Just a day before Diwali, the Centre brings cheer to the foreign investors planning to invest in India. On November 10, central government has removed all stringent restriction on foreign direct investments into the real estate and construction sector except for a 3 year lock-in period for select projects. New FDI norms are expected to boost foreign investment in the cash-starved realty sector and would also drive the entry and growth of smaller development firms.
Let us analyze how this would influence Indian realty sector.
The government had reduced the minimum capitalisation to $5 million from $10 million, which had to be brought into the country within the initial 6 months of the business. The government also reduced the development size from 50,000 square meters to 20,000 square meters. The decision to relax FDI norms by removing major bottlenecks related to minimum built-up area and capital requirement will definitely help the sectors where the capital investment is low.
As per revised norms, the condition of lock-in period for FDI investments would not apply to hospitals, hotels and resorts, old age homes, SEZs, educational institutions and investment by NRI. FDI, however, does not permit construction of farm houses, trading in transferable development rights (TDRs) and investment in immovable property or land in India.
Non-resident Indian (NRI) will be able to exit project and repatriate their investment before the completion of a project under the automatic route, provided that a lock-in-period of three years. This will further increase investor’s interest in Indian realty. Moreover, the transfer of stake from one non-resident to another non-resident, investors can exit projects at any time or even before the completion of lock-in period.
Currently, even though property developers can invest in large developments with capital accrued from FDIs, this does not allow for similar developments of a smaller scale. This would change. However, FEMA (Foreign Exchange Management Act) guidelines would still be a barrier. For example, foreign investment in a restricted liability partnership is allowed only under the govt. approval route, and only in the projects in which 100 per cent FDI is allowed by govt. Likewise, non-resident Indian (NRIs), are not allowed to invest in Indian partnership firms on a non-repatriation basis.