Modi govt eases FDI rules in construction

Minimum capital requirement reduced to $5 million from $10 million; built-up area lowered to 20,000 square metres

Amrit Raj, Madhurima Nandy, Utpal Bhaskar
Updated30 Oct 2014
In its maiden budget in July, Modi govt had proposed easing built up area and minimum capital requirement for foreign investments. Photo: Ramesh Pathania/Mint<br />
In its maiden budget in July, Modi govt had proposed easing built up area and minimum capital requirement for foreign investments. Photo: Ramesh Pathania/Mint

New Delhi/Bangalore: The Union Cabinet on Wednesday eased foreign investment rules in India’s construction sector, simplifying rules to make it easier for investors to enter the market, sell assets or transfer their stakes and repatriate proceeds before the completion of a project.

The new rules, proposed in the Union Budget, include reducing the built-up area requirement for foreign direct investment (FDI) in construction projects to 20,000 square metres from 50,000 square metres. The minimum capital requirement has also been reduced to $5 million from $10 million.

“The investor will be permitted to exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure,” the government said in a statement on Wednesday.

The new rules will make it easier for Prime minister Narendra Modi to attract investments to build smart cities and affordable homes in the country. It is also likely to help improve the crumbling infrastructure in Asia’s third-largest economy and provide impetus to key manufacturing industries such as cement and steel.

“The government may, in view of facts and circumstances of a case, permit repatriation of FDI or transfer of stake by one non-resident investor to another non-resident investor, before the completion of the project,” the government said in the statement.

The Modi government has vowed to revive manufacturing in the country. The share of manufacturing in gross domestic product (GDP) has hovered around the 15% mark since 2004-05. Modi wants to change that, but he faces the difficult task of re-igniting investor interest in the manufacturing sector, which is plagued by issues related to land acquisition, taxation, labour and the difficulty of doing business in India. The country is ranked 142 in the World Bank’s Ease of Doing Business index that grades 189 countries.

“It is likely to attract investments in new areas and encourage development of plots for serviced housing given the shortage of land in and around urban agglomeration as well as the high cost of land. The measure is also expected to result in creation of much needed low-cost affordable housing in the country and development of smart cities,” the statement added.

Anuj Puri, chairman and country head at property advisory Jones Lang LaSalle India (JLL), said: “The announcement literally comes in the nick of time for Indian real estate. During the current fiscal year until August, India has received FDI inflows worth $17.4 billion, or 70% of the total inflows received during the entire fiscal year of 2013-14. However, FDI inflows received by the construction, housing and real estate segment do not reflect the same sentiment.”

The government had announced a plan to develop 100 smart cities to provide better amenities in urban areas. The smart cities will include all state capitals and union territories. They will include 44 cities in the population range of 1-4 million people, nine satellite cities with a population of 4 million or more, 10 cities that are of religious and tourist importance and 20 cities in the 500,000 to 1 million population range.

The high-power expert panel on investment estimates the annual fund requirement for smart cities will be 35,000 crore. In the budget, finance minister Arun Jaitley had allocated 7,060 crore to develop 100 smart cities.

“The relaxation in minimum area and capitalization conditions will result in an increase in M&A/PE (merger and acquisition/private equity) investments in this space on account of lower risk and better returns on smaller projects albeit subject to further clarity on any lock-in conditions. This will also result in better developments in urban centres where space has always been a constraint and it was difficult to develop a 50,000 project,” said Akash Gupt, executive director, regulatory services, PwC India.

The union budget proposed low-cost affordable housing, which will be anchored in the National Housing Bank (NHB). The finance minister proposed to allocate 4,000 crore for NHB in the current financial year with a view to increase the flow of cheaper credit for affordable housing.

“The sector’s share in the total FDI has further slipped from 5% in the previous year to under 3% as of the current fiscal until August. In fact, its share has been consistently falling over the last six years since 2009-10, when it stood at over 20%. Meanwhile, developers continue to reel under high levels of debt, even as the channels of funding have shrunk,” JLL’s Puri said.

According to the consolidated FDI policy circular 2014, an investor was required to bring a minimum FDI of $5 million within six months of commencement of the project.

Subsequent tranches of FDI can be brought in till a period of 10 years from the commencement of the project or before the completion of the project, whichever ends earlier.

“The announcement has taken into consideration the proposals made by the DIPP (department of industrial policy and promotion). The easier rules will help faster completion of projects delayed by a squeeze on funds due to elevated debt levels,” Puri said.

In other decisions, the Cabinet Committee on Economic Affairs (CCEA) raised the minimum support price (MSP) for rabi crops for 2014-15 season that will be marketed in 2015-16. Accordingly, while wheat prices have been raised by a nominal 50 to 1,450 a quintal, lentil prices have been raised by 125 a quintal to 3,075. “The hike in MSP is marginal and does not cover for increasing costs of cultivation. While MSP for wheat has been increased by less than 4%, prices of inputs like diesel and fertilizers have gone up more compared to the previous Rabi season. Further, the central government has also restricted the state’s ability to give bonuses over MSPs. Coupled with the delay in implementing the food security act, this means the government is weakening existing food subsidy schemes,” said Himanshu, an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi

The union cabinet also approved a memorandum of understanding (MoU) for cooperation in the field of oil and gas between India and Mozambique for a period of five years.

The MoU seeks cooperation in the areas of upstream and downstream oil and gas sector.

India’s state-owned firms ONGC Videsh Ltd, Oil India Ltd and Bharat Petroleum Corp. Ltd together hold 30% in Rovuma gas find in Mozambique—the largest gas find off Africa’s east coast.

Sayantan Bera in New Delhi contributed to this story.

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