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Change in FDI Norms: Will it help real estate sector?

Ease of doing business surely improved due to recently announced changes in FDI norms. However, there are more steps required to revive real estate sector.

Surabhi Arora
Colliers International

The government has recently decided to introduce few changes in foreign direct investment (FDI) regime in construction development sector. Although, the changes are perceived as radical in the market, these changes are more to do with ‘ease in doing businesses’ in real estate. The norms seem to be eased and rationalised to simplify the complicated process of foreign investment in the current policy.

According to the DIPP press note, the conditions of area restriction of floor area of 20,000 sq mtrs in construction development projects and minimum capitalization of US $ 5 million to be brought in within the period of six months of the commencement of business is removed. These restrictions are not in compliance with standards of competitive regulation for emerging sectors such as affordable housing projects. These threshold limits are keeping investors at bay and mid-sized and small developers with good track record are also not able to get funding through these resource. Removal of minimum thresholds for floor area and capital investment will encourage investment in small projects. Thus, now the projects which need less capital and smaller in size such as affordable housing projects, small projects in prime areas and projects in tier II and III cities will get a boost.

The new FDI norms will make entry and exit for foreign investors easier. A foreign investor will now be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed. Further, transfer of stake from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval. Moreover, exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period. Now with exit norms clarity, the each phase of the construction development project would be considered as a separate project, it will pave the way for easy exit as the foreign fund will be allowed to exit with completion of each phase wherein they have invested.

There are other changes as well such as removal of lock In period to sectors such as hotel & tourist resorts and hospitals, SEZ, and investment by NRI; automatic 100% FDI under automatic route in operational malls, townships, business centers, etc.; transfer of ownership and control of investee company from resident to non-resident (subject to 3 year lock-in) permitted. These changes will definitely encourage more investment in these sectors and specially the investment by NRIs.

These changes are well appreciated; but there are few other important factors that are impacting FDI flow in real estate. One of the main factor is lack of clarity in the FDI policy and the numerous flip flops in the policies proposed which the government has tried to align through recent changes. The other factor is poor risk-reward equation due to the complicated and time consuming approval process. Internationally, the time taken for getting approvals is three to nine months. However, in India the time lag from conception to beginning of construction is anything from two to three years. Due to delay in approval process most of the projects are currently facing construction delays from three months up to three years. The construction delays result not only results in huge cost overruns but also impact the investor sentiments. Thus, still there is a dire need to strengthen approval process to streamline the risk return equation because ultimately, ROI will attract foreign investor to invest in the country in long run.

The views presented in the above articles are based on author’s personal opinion.