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10 July 2015
The 1991 Union Budget (introduced by then Finance Minister Dr Manmohan Singh) opened the doors to foreign investment in India. Since then, elaborate measures have been taken to attract foreign investment in various sectors, without making the economy completely dependent on it. Foreign direct investment (FDI) is governed by the Foreign Exchange Management Act 1999 and the regulations implemented thereunder.
The real estate industry is one of the most important sectors of the Indian economy. Besides being one of the fastest-growing sectors, it is also the largest employment-generating sector after agriculture. It also supports various ancillary industries (eg, steel, cement, brick and paint). Since 1991, Indian markets have changed dramatically as many multinational companies have set up bases in various parts of the country, thereby increasing the demand for sophisticated commercial premises and better housing facilities.
FDI in real estate businesses and the construction of farmhouses was always strictly prohibited under the Foreign Exchange Management Act 1999 and the government's FDI policies. However, in 2005 the Department of Industrial Policy and Promotion, the Ministry of Commerce and Industry and the government issued Press Note 2, permitting 100% FDI under the automatic route (subject to certain conditions and guidelines) in townships, housing, built-up infrastructure and construction development projects, including:
This amendment aimed to generate economic activity, create new employment opportunities and add to the available housing stock and built-up infrastructure. Foreign investors were permitted to invest in projects for serviced housing plots with a minimum land area of 10 hectares (approximately 24.71 acres) or, in the case of construction development projects, a minimum built-up area of 50,000 square metres. Further, a minimum capital investment of $10 million for wholly owned subsidiaries and $5 million for joint ventures with Indian partners was required. These minimum investments had to be provided within six months of commencement of the project. Foreign investors could not repatriate the proceeds for three years following completion of the minimum capitalisation without the Foreign Investment Promotion Board's consent.
This change in policy attracted many foreign real estate investment companies (eg, private equity funds, pension funds and development companies). Due to the high returns on investment, the sector witnessed tremendous growth within a short period. However, due to changes in the dynamics of the global economy, this growth subsequently stagnated.
In order to boost FDI in the real estate market, the government introduced Press Note 10/2014, which brought about a landmark change in policy, allowing foreign investors to invest in projects without minimum land area requirements for the development of serviced plots and reducing the minimum floor area for construction development projects from 50,000 square metres to 20,000 square metres. Further, the minimum capital investment was reduced from $10 million to $5 million, to be brought in within six months of commencement of the project. In addition, investors can now bring in subsequent tranches of FDI for a 10-year period following commencement of a project or before completion of the project, whichever expires earlier. Although the three-year lock-in period has been relaxed, foreign investors can exit only on completion of the project or after the development of trunk infrastructure (eg, roads, water supply, drainage and sewerage). Under this policy, Indian companies can sell only developed plots (ie, plots where trunk infrastructure has been made available).
Through this press note, the government also relaxed the minimum area and capital requirements in cases where the Indian company or joint venture companies commit to using at least 30% of the total project cost for low-cost affordable housing.
In yet another step in this direction, the government has clarified the rules regarding investment in completed projects for the operation and management of townships, malls, shopping complexes and business centres. While revenue from these entities (eg, completed real estate projects) may consist largely of income from the leasing or licensing of the space, if a company is essentially engaged in the business of managing and operating these spaces in malls, townships and business centres – rather than merely letting the premises – foreign investment in such companies is permitted.
The new policy seeks to ease FDI requirements and help developers to avail of financial assistance at a lower lending rate, thereby making the market more competitive. The benefit of this lower cost of construction will in turn be passed onto end consumers, providing better housing facilities at lower prices. While only time will be the true test of whether the policy will in fact justify investment in real estate and unlock assets by providing necessary liquidity in the form of foreign funds, it is a step in a positive direction.
For further information on this topic please contact Jessica Ghandi at Dhaval Vussonji & Associates by telephone (+91 22 6662 3535) or email (firstname.lastname@example.org).
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