The govt’s stance that property brokerage services are not real estate biz and hence are eligible for 100% automatic-route FDI would pave way for JVs with MNCs
Manoj K Singh
On January 10, 2018, the Union Cabinet, chaired by the Prime Minister, gave its approval to a number of amendments in the foreign direct investment (FDI) policy. These amendments include 100% FDI under automatic route in single brand retails trading, construction development (real-estate brokerage services), civil aviation and power exchange. The underlining aim of liberalising the policy is to provide ease of doing business, which will result in increasing the FDI inflow in the respective sectors, leading to growth of investment and employment in the country. Providing 100% FDI in construction development via automatic route is surely a significant move by the government. Earlier, the FDI policy included the real-estate broking services in real-estate business, in which 49% FDI was allowed under automatic route.
However, in the definition of real-estate business, clarification has been provided that the real-estate brokerage service does not fall under the real estate business. Now, “real estate business” means dealing in land and immovable property with a view to earning profit and does not include development of townships, construction of residential/commercial premises, roads/bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Earlier 100% FDI was permitted in construction-development projects with the following conditions:
*Minimum floor area to be developed of 20,000 sq. metres.
*Mandatory infusion of FDI of minimum $5 million within six months of the commencement of the project.
The investor was permitted to exit on completion of the project or after development of trunk infrastructure—roads, water supply, street lighting, drainage and sewerage. Transfer of investment from the foreign investor to another non-resident investor required government approval. Despite the fact that 100% FDI was permitted under automatic route, this sector was not showing any sign of recovery, as the minimum thresholds were suggesting that the FDI was permitted only in new projects and not permitted in the existing projects, which were incomplete due to lack of funds. However, the government, in November 2015, re-looked the policy and relaxed it. The amended policy broadly provided:
*Minimum thresholds related to the area to be developed and the amount to be infused was removed.
*The foreign investor has been given liberty to exit the project even before its completion or development of basic infrastructure subject to a lock-in period of three years.
*No prior approval is required for the sale of investment by the foreign investor to another non-resident wherein no repatriation of investment is involved.
*Each phase of the project would be considered as a separate project for the purpose of investment.
However, the government did not clarify whether the real-estate brokerage services will come under real estate business, which acted as a major factor in restricting the foreign firm to enter the sector. But, this time, the government has taken a view and clarified its stance on the subject. The clarification is a welcome step for the start-ups/foreign firms who see Indian real-estate brokerage services as a money-making sector. Now various multinational firms can enter the Indian market without the help of local partners. Another benefit from such relaxation will be the availability of technological know-how. Foreign firm will bring advanced technology in the country. More so, this step can be seen as a strong signal towards institutionalisation of the real-estates brokerage service in India.
The clarification can also prove to be a booster for real estate sector of construction development. In the last couple of years, the real estate market has seen slow growth due to various reasons, such as non-availability of fund and rigid laws. Now, the foreign firms can directly invest in the real estate sector without prior approval of government, making the country a global retail market for real estate brokerage services. This will also reduce the problem of non-availability of funds in the market, resulting in higher contribution to the economy of the country.
Author is Founding partner, Singh & Associates