Building For The Future: Relaxation in FDI Rules In Construction

Building For The Future: Relaxation in FDI Rules In Construction


There has been a change by the Modi government in the FDI rules for the construction sector. Affordable housing is the aim of the Modi government and they are pulling all stops for this one. Given the dream projects for smart cities, relaxation in the FDI rules has aided the construction sector. The first proposal made by the UPA government was to reduce the minimum built up area from 50,000 square metres to 20,000 square metres. Minimum capital requirements for the projects were brought down to USD 5 million from USD 10 million. This is expected to facilitate the fund infusion into debt burdened sector ensuring fast and further completion of projects.

The proposals have been cleared by the Union Cabinet in a meeting chaired by the PM. During his maiden budget speech on 10 July, Finance Minister Arun Jaitley had indicated an allocation of INR 7000 crore for 100 new smart cities in the nation prior to 2020. He has also promised for the liberalisation of FDI in the construction sector. Around 100% FDI has been permitted in the townships as well as housing and built up infrastructure as well as construction development as early as 2005, the new rules come as a relief for the construction sector as this included minimum levels of built-up area and capital requirements.

Between the months of April in 2000 to August in 2014, the construction sector received FDI of USD 23.75 billion which is 10% of the total FDI inflows into India for this period of time. The FDI proposal was moved by the DIPP or the Department of Industrial Policy and Promotion under the Ministry of Industry and Commerce for attracting foreign investment in the real estate and construction sector. This is important because these two sectors have been facing liquidity crunch in the past 2 to 3 years.

As per the change in rules, investors will now be able to exit following completion of the project following 3 years from the date of investment either of which depending upon which is earlier. The government has also declared that it will be allowing the repatriation of FDI or transfer of stake by a single NRI investor to another prior to project completion. Proposals of this nature will now be considered by the FIPB or the Foreign Investment Promotion Board on a case basis.

As per the official statement, around USD 5 million in FDI will have to be brought within 6 months of project commencement and the date of approval for the building or layout plan by the authorities. Further tranches can be brought in until 10 years from the time when the project is commenced or just before the project completion whichever is earlier. However, since 2005, 100% FDI through automatic route is allowed in the sector which includes townships as well as residential and commercial premises apart from hotels, resorts and hospitals.

"The easing of foreign direct investment rules in the construction sector will surely provide a boost to the real estate sector and go a long way in fulfilling Prime Minister Narendra Modi's dream of creating smart cities across the country. The permission to sell completed projects to foreign investors will help Indian real estate developers get much-needed liquidity into the system," said Sanjay Chandra, managing director of Unitech, as per Business Standard.

DLF ED Rajiv Talwar said, as per a Business Standard report "Now, foreign investors will not be wary at all. With the positive announcements by the government and Reits (real estate investment trusts) coming soon, I do not think foreign players will hesitate in coming to India."
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