Removal of 3 yr lock-in period for FDI in realty proposed

The Department of Industrial Policy and Promotion (DIPP) has proposed the removal of the three-year lock-in for foreign direct investment (FDI) in realty, sources told CNBC-TV18. The lock-in period was a cautionary move against speculation. Till date, no sector besides defence has a lock-in period. Portfolio investments also don't have a lock-in period. The draft Cabinet note for removal of lock-in has been circulated, reports CNBC-TV18's Nayantara Rai.

This proposal has been made by the DIPP. The DIPP has even drafted the cabinet note which has been circulated to come before the Cabinet Committee on Economic Affairs (CCEA). The DIPP has now said that the three year lock-in period which was introduced in 2005 and the entire sector was liberalised and 100% FDI was permitted back in 2005.

The rationale for the lock-in period at that time was a cautionary move against speculative investments. Now the DIPP is rationalising and saying that no sector besides defence is governed by such a lock-in period. Even portfolio investors do not attract a lock-in period of any sort.

Sources have also told me that this move will encourage FDI. Just a few months ago the DIPP had clarified that the entire sum that would be invested by the foreign investor would be subject to a 3 year lock in period. In this sector there is a minimum requirement of USD 5 million from foreign investors and typically such FDI inflows in the real estate sector come in tranches as the payment is linked to construction.

Therefore, developers and foreign investors are rather surprised at the clarification because at one time they thought just the USD 5 million will be subject to a 3-year lock-in and then they realised that the entire sum would be subject to a lock-in period and now the DIPP is proposing to do away with the lock-in period altogether.