Although the Indian real estate sector has attracted many investors from across the globe, the companies are still bound by strict conditions for bringing in foreign direct investment (FDI). Therefore, there have been efforts on the part of the government to exempt real estate projects from Press Note 2 of 2005. Now, the Department of Industrial Policy & Promotion (DIPP) has sent a second draft for the consideration of the Cabinet Committee on Economic Affairs (CCEA) on FDI in mixed projects with a change. After inter-ministerial consultations, the DIPP has circulated the note saying that the mandatory three-year lock-in should be retained while the minimum capitalisation and minimum area of development condition should be waived off.
DIPP has circulated a note saying that the mandatory three-year lock-in should be retained while the minimum capitalisation and minimum area of development condition should be waived off for mixed use projects like hotel and tourism activities
Mixed real estate projects include hotel and tourism activities. The first draft meant for CCEA had proposed exemption from mandatory lock-in as well for FDI in such projects. The Press Note 2 of 2005 makes minimum capitalisation, minimum area of development and three-year lock-in mandatory for the flow of FDI in real estate. The detailed guidelines are as follows:
v Minimum area to be developed:
Ø In case of development of serviced housing plots, a minimum land area of 10 hectares
Ø In case of construction-development projects, a minimum built-up area of 50,000 sq. metres
Ø In case of a combination project, any one of the above two conditions would suffice
v The investment would further be subject to the following conditions:
Ø Minimum capitalization of US$10 million for wholly-owned subsidiaries and US$5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company.
Ø Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the Foreign Investment Promotion Board (FIPB).
v At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances.
The government has been mulling over easing the restrictions since April this year. It is of the view that exemption from minimum capitalisation and minimum area of development can be provided for FDI in the projects that include hotel and tourism activities. DIPP has submitted a note to this effect to the Prime Minister’s Office and the ministries dealing with the subject. And this will be put up with the CCEA with the comments of other departments. The Indian real estate companies are undoubtedly going to be more comfortable with the proposed changes in the FDI policy. Easing the restrictions will help them mobilize more foreign funds for which there is no shortage. In fact, the real estate companies have also been pushing for liberal FDI norms. The developers are facing pressure due to the
For exemption in the FDI condition for the mixed projects, 50% of the total built-up area should be reserved for tourism activities and 20% of the total built-up area has to be reserved for hotel rooms
The projects seeking to qualify for the exemption will be subject to the condition that 50% of the total built-up area in such projects should be reserved for tourism activities and 20% of the total built-up area has to be reserved for hotel rooms. Tourism activities encompass restaurants, resorts and tourism complexes providing accommodation and other related services to tourists. Travel agencies, tour operators, transport agencies, units dealing with cultural activities and wildlife, entertainment services, sports, amusement parks and health facilities would also qualify for the ‘tourism facility’ categorisation. At least 20% of the total built-up area should comprise of hotel rooms. This in turn, means that at least 30% of the total built-up area should be allocated for tourism activities other than hotel rooms. The proposal has been justified on the ground that it would boost tourism and hospitality. And these two sectors are identified by the government as vital job creators in the coming years.
In the recent draft sent to the Prime Minister’s office, DIPP has listed other conditions that also need to be fulfilled. These are:
• Construction projects with mixed development to be regulated by the concerned authority;
• Residential buildings not to be misused for non-residential purposes;
• Adequate parking space and structural safety of the buildings;
• Provision for rain-water harvesting; and
• Provision of barrier-free environment.
The government had made clearance to FDI in real estate and construction conditional to ensure that flow of foreign money does not lead to speculation in the real estate business.
Meanwhile, the FDI inflow into the real estate sector has been increasing manifold. The sector has evoked the interest of a number of foreign investors such as Royal Indian Raj, Blackstone, Goldman Sachs and Emaar properties, which have announced plans to collectively invest over $6 billion. At present, the flow of FDI in Indian realty sector is estimated at around 5 to 5.50 billion dollars. The industry body Assocham said that the FDI in the Indian realty sector may jump around six-fold to $30 billion in the next ten years. According to Assocham, the sector is expected to grow more than 30 per cent in the next few years (http://www.indianrealtynews.com/fdi-india).
But at the same time, it is true that this huge inflow has led to a manifold increase in the property prices. The Reserve Bank of India (RBI) has been warning about a real estate bubble. The RBI, in fact, wants that some curbs should be imposed on the FDI in real estate. For that reason, even the current DIPP proposal might face resistance from the RBI.
If the waiver that has been sought for the real estate projects by the DIPP is accepted, then the real estate companies are going to get a fillip in terms of mobilising FDI. This, however, could lead to a continuation of the rising price trends in the economy.
Published by Real Estate TV
