The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval for amending the existing Foreign Direct Investment (FDI) policy on the `Construction Development Sector` in line with the Budget announcement of the Government.

The amendments in the relevant paragraphs of the extant FDI policy as contained in the Consolidated FDI Policy Circular 2014 are as follows:

I.    100 percent FDI under automatic route will be permitted in the construction development sector.

II.   Investment will be subject to the following conditions:

(A) Minimum area to be developed under each project would be:

i   In case of development of serviced plots, there is no condition of minimum land,

ii.   In case of construction-development projects, a minimum floor area of 20,000 sq. meters.

iii.   In case of a combination project, any one of the aforestated two conditions will need to be complied with.

(B) The investee company will be required to bring minimum FDI of US$ 5 million within six months of commencement of the project. The commencement of the project will be the date of approval of the building plan/lay out plan by the relevant statutory authority. Subsequent tranches of FDI can be brought till the period of ten years from the commencement of the project or before the completion of the project, whichever expires earlier.

(C) 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.

(D) 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. These proposals will be considered by FIPB on case to case basis.

(E) The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control  regulations, bye-laws,  rules,  and other regulations of the State Government/Municipal/Local Body concerned.

(F) The Indian investee company will be permitted to sell only developed plots.  Forthe   purposes   of  this   policy   "developed   plots"   will   mean   plots   where  trunk infrastructure including roads, water supply, street lighting, drainage and sewerage, have been made available.

(G) The Indian investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/ Municipal/Local Body concerned.

(H) The State Government/ Municipal/ Local Body concerned, which approves the building / development plans, will monitor compliance of the above conditions by the developer.

These measures are expected to result in enhanced inflows into the Construction Development sector consequent to easing of sectoral conditions and clarification of terms used in the Policy. 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 agglomerations 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.

Note:

1.    It is clarified that FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in Transferable Development Rights (TDRs).

"Real estate business" will have the same meaning as provided in FEMA Notification No. 1/2000-RB dated May 03, 2000 read with RBI Master Circular that is dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.

2.    The conditions at (A) to (C) above, will not apply to hotels and tourist resorts; hospitals;  Special  Economic Zones  (SEZs);  educational  institutions,  old age homes and investment by NRIs.

3.    The conditions at (A) and (B) above, will also not apply to the investee/joint venture companies which commit at least 30 percent of the total project cost for lowcost affordable housing.

4.    An Indian company, which is the recipient of FDI, shall procure a certificate from an architect empanelled by any Authority authorized to sanction building plan to the effect that the minimum floor area requirement has been fulfilled.

5.    `Floor area` will be defined as per the local laws/regulations of the respectiveState governments/Union territories.

6.    Completion of the project will be determined as per the local bye-laws/ rules and other regulations of State Governments.

7.    Projects using at least 60 percent of the FAR/FSI for dwelling units of Carpet Area not more than 60 sqm. will be considered as Affordable Housing Projects. In addition, 35 percent of the total number of dwelling units constructed should be of carpet area 21-27 sqm for EWS category. Such projects can have a mix of EWS/LIG/Higher Category DUs and commercial units. Provision of servant`s quarter along with the main dwelling unit will not be counted as dwelling units for EWS/LIG under Affordable Housing (AH) project.

8.   It is clarified that 100 percent FDI under the automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.

Background

Investment in the construction development sector has a multiplier effect on the economy by way of infrastructure creation; substantial employment generation over the entire spectrum from unskilled workers to engineers, architects, designers as well as financial and other supporting services. Further, it creates demand for the products of a number of related industries including those in the manufacturing sector like cement, steel, fittings and fixtures and others. Besides its employment and income generation potential, greater investment in the sector would help to augment the available housing stock including affordable housing and built up infrastructure for different purposes. Enhancement of the affordable housing stock is an urgent need in order to stem the proliferation of slums in and around the cities. The sector witnessed steadily rising FDI from 2006-07 to 2009-10 after which the levels of inflows have been much lower. Therefore in order to step up investment in construction development with its backward and forward linkages for many other sectors of the economy, it is felt that some liberalization and rationalization of the FDI policy on construction development could be the necessary catalyst to give a boost to the sector.

Foreign Direct Investment liberalization in construction allows full automatic-route investment subject to project, approval and infrastructure conditions. The policy permits 100 percent Foreign Direct Investment under the automatic route in the construction development sector subject to conditions on minimum project area, staged timing for initial and subsequent foreign investment, exit linked to project completion or a post-investment period contingent on trunk infrastructure, and case-by-case early repatriation or stake transfer. Investee companies must obtain statutory approvals, develop required internal and peripheral infrastructure, secure architect certification for floor area compliance, and conform to local building regulations; certain project types and socially oriented housing commitments qualify for specified relaxations.