New Delhi: In an attempt to attract more foreign direct investment (FDI) to the affordable housing segment, the department of industrial policy and promotion (DIPP) proposes to liberalize FDI regulations in the realty sector.

DIPP will soon bring out a discussion paper on the subject proposing to scale down the minimum area requirement for FDI in residential projects to 10 acres from 25 acres, said an official at the department who didn’t want to be identified.

It may also propose to reduce the minimum capital requirement from $10 million (Rs47.4 crore) for wholly owned subsidiaries and $5 million for joint ventures.

Last year, DIPP had circulated a draft note to this effect for inter-ministerial consultation. The proposal was put on hold because of a lack of consensus.

India needs FDI to reduce an urban housing shortfall that the 11th Plan (2007-12) estimated at the beginning of the Plan period at 24.7 million units.

Graphic: Paras Jain/Mint

“Reducing the size will attract more investments through FDI and private equity (routes)," said Sanjay Dutt, chief executive officer-business, of international property consultancy Jones Lang LaSalle-Meghraj.

“Government should make infrastructure development as the base for developers to bring affordable housing in the suburbs. Better infrastructure in the peripheral regions will lead to correction in prices, as the land will be available at lower rates," he said.

The government relaxed FDI norms in the real estate sector in 2005 by allowing up to 100% investment through the so-called automatic route in townships, housing and construction-development projects.

The government needs to ease the regulations laid down through so-called Press Note 2 of the 2005 series to attract more FDI in low cost-housing, said Akash Gupt, a partner with consultancy PricewaterhouseCoopers.

“The strict provisions under the press note make affordable housing unviable. The minimum land requirement, minimum capitalization and lock-in period for investment should be relaxed for this purpose," Gupt said.

According to the present regulations, original foreign investment cannot be repatriated before a period of three years from the completion of minimum capitalization.

“Such restrictions should be applicable only to big malls and special economic zones, not on low-cost housing," said Ganesh Raj, partner at Ernst and Young.

The discussion paper will be one of a series of six concept papers DIPP has promised to bring out, seeking public views on changing the FDI regime in sectors such as defence, multi-brand retail, agriculture and finance, among others.

Earlier this month, the department released its first discussion paper proposing to raise the FDI limit in private defence manufacturing to as much as 74% from 26%. The next paper is scheduled for release in June.

A task force under Housing Development and Finance Corp. Ltd chairman Deepak Parekh last year estimated that alleviating the urban housing shortage could potentially raise the rate of growth of the gross domestic product by at least 1-1.5 percentage points and have a decisive impact on improving the basic quality of life.

Housing and real estate attracts the fourth highest FDI into the country. During April 2009-February 2010, the sector attracted $2.7 billion in FDI. Total FDI inflow during the same period was $24.7 billion.

Devesh Chandra Srivastava contributed to this story.

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