Foreign direct investment, or FDI, in the Indian real estate sector is permitted under Press Note 2 of the 2005 series (Press Note 2), which includes foreign investments in the development of townships, housing projects, built-up infrastructure and construction development projects, including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities and city and regional level infrastructure facilities.
Press Note 2, however, provides for certain conditions to be met before FDI may be brought into the realty sector. These include requirements with respect to the minimum area to be developed (for instance, a minimum built-up area of 50,000 sq. m is required for construction development projects, including commercial premises), minimum capitalization (this is prescribed at $10 million, or Rs48.9 crore now, for wholly owned subsidiaries and $5 million for joint ventures with Indian partners), the time period within which funds are to be brought in (within six months of commencement of the firm’s business) and a minimum lock-in period of three years from the completion of minimum capitalization before repatriation of original investment.
Apart from prohibiting the sale of undeveloped plots, Press Note 2 also indicates that foreign investment would not be permitted in developed or completed projects.
On 12 March, Press Note 3 of the 2008 series (Press Note 3) was issued, which permits FDI up to 100% under the automatic route without fulfilling any of the conditions of Press Note 2 for setting up and in established industrial parks, provided the industrial park satisfies the following conditions: (i) it comprises a minimum of 10 units with no single unit occupying in excess of 50% of the allocable area; and (ii) the minimum percentage of the area to be allocated for industrial activity is not less than 66% of the total allocable area.
Initially, industrial parks were projects established under the notified special industrial parks schemes under the Income-tax Act, 1961—these schemes were primarily aimed at providing certain tax benefits to undertakings that develop, or develop and operate, or maintain and operate an industrial park.
Subsequently, on 8 January, the Industrial Parks Scheme, 2008, was notified by the finance ministry. This scheme is intended to apply to industrial parks set up during the period commencing on 1 April 2006 and ending 31 March 2009.
Until 12 March—that is, the date of Press Note 3—FDI up to 100% was permitted in industrial parks provided they were notified under the relevant scheme, which stipulated various conditions and defined certain parameters of industrial and commercial activities.
However, the coming of Press Note 3 has, in effect, led to the creation of two kinds of “industrial parks”—those that are eligible for foreign investment under the automatic approval route (by complying with the conditions of Press Note 3) but not for the tax benefits under the current Industrial Parks Scheme (as they are not notified under this scheme) and those that are eligible for the tax benefits as well as FDI under the automatic approval route.
There are marked differences between the current Industrial Parks Scheme and Press Note 3.
For instance, the Industrial Parks Scheme requires that the minimum floor area constructed be not less than 15,000 sq. m, while Press Note 3 does not prescribe any requirement with respect to the minimum constructed floor area.
This would essentially mean that irrespective of the constructed floor area, any building fulfilling the other conditions of Press Note 3 could qualify as an industrial park for FDI purposes.
Stretching the argument further, not just a building but a floor in a building with 10 units carrying on industrial activity in 66% of the total allocable area could qualify as an industrial park as well.
Unlike the current Industrial Parks Scheme, which requires an industrial park to have a minimum of 30 units and states that the units of a person and his associated enterprises would be treated as a “single unit”, the requirement of Press Note 3 is a minimum of 10 units with no further stipulation regarding treatment of units held by a single person.
Also, a look at the definition of “industrial park” and “industrial activity” under Press Note 3 shows that the term industrial activity is defined very widely and goes much beyond the definition provided under the current Industrial Parks Scheme.
An “industrial park”, for the purposes of Press Note 3, is “a project in which quality infrastructure facilities 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 purposes of industrial activity”.
The term “industrial activity” under Press Note 3 includes manufacturing, electricity, gas and water supply, post and telecommunications, software publishing, consultancy and supply, data processing, database activities and distribution of electronic content, other computer-related activities, research and experimental development on natural sciences and engineering, business and management consultancy activities and architectural, engineering and other technical activities.
In contrast to the 2005 press note, Press Note 3 does not contain any requirements as to the minimum capitalization, completion of project, lock-in of original investment and prohibition on the sale of undeveloped plots.
Though an industrial park seeking tax benefits would still have to comply with the conditions of, and get notified under, the Industrial Parks Scheme, for FDI purposes—as Press Note 3 clearly provides that for foreign investment in industrial parks, the conditions of Press Note 2 do not have to be complied with—so long as the proposed real estate is developed for an activity falling within the wide definition of “industrial activity” and satisfies the other conditions of Press Note 3, the real estate project would essentially serve to qualify as an industrial park.
This column is contributed by Ashima Obhan of AZB & Partners, Advocates & Solicitors.
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