Monday, November 3, 2014

Update: Relaxation of FDI Norms for Construction Development Sector

[The following post is contributed by Bhushan Shah at Mansukhlal Hiralal & Company, Mumbai]

The Union Cabinet on 29 October 2014 decided to amend the Foreign Direct Investment (FDI) policy in the construction sector, i.e. townships, housing and built-up infrastructure. The press release is available here.

The key amendments are as follows:

Minimum area to be developed: (a) The minimum built up area has been reduced from 50,000 square meters to 20,000 square meters for construction development projects (b) The term “service housing plot” has been replaced by “service plots” allowing companies to have commercial plots. Further the minimum built up area for plot has been reduced from 10 hectares to nil;

Minimum capitalization: The minimum capital requirement (which is to be brought within 6 months of the commencement of the project) has been reduced from USD 10 million to USD 5 million for a wholly owned subsidiary;

Exit: Investors can now exit the project immediately after the completion of the project or after 3 years from the date of final investment subject to the development of trunk infrastructure;

Transfer: Transfer from one non resident investor to another non resident before completion of the project has been permitted subject to the approval of the Foreign Investment Promotion Board;

Affordable housing: The cabinet has proposedthat any project which has a 30% allocation of total project cost for low-cost affordable housing would be exempted from compliance of the conditions pertaining to minimum capitalisation and minimum developed area norms;

Completed Projects: For completed projects, 100% FDI under the automatic route is allowed for operation and management of townships, malls/shopping complexes and business centres;

Investor Responsibility Eased:  (a) Responsibility of Investor for obtaining all regulatory permission by the investor has been dropped; (b) The condition regarding development of 50% of project within 5 years from the date of commencement and making it the responsibility of the investor has now also been waived.

The aforesaid amendments will come into effect upon the Department of Industrial Policy &
Promotion issues a press note notifying the changes.

COMMENTS

The relaxations in the conditions for foreign investment in real estate and construction sector are a significant boost to foreign investors to invest in residential and commercial projects. Real estate developers see the most incentive in reduction in area and capital requirements, as they will provide the much needed liquidity in the sector. This may also represent major steps for fulfilment of the goal of creating smart cities across the country at affordable pricing.

- Bhushan Shah


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