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Open house in
India
By Kunal Kumar Kundu
MUMBAI - India on Thursday liberalized
rules for foreign investment in the real estate
sector by deciding to allow 100% foreign direct
investment (FDI) in construction. "The cabinet
cleared the proposal for 100% FDI on the automatic
approval route in the construction development
sector," India's Commerce and Industry Minister
Kamal Nath announced after a cabinet meeting. Till
now, overseas firms were allowed in only after
clearance from the highly bureaucratic Foreign
Investment Promotion Board (FIPB).
"Foreign investors can enter any
construction development area, be it to build
resorts, townships or commercial premises, but
they will have to construct at least 50,000 square
meters within a specific time-frame," said Nath,
without specifying the timeframe. "This will
ensure they do not hold onto land for speculative
purposes."
Nath said higher foreign
investment in the real estate and construction
sectors would boost employment and generate
"positive spin-offs" for India's labor-intensive
cement, steel and brick industries.
So
far, only non-resident Indians (NRIs) and persons
of Indian origin (PIOs) were permitted to invest
in the housing and real estate sectors. Foreign
investors other than NRIs were allowed only in
development of integrated townships and
settlements either through a wholly-owned
subsidiary or through a joint venture company in
India along with a local Indian partner.
Conditions for foreign entities to come
into the sector were very restrictive. They were
not allowed to make any equity investments in the
sector and the area of their involvement was
limited to providing engineering, architectural
and designing services. The minimum area they were
required to develop was 100 acres (40 hectares), a
minimum of 2,000 houses or for at least 10,000
people. Foreign companies were allowed to invest
upfront US$10 million for wholly-owned
subsidiaries and $5 million for joint ventures,
but with a lock-in period of three years. The land
area criterion meant that foreign developers could
only work on plots away from cities as major
cities in India don't have that kind of empty
space.
These restrictive norms resulted in
just a handful of foreign players, including a
consortium of High Point Rendel of the UK,
US-based Edaw Ltd, Kikken Sekkel of Tokyo,
Canada-based Royal Indian Raj International
Corporation, Dubai-based Emaar Group, Lee Kim Tah
Holdings and CESMA International (a subsidiary of
the Singapore government's housing agency). In
fact, the FIPB has received just three development
proposals in the past four years, thanks to the
restrictive rules.
Various international
players and trading partners, like Singapore, have
long been lobbying with the Indian government to
do away with the acreage requirement. Singapore,
as part of the negotiations for the Comprehensive
Economic Cooperation Agreement, had proposed that
it be reduced to 20-30 acres to enable companies
to set up multi-storied residential complexes in
cities like Hyderabad and Bangalore, but the
government didn't relent.
However, it
began to rethink its options seriously after the
recent World Economic Forum meeting in Davos,
where foreign participants made a strong case for
freeing up the sector, which, they said, would
attract huge FDI into India. While China attracts
about 3.2% of its gross domestic product as FDI in
its real estate sector, India draws a measly 1.1%.
According to the new norms, the existing
100-acre stipulation has been reduced to 25.
Foreign investment will be allowed in office
accommodation, too. Earlier, FDI was permitted in
commercial construction, but only as part of a
township project. In the new dispensation, a
foreign investor can even construct stand-alone
facilities. The minimum capital requirement for
foreign firms wanting to set up wholly-owned
subsidiaries in the construction sector has been
fixed at $10 million, and $5 million for joint
ventures. The funds will have to be brought in
within six months of commencement of business and
foreign firms will not be allowed to repatriate
their original earnings before three years unless
an early exit is cleared by the FIPB.
The
policy also defines "undeveloped plots" which
cannot be sold by a foreign investor. Undeveloped
plots will mean areas where roads, water supply,
street lighting, drainage, sewage and other
facilities have not been made available. The
investor will have to provide this infrastructure
and obtain a completion certificate from the local
body before it can dispose of the plots. This has
been done to avoid speculation in real estate.
Foreign ventures in development from now on will
thus be approved by state governments and
municipal bodies, not the central administration.
FDI projects will be accorded national treatment
on par with local developers, Nath said, adding
this sector will not displace or replace the local
investor, but help it grow. The government is
expected to come out shortly with norms that will
make FDI in the sector more construction-centric
rather than land-centric.
The 100% FDI
under the automatic route, apart from speeding up
investment in the vital infrastructure sector, is
likely to have a multiplier effect on the economy
by boosting construction activities of all types.
This will result in employment creation and lead
to spin-off benefits for the manufacturing sector.
The National Real Estate Development Council has
welcomed the relaxation of the FDI norms, saying
this will speed up the growth process in the
sector. "This is a good decision," executive
director R R Singh was quoted by media reports as
saying, adding the earlier norm of 100 acres was a
constraint in attracting FDI.
Kunal
Kumar Kundu is a senior economist with a
leading bilateral Chamber of Commerce in India. He
has a Masters in Economics with specialization in
econometrics from the University of Calcutta.
(Copyright 2005 Asia Times Online Ltd.
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