FDI norms likely to be relaxed for construction industry

Foreign Direct Investment (FDI) norms in the construction industry in India are likely to be relaxed by the government of India. The current real estate market is highly facing liquidity crunch for which the government is looking to boost up the flow of investments in the sector.

Proposed changes in Draft note

Official sources from the Department of Industrial Policy and Promotion revealed that the Commerce and Industry Ministry is finalizing a draft proposal regarding easing out the entry guidelines, minimum-area requirement and minimum lock-in period for investments, on the basis of the guidelines given by the Ministry of Housing and Urban Poverty Alleviation (MHUPA). Once the draft note is ready, it will be tabled in the cabinet, said sources.

The existing policy allows 100 percent foreign investment, including in housing, townships and construction of infrastructure, although there are several limitations.

The current FDI policy demands a lock-in period of three years for the investments made in India by foreign players. The three-year time is applicable right from the date of receipt or from the date of completion of minimum capitalization, whichever is later. But the draft policy proposes to relax this lock-in period for FDIs.

The policy also restricts the investments only to projects which have a minimum built-up area of 50,000 square metres and minimum capitalisation of $10 million for wholly-owned subsidiaries. But to attract more cash-flow in the sector, the draft note seeks to cut down the minimum built-up area limit to 20,000 square metres of carpet area and to decrease the minimum capitalisation limit to $5 million.

Most of the implications made by the Housing Ministry have been added in the draft note. The Department of Industrial Policy and Promotion (DIPP) has requested suggestions from other ministries such as Finance, Home Affairs and the Planning Commission, and after seeking the suggestions, they will also be incorporated in the final note.

Possible impacts on real estate

Relaxing the FDI norms as proposed in the draft policy would attract more foreign investments to the real estate sector in India. This would give some relief to the cash-crunch developers and would also bring down the prices of properties in India. However, the property prices are not solely dependent on this factor alone.

The construction sector in India has attracted FDI inflows of Rs 100,363 crore, starting from April 2000 to January 2013, which sums to nearly 12 percent of the total FDI inflows in the nation.

Complications likely to come in the way

Real estate experts opine that the proposed changes in FDI norms may not immediately help in drawing more foreign investments to the sector as the investors will keenly scrutinize the market scenario before investing.

Also there are other hurdles associated with foreign investments such as country-risk, exchange rate risk and policy risk as well. Hence, to protect the investors’ interest, it is necessary for the government to maintain transparency in all related affairs.

Other prime areas that require immediate attention are high interest rates, no steady support and lack of incentive schemes in the present economy.