Department of Industrial Policy and Promotion (DIPP)’s release of Press Note 10 of 2014 on 3rd December 2014 relaxes the norms of Foreign Direct Investment (FDI) Policy with respect to Construction Development sector. It has made the norms more clear and beneficial to the investors and at the same time our country too. With the easier norms with regard to minimum land area and minimum capitalisation requirement, and easier repatriation, more and more investors will be interested in investing in India. And with the exit policy being specific about the trunk infrastructure completion and the more relaxation on the norms for the investors who provide affordable housing helps in the economic growth of our country satisfying the needs of the common man.
The major areas where relaxation has happened are:
1. Minimum area requirement: DIPP has dispensed off with the minimum requirement for serviced plots. Moreover, initially DIPP had provided for minimum land area of 10hectares for serviced business plots. This means, DIPP has not just dispensed off the minimum requirement but has also widened the scope for FDI. It was restricted only to serviced business plots but with the removal of the word “business” it has widened the scope to commercial plots as well. Meaning of serviced plots – plots where roads, street-lighting, water supply, drainage, sewerage and other conveniences are available.
For construction plots, minimum floor area requirement has been reduced from 50,000 square metres to 20,000square metres.
2. Minimum capitalisation requirement: Minimum capitalisation for wholly owned subsidiaries has been reduced from USD 10million to USD 5million. The minimum capitalisation for a wholly owned subsidiary matches with the requirement for joint venture with Indian partners.
Investment must be brought in within 6months of the commencement of the project. Subsequent tranches should be brought in within 10years from the date of commencement or before the completion of project whichever is earlier.
Date of commencement has been defined now and avoids all ambiguity. Date of commencement is defined as date of approval of building plan/ layout plan.
3. Exit policy: DIPP has eased out on the exit policies as well. Investors may exit after the completion of project or after development of trunk infrastructure. Trunk infrastructure means development of roads, water supply, drainage, street-lighting, sewerage etc. This would incentivise the investors for taking more risks and more projects. With the development of trunk infrastructure, it provides a better living condition to the citizens.
If the investor wishes to exit or transfer the stake to another non-resident before the completion of the project, approval of Foreign Investment Promotion Board would be required.
4. Affordable housing: Affordable housing project has been defined as project using at least 40% of the Floor Area Ratio/Floor Space Index (FAR/FSI) for dwelling unit of floor area of not more than 140 square metres. Further, out of the total FAR/FSI reserved for affordable housing, at least 1/4th should be used for houses of floor area of not more than 60 square metres. Floor area ratio or floor space index briefly can be described as the ratio between the built -up area allowed and plot area available. For example, if FSI is 1 then on a plot of 100 square metres, one can build 100 square metres of built-up area.
No minimum area or minimum capital is required if 30% of the total project cost is allocated to low-cost affordable housing.
There are other amendments to this too. One of the amendments mandates the investee company to sell only developed or serviced plots. Also 100% FDI is allowed in completed projects for operation and management.
All of these amendments would attract more and more foreign investors to invest in the construction sector which in turn would result in development of, particularly, tier 2 and tier 3 cities of our country with regard to townships, hospitals, hotels, infrastructure, educational institutions. Construction industry is going to experience a complete new phase now!
C.A Rashmi Vadavi
Membership No. 144046
The author is a chartered accountant and a professional dancer