FDI in construction and development sector in view of easing FDI policies
The Government of India felt that the country has the potential to attract far more Foreign Direct Investment (“FDI”) and this can be achieved by further liberalizing and simplifying the FDI’s regime. Therefore, the Government of India has decided to introduce a number of amendments in the FDI policies which include increase in the sectoral cap, brining more activities under automatic route and easing the conditions for foreign investments.
A few radical changes have been made in the FDI policies (“New FDI Policies”) pertaining to the construction development sector.
Changes that have been made:
1. Change of minimum floor area in case of construction development project:
As per paragraph 18.104.22.168 of Consolidated FDI Police Circular of 2014 (“FDI Policy Circular”) issued by Government of India, Ministry of Commerce and Industry, in case of construction development project (“CDP”, a minimum floor area of 20,000 square meter is required to qualify the condition of 100% FDI under automotive route. Similarly Investee Company is required to bring minimum FDI of US $ 5 million within 6 months of commencement of the project.
Now under New FDI Policies, conditions of area restriction of floor of 20,000 square meter in CDP and minimum capitalization of US$ 5 million is removed.
Minimum area requirement in case of development of service plots had already been removed under FDI Police Circular and now the conditions of minimum area of CDP has also been removed. Therefore under the new regime, there will be no requirement of minimum area for real estate project and now FDIs are free to make investment without any area restrictions which will give a push to the real estate sector and relief to the developers who are having small size plots which were otherwise not qualified to invite FDI under FDI Policy Circular. Likewise the removal of minimum capitalization is a huge relief to the investors who do not have the deep pockets and were constrained to make investment due to have the requirement of minimum capitalization of US$ 5 million.
2. Each phase of the project to be treated as a separate project.
FDI Policy Circular was silent on the question of the treatment of phases of the project.
It is clarified that each phase of the construction project shall be treated as a separate project for the purpose of FDI
By removing the minimum area requirement of the project and also de-linking the exit and repatriation of the foreign investment with the completion of project, the government has clarified that the each phase of the project shall be treated as separate project. The developer having sizable amount of consolidated land and willing to launch the project in phases is placed in advantageous position by bring the present amendment. Each phase of the project shall be treated as a separate project.
As per FDI Policy Circular, the original investment can be repatriated on the completion of project or after development of trunk infrastructure. Further the approval of FIPB is required for transfer of stake by one non- resident investor to another non- resident investor before completion of the project.
As per the New FDI Policy, FDI will be permitted to exit and the amount of investment can be repatriated before completion the project/ trunk infrastructure provided that the lock- in period of 3 years has been completed. Now the lock-in period shall be calculated with reference to the each tranches of foreign investment. As a result thereof, the foreign investor is permitted to exit and repatriate its foreign investment at any time on completion of lock-in period of 3 years or completion of trunk infrastructure; whichever is earlier. Further 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 FIPB approval.
As per the New FDI Policy, now the maximum period of lock-in i.e. 3 years, would be prescribed and no obscure reason of not to allow the repatriation of the investment due to reason of non-completing the project or development of trunk infrastructure can create an obstacle in repatriation of the foreign investment. The move shall create a good investment environment and enhance the confidence of foreign investors by securing repatriation of their investment on completion of prescribed period. Similarly transfer of stake from one non- resident to another no- resident is an attempt to facilitate the exit of one investor by selling its stake to another non- resident investor who is ready and willing to invest till completion of prescribed lock-in period. Both the aforesaid changes are to create a confidence in the foreign investors and make their investment more liquid.
4. Restricted area for FDI.
As per the FDI Policy Circular, FDI is not permitted in any entity which is engaged or proposes to engage in real estate business, construction of farm houses and dealing in transferable development rights (TDRs). Real estate business as defined in FEMA notification no. 1/2000-RB dated May, 03, 2000 read with RBI Circular i.e.dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.
The word ‘ real estate’ has been defined first time in the new FDI Policy which means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.
The words ‘ earning income there from’ has been removed in the new definition with an intention that any earning on account of rent or income from the lease of the property which is not amount to ‘ transfer’ shall not be treated as ‘real estate business’. Therefore now an entity in which FDI is involved can venture and earn income from rent/ lease of the property.
5. No lock-in in certain cases.
A per FDI Circular, lock in requirement are not applicable in case of Hotels & Tourist resorts; Hospitals; Special Economic Zones (SEZs); Educational Institutions, Old Age Homes and Investment by NRIs.
It is clarified that condition of lock in will not be applicable in aforesaid sector
There is no change in provision of no- lock in the aforesaid sector. It seems that in view of change in requirement of lock in under press note, it made abundantly clear that the condition of lock-in shall not be applicable in the aforesaid specified sector.
6. FDI in operation and management of township etc.
As per the New FDI Policy, 100% FDI is permitted in the operation and management of township, malls/ shopping complexes and business centers
As per the New FDI Policy, besides keeping the present position intact, transfer of ownership and control of the companies involved in the aforesaid business is allowed.
The new amendment will facilitate the transfer of ownership of facilities management companies from resident to non- resident subject however to the lock –in period requirement of 3 years.
7. Definition of ‘Transfer”.
The word ‘transfer’ has not been defined in the FDI Circular.
The general legal meaning of the word ‘transfer’ mean the sale and every other method, direct or indirect, of (1) disposing of property or an interest therein or possession thereof; or (2) fixing a lien (a charge against property to secure a debt) absolutely or conditionally, voluntarily or involuntarily, with or without judicial proceedings, in the form of a conveyance, sale, payment, pledge, lien, mortgage, gift, or otherwise. The term transfer has a general meaning and can include the act of giving property by will.
The word transfer has been defined as:
Transfer", in relation to FDI policy on the sector, includes,
(a) the sale, exchange or relinquishment of the asset ; or
(b) the extinguishment of any rights therein ; or
(c) the compulsory acquisition thereof under any law ; or
(d) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(e) any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.
The present amendment is seems to bring the clarity in FDI transaction and keeping out the leasing transaction by FDI funded project from the ambit of ‘transfer’ because as per the transfer of property act, lease of immovable property is also falls within the definition of transfer of immovable property.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
SA & Associates
Advocate & Solicitor