Relaxed FDI limits in construction sector a booster shot for the sector, say experts

The BJP-led Government on Tuesday announced easing and simplification of foreign direct investment (FDI) rules in the construction sector wherein the conditions of area restriction of floor area of 20,000 sq. m in construction development projects and minimum capitalisation of $5 million to be brought in within the period of six months of the commencement of business have been removed.

Real estate analysts expect that this will bring the much needed booster shot for the ailing sector. Anuj Puri, Chairman & Country Head, JLL India, said, “Both the restrictions with regards to size and minimum capitalisation allowed have now been done away with altogether, meaning that FDI can now be brought into the construction sector in any amount and for any size of project. This will have a huge positive impact on the housing sector as a whole, but much more so on the affordable housing segment, which was so far not a beneficiary of FDI in any significant manner.”

Shouvik Purkayastha, MD, Capital Markets, Cushman and Wakefield, told BusinessLine, “While this is not a large-scale reform, this will remove irritants in investment flows into the construction sector. The 6-month clause did not have any rationale. This move will instil confidence in foreign investors in the construction sector.”

Now, there will be no lock-in period for FDI investments into hotels and resorts, hospitals, SEZs, educational institutions, old age homes and NRI investments, which is expected to result in greater and smoother flow of FDI into all these categories.

 “Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy. A foreign investor will 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. Nonetheless, exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period,” a statement from the Department Of Industrial Policy & Promotion said.

The announcement also clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs). 

“Real Estate Business will mean as ‘dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business,” the statement added.

Kalpesh Maroo, Partner, BMR & Associates LLP, said, “The policy changes, especially the clarification on leasing/renting of completed assets not constituting real estate activity is going to be a game changer and will fuel the growing appetite in the Indian and international investment community for investments in completed commercial buildings.”

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