Is FDI relaxation aimed at attracting investment in smart cities?

Narendra Modi’s pet project of creating ‘smart cities’, is likely to benefit from the government’s relaxation of FDI regulations and attract a major share of the FDI inflow

When the government of India announced the relaxation in foreign direct investment (FDI) norms, it seems to have done so, with a long-term blueprint in mind. FDI is likely to be crucial to the fortunes of the prime minister’s dream project of creating smart cities.

The real estate fraternity concede that FDI was instrumental in the turnaround that the sector witnessed, when it was first announced in 2005. The latest policy announcement is hence cited by a section of analysts, as the second wave of FDI into the sector. The government also seems determined to take the FDI roll out to the next level, with a fresh set of guidelines for the same.

The main features of the provisions issued by the Department of Industrial Policy & Promotion (DIPP) of the Government of India are as follows:

  • “Conditions of area restriction of floor area of 20,000 sq metres in construction development projects and minimum capitalisation of US $5 million to be brought in within the period of six months of the commencement of business, have been removed. Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy.” Exit will, therefore, be linked to each phase and is likely to be much easier, as compared to existing regulations.
  • Moreover, exit has been linked to three years of each FDI tranche. “A foreign investor will be permitted to exit and repatriate foreign investment before the completion of the project under the automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed. 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,” according to the new amendments. Exit is also possible before three years, if the trunk infrastructure is completed before three years.
  • Earning rent or income by leasing a property, not amounting to ‘transfer’, will not be considered as a real estate business (in which FDI is prohibited).
  • The government has also allowed 100% FDI in completed projects under the automatic route, for operation and management of townships, malls, shopping complexes and business centres. “Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.

Kalpesh Maroo, partner, BMR & Associates LLP, maintains that these announcements are the biggest relaxation to the FDI policy for the real estate sector, since the sector was opened up in 2005. “The policy changes, especially the clarification on leasing/renting of completed assets not constituting real estate activity, are going to be a game changer. They will fuel domestic and international investment in completed commercial buildings,” Maroo predicts.

Nikhil Hawelia, managing director of the Hawelia Group, feels the government is conscious of the fact that the allocated budget of Rs 500 crore for each smart city, is peanuts. Consequently, the relaxation in FDI norms, is an attempt to attract foreign investors, with a carrot of easy exit, he believes. There could be more such sops to attract foreign money and this augurs well for the sector. Hawelia points out that in the financial year 2014-15, construction development of housing, townships, and built-up infrastructure, attracted foreign investemnts worth Rs 4,582 crore. “This amount is likely to rise significantly, following the change in norms. As the potential for appreciation and scope of development is more in new cities, investors will park significant funds in the proposed smart cities,” he concludes.

(The writer is CEO, Track2Realty)


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