Foreign Direct Investment (FDI) is a significant source of funding for India’s economic growth. Following the crisis of 1991, India began its economic liberalisation, and FDI has steadily expanded since then. India now ranks first internationally for greenfield Foreign Direct Investment (FDI) and is a member of the top 100-club for ease of doing business (EoDB). India’s economy is currently one of the fastest-growing in the world, and given its present financial situation, real estate has become one of the most alluring investment sectors for both domestic and foreign investors. Furthermore, a strong economy and a liberalised Foreign Direct Investments (FDI) environment in the real estate industry both contributed to the real estate sector’s high rate of growth. In this article, we will discuss about FDI Policy in Construction Development.
Short Glimpse
The majority of Foreign Direct Investments are made in open economies with a competent labour force and promising futures. FDIs offer skills, technology, and expertise in addition to money. Also, Due to its significant multiplier effect on the economy, the Construction and Real Estate industries are among the most important ones in India. The real estate industry directly affects the expansion of the economy. The Foreign Direct Investment (FDI) method has drawn the interest of foreign investors in this industry due to the widely accepted necessity for foreign capital due to the sheer demand.
Wait a second; let us first delve into FDI in greater detail, so that we could have a better understanding regarding Conditions on FDI in Construction Development, Industrial Parks & Satellites or in simpler terms FDI Policy in Construction Development.
Meaning of Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is defined as a cross-border investment made by a company/individual in a foreign country into another company residing in another country. Therefore, India’s economy has been considered as one of the most profitable and prospective destinations for foreign investors and businesses. Furthermore, it has vice-versa benefitted the Indian economy, as foreign investment is one of its major monetary sources and also provides various job opportunities for a large number of its citizens.
FDI Policy Update
The new FDI policy states that only investments made through the government channel are permitted for entities of nations with land borders with India, nations where the beneficial owner of an investment in India is located, or individuals who are nationals of such nations.
Government permission is also required for any transfer of ownership under an FDI agreement that benefits any nation with whom India shares a border.
Instead of requesting prior authorization from the appropriate government department, investors from nations not covered by the new regulation merely need to alert the RBI after a transaction.
The prior FDI policy only permitted Bangladesh and Pakistan through the official channel in all industries. Also, Companies from China are now subject to the government’s route filter thanks to the updated rule.
FDI Policy in Construction Development
In order to facilitate the ease of inflow of global funds into the economy, the government has taken steps to ensure a favourable policy regime to attract foreign investors and MNCs by adopting favourable measures and policies. So, with respect to the dynamic business conditions and competitive nature of the Indian economy, it is essential to understand the legal system and regulatory framework revolving around foreign direct investments in order to establish a solid foundation for international businesses intending to initiate their operations in the Indian market.
Here is the List of Services in which FDI is permitted
- Broadcasting
- Print Media
- Civil Aviation
- Construction Development: Townships, Housing, Built-up Infrastructure
- Industrial Parks
- Satellites- Establishment, and Operation
- Private Security Agencies
- Telecom Services
- Trading
- Railway Infrastructure
Construction Development: Townships, Housing, Built-up Infrastructure
The Construction/ Real Estate sector is one of the most critical sectors of the Indian economy due to its huge multiplier effect on the economy. Any impact on the Real Estate sector has a direct bearing on economic growth. Due to the well-acknowledged need for foreign investments into this sector because of the sheer demand, the Foreign Direct Investment (FDI) route has attracted foreign investors interest in this sector. In the year 2005, Reserve Bank of India (RBI) issued a notification and the township, housing, construction development project sector and built-up infrastructure was opened for 100% FDI with specific terms and conditions.
- Minimum Capitalization: No minimum requirement
- Exit and Lock-in Restrictions
The investor is permitted to exit from the investment:- After 3 years from the date of each tranche of foreign investment
- On the completion of the project
- On the completion/development of trunk infrastructure i.e., roads, water supply, street lighting, drainage and sewerage. The lock-in period of 3 years will also not apply to Hotels & Tourist Resorts, Hospitals, Special Economic Zones, Educational Institutions, Old Age Homes and investment by NRIs.
