New Delhi: The government on Wednesday notified the foreign direct investment (FDI) policy in the construction sector to stimulate overseas investment in real estate.

While the policy removes some of the anomalies with regard to the minimum lock-in period and floor area in the earlier draft cleared by the cabinet in October, it does not address the issue of how the government will treat projects that have already been undertaken under the older policy.

In the final policy, the government has done away with the three-year lock-in period, permitting the investor to exit on completion of the project or after the development of so-called trunk infrastructure. The policy now requires a minimum of 20,000 sq. m of floor for a project which is a combination of serviced plots and construction development activity. In the cabinet decision taken on 29 October, this category was required to fulfil either the requirement for serviced plots project (no minimum area required) or that of the construction development project (minimum of 20,000 sq. m of floor area).

The note also makes a change in the categorization of an affordable housing project. According to the final norms, a project using 40% of the floor area ratio, or floor space index, for a dwelling unit of floor area of not more than 140 sq. m will be considered as an affordable housing project against a project using 60% of the floor area ratio for a dwelling unit of floor area of not more than 60 sq. m as in the cabinet decision.

The government had eased the foreign investment rules in India’s construction sector through a cabinet decision on 29 October. The revised policy, the final version of which the government released on Wednesday, simplifies 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 include reducing the built-up area requirement for FDI in construction projects to 20,000 sq. m from 50,000 sq. m and the lowering the minimum capital requirement to $5 million from $10 million.

The government permits 100% FDI in the construction development sector.

“It allows FDI in smaller projects and brings the risk of capital down as smaller projects are easier to execute and dispose of. It makes the construction development sector attractive and we can expect more M&A (mergers and acquisitions) activity in the sector," said Akash Gupt, partner, regulatory services, PwC. “What the final policy does not answer is treatment of existing investments in construction development sector which were made under the erstwhile policy. For example, if the investment was made for a 50,000 sq. m of development area, can the investor exit on completion of 20,000 sq. m floor area or that of the trunk infrastructure? Further, if the investment has been made with a commercial understanding with the Indian partner to exit post three years, will that now be locked-in till the completion of the project?"

“This is a fairly strong policy. It will help bring down the cost of capital and increase the flow of funds, thereby bringing down the cost of affordable housing which will get a big boost," said P.S. Jayakumar, managing director, Value and Budget Housing Corp. Pvt. Ltd. “However, there is also a business case for allowing foreign investment in existing projects."