Foreign Direct investment in Real Estate / construction in india
Because of its enormous multiplier effect on the economy, the construction / real estate sector is one of the most critical sectors of the Indian economy. Any impact on Real Estate has a direct effect on economic development. The Foreign Direct Investment ( FDI) route has attracted interest from foreign investors in this sector because of the well-recognized need for foreign investments in this sector because of the sheer demand.
Reserve Bank of India ( RBI) issued a notification in 2005, and specific terms and conditions for the township, housing, construction project development sector and built-up infrastructure were opened for 100 percent FDI.
Recently, the Reserve Bank of India has relaxed restrictions on end-use of funds raised by foreign commercial borrowing, making it more feasible and viable to raise cheaper offshore funds for companies and non-bank finance firms. In order to further liberalize the ECB framework, it was decided to relax the end-use restrictions and allow the use of funds for the requirements of working capital, general corporate purposes and the repayment of rupee loans. ECBs with a minimum average maturity period of 10 years can now be used for general corporate and working capital purposes.
These changes will enhance business facility in India.
Changes in FDI policy have occurred in this sector from time to time and the updated policy follows as of now.
Current FDI Regulatory Position for 2017
* Corporate Real Estate
'Real Estate Business' has been defined as land and immovable property with a view to profit from it and does not include the development of townships, the construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities , infrastructure at the city / regional level, townships. Significantly, earning rent or income from a project in which FDI is allowed would not amount to 'Real Estate Business,' not being transferred.
Conditions applicable to FDI in Indian real estate sector:
Conditions Applicability according to FDI Policy 2017
Minimum Capitalisation No minimum
Restrictions on exit and lock-in • An investor may exit the investment: I after 3 years from the date of each tranche of foreign investment, or (ii) after completion of the project; or (iii) after completion / development of trunk infrastructure, i.e. highways, water supply, street lighting, drainage and sewerage.
• The 3-year lock-in term shall also not extend to Hotels & Tourist Resorts, Schools, Special Economic Zones, Educational Establishments, Old Age Homes or NRIs.
Transfer of the stake from a non-resident investor to another non-resident investor Transfer is not subject to lock-in or prior RBI approval without repatriation of the investments.
Separate phases / projects For the purposes of the FDI Policy, each phase of a project is considered as a separate project
Minimum Land Stipulation No requirement for a minimum area.
Completed Assets • Automatic route to completed projects for the operation and management of townships, malls / shopping complexes and business centers allows 100 per cent FDI.
• There is also a 3-year lock-in clause applicable.
Transfer of control from residents to non-residents Also allowed is transfer of control from residents to non-residents as a result of foreign investment. There is however a lock valid for the duration of 3 years and no transfer of immovable property is allowed during this time.
An individual which is engaged or proposes to engage in 'Real Estate Business' is not permitted to receive or rent/income on lease of the FDI land. However, earning rent/income on the property's lease, not amounting to transfer, is not 'Real Estate Business' and is therefore allowed.
Indian Investee Company Bonds • Indian Investee Company is allowed to sell only developed parcels, i.e. plots where trunk infrastructure was available.
• The Indian Investee Company is responsible for securing all permits, payment of construction and other fees and fulfillment of all other specifications as approved by local authorities.
Compliance control authority The state / municipal / local body concerned, which approves the construction / development plans, must monitor the developer 's compliance with all the conditions.
In the existing regulations, the timeline at which stage the foreign investment must come in is not provided and clarification on the same is awaited.
In the absence of any investment timeline, because the FDI is permitted in construction-development projects, it is to be seen at what point a project will qualify as being in the process of 'construction-development.'
Real estate being a subject of the state, any state guidelines or regulations for the benefit of foreign investors would be a welcome step and are expected.
Take the time off
RBI has been developing the real estate sector for FDI on a regular basis, which would hold great potential for work creation and income generation. In addition , given the urgent need to enhance affordable housing stock, the government provided definite relaxation to FDI conditions in the real estate sector. It also explained that real estate broking services are not an immovable company and are thus compliant under the automatic route for 100 per cent FDI.