Therefore, one should keep in mind the Exit and Lock-in Restrictions related with conditions on FDI in Construction Development, Industrial Parks and Satellite.
- Transfer of stake from a Non-Resident Investor to another Non-Resident Investor: Transfer without any repatriation of investment is not subject to any lock-in or prior RBI approval.
- Separate Phases/Projects: Each phase of a project is considered as a separate project for the purposes of the FDI Policy.
- Minimum Land Stipulation: There is no minimum area requirement.
- Completed Assets: 100% FDI is permitted under automatic route into completed projects for operation and management of townships, malls/ shopping complexes and business centres. However, there is a lock-in period of 3 years applicable.
- Transfer of control from residents to Non-Residents: Transfer of control from residents to non-residents as a consequence of foreign investment is also permitted. However, there is a lock in period of 3 years applicable and no transfer of immovable property is permitted during this period.
- Earning or Rent/Income on lease of the Property: FDI is not permitted in an entity which is engaged or proposes to engage in Real Estate Business. However, the earning of rent/ income on lease of the property, not amounting to transfer, does not amount to ‘Real Estate Business’ and hence is permitted.
- Obligations on Indian Investee Company: Indian Investee Company is permitted to sell only developed plots. The plots where trunk infrastructure has been available. Indian Investee Company is responsible for obtaining all approvals, payment of development and other charges, and compliance with all other requirements as prescribed by local government bodies.
- Authority to Monitor Compliance: The State Government/Municipal/Local Body concerned, which approves the building/development plans, will monitor compliance of all the conditions by the developer.
Open Conditions regarding FDI Policy in Construction Development
The following are the open conditions on FDI in Construction Development, industrial Parks & Satellites:
- Timeline at which stage the foreign investment must come in is not provided in the existing regulations and the clarification on the same is awaited.
- In the absence of any timeline for investment, since the FDI is permitted in construction-development projects, it is to be seen at what stage a project can qualify as being in the ‘construction-development’ phase.
- Real estate being a state subject, any guidelines or regulations by state for the benefit of foreign investors would be a welcome step and is awaited.
RBI has been regularly improving the real estate sector for FDI, which will hold great potential for formation of employment and generation of income. Furthermore, considering the urgent need to enhance the affordable housing stock, the government had provided definite relaxations to conditions for FDI in Real Estate sector. It also clarified that real estate broking services do not amount to real estate business and are, therefore, eligible for 100 per cent FDI under the automatic route.
Condition on FDI in Construction Development of Industrial Parks
Industrial Park is a project in which quality infrastructure in the form of plots of developed land or built-up space or a combination with common facilities, is developed and made available to all the allottee units for the purposes of industrial activity.
Infrastructure refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), railway line/sidings including electrified railway lines and connectivity’s to the main railway line, water supply, and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.
Common Facilities refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads, railway line/sidings including electrified railway lines and connectivity to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.
FDI in Industrial Parks would not be subject to the conditionalities applicable for construction development projects
- It would comprise of a minimum of 10 units and no single unit shall occupy more than 50% of the allocable area
- The minimum percentage of the area to be allocated for the industrial activity shall not be less than 66% of the total allocable area.
Condition on FDI in Construction Development of Satellites
FDI in space is allowed under government route only for satellite establishment and operations. Further, FDI in space is approved by the Government on a case-by-case basis and often this approval takes years. However, witnessing the change in approach of the Indian Government towards private player’s involvement, foreign companies have expressed interest in investing in this space. Soon after opening the Indian space sector to private actors, the next step has been to seek foreign direct investment. ISRO officials have called for introduction of a new FDI policy to engage with foreign firms and make the Indian space sector accessible to both domestic and foreign players.
Conclusion
The FDI policy has prescribed the mandatory procedure to regulate the inflow of foreign funds and investments into the Indian economy. Hence it will be vital to adopt favourable policies and impose limited restrictions which would help facilitate the smoother inflow of capital investment within the economy and thus would usher wealth creation and growth in the economy and also enable the development of entrepreneurship in India. Therefore with the FDI policy actively scrutinising the investments routes, it will ensure a greater scope of foreign investment.
