The government on Wednesday notified the revised rules for FDI in construction. Under these rules, the three-year lock-in period for repatriation of investment has been removed. Henceforth, investors will be permitted to exit on completion of the project or after development of trunk infrastructure, i.e. roads, water supply, street lighting, drainage and sewerage. The revised norms had received a Cabinet nod in October
The revised rules also reduces the minimum floor area to 20,000 sq m from the earlier 50,000 sq m. It has also brought down the minimum capital requirement to $5 million from $10 million.
Industry observers welcomed the move, saying this would bring in more flexibility to the investor regarding their funds. Neeraj Sharma, partner, Walker Chandiok & Co, said, “Linking the exit rules to the completion of a project or development of trunk infrastructure and scrapping a three-year lock-in, is a smart move by the government. This would mean that the investors will be able to exit a project even in the initial years of investment once the trunk infrastructure is ready. The move should encourage more real estate developers to create quality infrastructure around their projects from the very beginning, and it will also help in fetching better prices for the projects.”
However, there is a word of caution too. Anuj Puri, chairman and country head, Jones Lang LaSalle India, said: “With the FDI policy now providing investors a much more attractive exit option, albeit subject to whether the investor has a strong case for exit which needs to be approved, FII interest in the Indian construction sector is bound to increase. However, a certain amount of increased speculative activity may also be anticipated.”
The relaxed rules are expected to bring in more FDI into the construction sector, which has seen a decline in the inflows over the last few years.
Between April 2000 and August 2014, construction development, including townships, housing and built-up infrastructure in the country, received FDI worth $23.75 billion, or 10% of the total FDI attracted by India during the period.
The new policy is also aimed at encouraging the much-needed low-cost affordable housing in the country and development of smart cities. The government has exempted the conditions of minimum floor area as well as capital requirement if an investee/joint venture companies commit at least 30% of the total project cost for low-cost housing.
The real estate developers have given a thumbs up to the new rules, but seek more clarity on the definition of FDI investment that will follow in the remaining cycle of the project after the initial $5 million.
Lalit Kumar Jain, chairman and managing director, Kumar Urban Development, and chairman, CREDAI, said: “The removal of three-year lock-in is a welcome move. However, we feel that the government needs to clarify whether the rules of exit will apply in the same manner if the subsequent tranches of FDI are brought in by an investor who is different from the initial investee.”