New FDI Norms To Boost Foreign Investment In Real Estate

Real estate is one of the largest segments of the Indian economy. But, for the sector to grow it requires capital investment, of which foreign investment is an essential part. This year, Narendra Modi-led government's Diwali gift has removed many stringent restrictions on foreign direct investment (FDI).

Let us take a look at how this would influence investments in real estate in India.

• The government removed minimum capital requirement of $5 million in the first six months since the project is initiated. The government also removed the minimum floor area requirement of 20,000 sqm. This will make it easier for foreign investment to flow into sectors where the capital investment required is lower. For example, there would be greater investment in the affordable residential segment and in small scale construction projects.

• Presently, even though real estate developers can invest in large scale projects with capital accrued from FDIs, this is not allowed for similar projects of a smaller scale. This would change. However, Foreign Exchange Management Act (FEMA) regulations would still be a hurdle. For example, foreign investment in a limited liability partnership is allowed only under the government approval route, and only in projects in which, the government allows 100 per cent FDI. Similarly, foreigners who are not non-resident Indian (NRIs), are not allowed to invest in Indian partnership firms on a non-repatriation basis.

• According to the revised norms, if the three year lock-in period is completed, foreign investors will be able to exit projects. Moreover, by transferring stakes to another non-resident, investors can exit projects even before the lock-in period. This would allow foreign investors to exist projects when there is business sense in doing so, and when the contractual agreement otherwise permits it. However, it may be difficult for the government to assess the status of non-resident investors. Moreover, the complexity of regulations may deter many foreign investors from investing.

• The new norms, however, does not allow investment in land in India or immovable property, trading in transfer of development rights, or construction of farm houses. The revised norms also remove, hotels and tourist resorts, hospitals, special economic zones (SEZs), educational institutions, old age homes and investment by NRIs, from the lock-in period. While this would raise foreign investment in these sectors, it is not clear why certain segments of the economy are excluded from norms that apply to other sectors.