Foreign Investment Norms in Real Estate Changed
In line with the announcements in the Finance Minister’s budget speech for 2014, the Union Cabinet in a recent press release issued pursuant to its meeting dated October 29, 2014 (“Press Release”), proposed certain relaxations for Foreign Direct Investment (“FDI”) in ‘construction-development sector’. This was followed by press note 10 of 2014 (“Press Note”) on December 3rd, 2014 and an RBI circular dated January 22, 2015 to formally notify the relaxations. Though most of the changes proposed in the Press Release have substantially been incorporated in the Press Note, there are certain differences in the Press Note as against Press Release. For a detailed analysis of the Press Release, please refer to our previous hotline ‘Foreign investment norms for real estate liberalized’. In this hotline, we are covering only the differences in the Press Note as against the Press Release.
The Press Release proposed that a foreign investor can exit from its investment only on (i) the completion of the project, or (ii) completion of three years from the date of final investment, subject to the development of the trunk infrastructure, i.e., roads, water supply, street lighting, drainage and sewerage. The Press Note has done away with the requirement of 3 (three) years from the date of final investment, and hence, an investor can now exit from the project once it is completed or after the development of the trunk infrastructure.
No minimum lock-in period: As per the earlier FDI Policy, each tranche of investment was locked in for a period of 3 years. Though this was intended to provide some long term commitment to the project by a foreign investor, even if the project was completed, some later tranches of foreign investment, especially the last mile funding could still be locked-in. By removing the 3 year (three) lock-in now, the government has encouraged foreign investments in shorter projects (also applicable as the minimum area requirements have now been relaxed), and removed deterrence for a foreign investor to provide subsequent funding in case of longer projects.
Ambiguity in exit from multi-phase projects: Previously if a project was developing in phases, a foreign investor could exit from the project upon completion of the initial phase, provided the 3 (three) year lock-in period had expired. However now, since the exit is linked to either project completion or development of trunk infrastructure, it is unclear whether a foreign investor can exit (whether partly or completely) upon completion of any phase of the project, when the trunk infrastructure for later phases is not developed.
Affordable housing project
The Press Note has relaxed the criteria for determining ‘affordable housing projects’ than as proposed in the Press Release. As per the Press Release, ‘affordable housing projects’ were defined to mean projects which allot at least 60% of the floor area ratio (“FAR”) / floor space index (“FSI”) for dwelling units of carpet area not being more than 60 sq. meters, and out of the total dwelling units, at least 35% should be of carpet area 21-27 sq. meters for economically weaker section category.
Press Note defines ‘affordable housing projects’ as projects where at least 40% of the FAR / FSI is for dwelling unit of floor area of not more than 140 sq. meters, and out of the total FAR / FSI reserved for affordable housing, at least 1/4th (one-fourth) should be for houses of floor area of not more than 60 sq. meters
This relaxation is a welcome move, since projects which qualify for ‘affordable housing’ will not be required to comply with certain conditionalities like minimum area requirements and minimum investment requirements. Having said the above, since the area requirements is relaxed to as high as 140 sq. meters (approx. 1510 sq. feet), and only 1/4th of the affordable housing portion needs to be 60 sq. meters (approx. 645 sq. feet), whether the purpose for which this relaxation is introduced will be met or not is not clear.
The Press Release retained the provision that in case of combination projects (mix of serviced plots and construction development), either of the condition for minimum area requirement can be satisfied. However, since now the minimum area restriction (being 25 acres) for ‘serviced plots’ has been removed, to avoid any misuse, the concept of combination projects has been removed in the Press Note.
The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Sixteenth Amendment) Regulations, 2014, dated December 8, 2014 (“Amendment Regulations”) which amends the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 to include the changes introduced by the Press Note, provides that (i) the Amendment Regulations shall be deemed to have come into force from December 3, 2014, and (ii) no person will be adversely affected as a result of the retrospective effect being given to the Amendment Regulations.
The changes introduced by the Press Note are expected to provide a much need fillip to the ‘real estate sector’. The relaxations in the minimum land area requirements will bring a lot of projects under the FDI compliant fold, especially in Tier I cities, where project sizes are typically small. Having said the above, there are two issues which may cause a concern: