1. New FDI norms: Real gains for real-estate sector

New FDI norms: Real gains for real-estate sector

The move will give stuck projects in the real-estate sector a new lease of life

By: | Updated: November 16, 2015 7:47 AM
real estate cities

The parable of ‘the elephant moves slowly in India’ is often used as a tongue-in-cheek allusion to the slow-paced nature of reforms in this large and multi-faceted country.

The parable of ‘the elephant moves slowly in India’ is often used as a tongue-in-cheek allusion to the slow-paced nature of reforms in this large and multi-faceted country. While one could surmise the extent of bearing the recently concluded Bihar election has on the move, the recent press note issued by the department of industrial policy and promotion (DIPP), a body under the ministry of commerce & industry, definitely seeks to challenge this notion by demonstrating the boldness with which the government can, if willing, bring in reforms in respect of foreign direct investment (FDI).

The press note is arguably one of the clearest signals in recent times, as far as the overhaul and liberalisation of FDI is concerned. Making no secret of the impact FDI has on the growth prospects of the Indian economy, in a single-stroke, about 15 major sectors that are the backbone of the economy have been given impetus, albeit with varying degrees of success.

The lion’s share of the reforms have been directed at the real-estate sector, plagued with negative sentiments in recent times, including a sharp slowdown in key markets. The sector was opened up to FDI, with the introduction of Press Note 2, in 2005. The government, wary of the impact a flush of foreign investment can have in the sector, had imposed somewhat stifling restrictions such as minimum area to be developed, minimum investment to be brought, restrictions in the form of lock in conditions in respect of any exit given to the investor on the investment made, etc.
The priority areas of the government, such as the ambitious “housing for all by 2022” goal, the development of 100 smart cities, etc, demand a thriving real-estate sector which, in turn, requires significant participation by the foreign-investors community. The task for the government, therefore, was to balance the urgent need for significant investment in this sector against the fear of fuelling an asset bubble riding on top of speculative investments fuelled by foreign capital.

In the recent announcement, the policy seeks to take a mid-path approach by doing away with some of the restrictive conditions of the past even while imposing overarching conditions preventing speculative trading.

Coming to the specific changes, the earlier policy required a minimum of 20,000 square meters of development and a minimum capital of $5 million. Both of these conditions have been done away with. This is indeed a welcome change as the earlier conditions, by definition, tended to favour foreign investments only in larger Tier-I cities as development at this scale in Tier-II and -III cities of would often be non-viable. Equally, by doing away with these conditions, investment could flow into city-centric developments where the ‘20,000 sq m condition was a dampener.

In addition to this, the requirement of bringing in foreign investment within 6 months of commencement of the project under the earlier policy has also be removed. Many projects have been stalled midway for reasons including viability of the project, want of funds etc. Although foreign investors were keen to invest in such projects, the requirement to bring in funds by 6 months created a hurdle. The proposed change would help such projects gain a fresh lease of life, assisting many embattled developers who can now access foreign investment.

The earlier policy required that the investor would be allowed an exit from the investment only on completion of the project or completion of the requisite infrastructure like sewage, lighting, etc, termed as trunk infrastructure. Arguably, this condition was imposed to prevent speculative investments in land without any intent to develop the project. Here, again, the proposed policy seeks to strike a balance by imposing a 3-year lock-in on the investment but permits the foreign investor to exit earlier if the project or trunk infrastructure is completed earlier.

Since the sector was classified as the construction development sector, and  given the blanket prohibition for foreign investment in real-estate business, there were ambiguities in respect of whether foreign investment can be made in completed buildings. The doubt arose from the fact whether the acquisition of said buildings for the purpose of leasing to tenants could constitute real-estate business, which is a prohibited sector. The press note clarifies that such activities do not constitute real-estate business. While the language of the policy in relation to investments in completed assets could definitely have been clearer, the intent definitely seems to be to allow foreign investments in completed assets provided that the intent is to earn rental income. This is indeed a welcome move as this will allow large Indian developers the flexibility to sell their portfolio of developed assets and deleverage their balance sheets.

In addition, this will also benefit several operating companies with large real-estate holdings to monetise their non-core real-estate holdings.

Overall, the message is extremely positive, and the devil being in the details, the sector is keenly hoping that the message is not lost in translation when it finally becomes part of the FDI policy.
With inputs from Vinay K

The author is partner, BMR & Associates LLP. Views are personal

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