Realty JV only if local firm holds 25%

Written by Subhash Narayan | Timsy Jaipuria | New Delhi | Updated: Dec 19 2012, 09:30am hrs
Foreign investors in Indian construction and housing projects will now have to give at least 25% stake to Indian partners if they have to be treated as joint ventures and claim the benefit of a low capital infusion norm of $5 million.

The department of economic affairs (DEA) has made this condition mandatory for foreign investment in these projects to prevent wholly-owned subsidiaries of international firms from acting as "joint venture entities" despite shareholding by Indian partner/s being minimal.

Under the existing FDI policy, 100% foreign investment is allowed in "construction development" projects that includes construction of townships and housing infrastructure. But FDI in "real estate companies" is barred. While the minimum capitalisation norm of $ 10 million is applicable for wholly-owned subsidiaries, only $ 5 million capital needs to be brought in for joint venture with Indian partners in the projects specified above.

Sources said the department of industrial policy and promotion (DIPP), the nodal government agency for finalising the sectoral FDI policy, would soon come out with a press note on the matter after consulting the ministry of housing and urban poverty alleviation and the ministry of urban development.

With this move, the Centre has brought clarity in the definition of joint venture operations in the housing sector. Several government agencies, including the Reserve Bank of India, had raised concerns over the ambiguity in provisions, saying it could be easily misused by investors.

In fact, in an earlier letter to DIPP, the RBI had raised concerns about overseas firms taking the benefits of lower capitalisation available to JVs by keeping just 0.1% equity or just one share holding with an Indian entity. Experts feel such clarification will further plug loopholes in the sector. It does bring in transparency in the policy. However, we must see that not much of investment is flowing in the country and such a policy should not discourage investor interest.

Despite all this, we expect that more reforms should take place so that more investments comes in the country, Anshuman Magazine, chairman & managing director of CBRE South Asia region, said.

Sanjay Dutt, executive director, Cushman & Wakefield South Asia said, With this policy, some more skin in the game has come in for local investor as he too shall now get more ownership rights. Now, theIndian players will take their projects more seriously.

The RBI, in a letter to the DIPP, had said the term wholly-owned subsidiary was not clearly defined in the FDI policy.

"While the term joint venture is defined in the consolidated FDI policy as an Indian entity incorporated in accordance with the laws and regulations in India and in whose capital a non-resident makes an investment, the term WoS has not been defined in DIPP's consolidated FDI policy, RBI said.

The apex bank had also highlighted that according to the Indian Companies Act, 1956, even if a resident Indian holds a single share in a company in construction development sector, such a company will be termed as a joint venture. "Accordingly, no company in construction development sector will be treated as wholly owned subsidiary by non-residents even if 99.99% share is held by non-residents and only one share is held by resident, RBI said in the letter.

The RBI had sought clarification saying that a foreign firm can avoid meeting the higher requirement of a minimum capital of $10 million. It had also pointed that by offering single share in the company to a resident Indian, foreign companies were flouting norms as they treated such an arrangement as a joint venture, which indirectly was bringing down the minimum capital requirement to $5 million.

It suggested that DIPP take leaf from the provisions existing in the NBFC sector where the cap on holding is specified for treatment as joint ventire and WoS.