policy makers were conscious of the fact that the need of foreign funds in the Indian economy in general and real estate sector in particular were not short term on the festive season.
As a mater of fact, the FDI norms were being relaxed with a long term blue print in mind since the foreign direct investment would be critical to the fortunes of Prime Minister’s dream project of creating smart cities.
As far as real estate is concerned, everyone within the built environment of real estate is conscious of the fact that it is the FDI that has been the catalyst of the turnaround of the business when it was first announced in 2005. The policy announcement now is hence cited by a section of analysts as the second wave of FDI investment into the sector. The government also seems to be determined to take the FDI roll out to the next level and hence they have come out with fresh set of guidelines for the same.
As per the new provisions issued by the Department of Industrial Policy & Promotion (DIPP) of Government of India, exit is much easier compared to the terms & conditions that exist now. The conditions of area restriction of floor area of 20,000 sq. mtrs in construction development projects and minimum capitalisation of US $ 5 million has been brought in within the period of six months of the commencement of business, have been removed. Secondly, each phase of the construction development project would be considered as a separate project for the purposes of FDI policy. Exit will therefore be linked to each phase.
Moreover, exit has been linked to 3 years of each FDI tranche (earlier exit possible before three years if trunk infra is completed before 3 years). A foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed.
There is no lock-in of 3 years for non-resident transfers. Transfer of stake from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval. Nonetheless, exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period.
Finally, leasing is not ‘real estate business’ (in which FDI is prohibited) – Earning of rent or income on lease of the property, not amounting to ‘transfer’, will not amount to real estate business. 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls, shopping complexes and business centres.
Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period of 3 years.
Kalpesh Maroo, Partner, BMR & Associates LLP points out that the significant reforms announced can be said to be the biggest relaxation to the FDI policy for the real estate sector since the opening up of this sector for FDI in 2005.
“The policy changes, especially the clarification on leasing/renting of completed assets not constituting real estate activity is going to be a game changer and will fuel the growing appetite in the Indian and international investment community for investments in completed commercial buildings,” says Maroo.
Nikhil Hawelia, Managing Director of Hawelia Group says the government is conscious of the fact that the allocated budget of Rs. 500 crore for each smart city is peanuts. He believes the FDI relaxation is hence an attempt to attract the foreign investors to invest with a carrot of easy exit. There could be more of such sops to attract the foreign money which augurs well for the sector at large.
“The construction development, including townships, housing and built-up infrastructure attracted Rs 4,582 crore foreign investments in the financial year 2014-15. This amount is expected to rise significantly after the change in norms. I feel since the appreciation potential and scope of development is more in the new cities, the investors will park significant investment in the proposed smart cities,” says Hawelia.
Post the initial euphoria around the FDI in 2005, the foreign funds have dried up in the sector due to lack of clarity with the regulation. Now that the FDI is permitted in rent yielding assets, the earlier ambiguities on whether activity of renting amounts to ‘real estate business’ (and therefore whether prohibited) is removed, it is expected that proposed smart cities will attract the major share of FDI money.
