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Although the new FDI norms have liberalised investments in the construction industry, more needs to be done, write Samir Kanabar & Anand Laxmeshwar, senior tax professionals with Ernst & Young, India.

Until the cookie crumbled, the Indian realty sector had been one of the most appealing sectors for investors and, if some eminent voices are to be believed, continues to remain so.

It is trite, or rather an understatement, to say that the primary catalyst for the exponential growth in the realty space has been the influx of foreign capital, aided by the liberalised foreign investment norms introduced by the government to unlock the sector’s potential.

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Until early 2005, only non-resident Indians (NRIs) and persons of Indian origin (PIOs) were permitted to invest in this sector. Except for hotels and industrial parks, foreign investors (other than NRIs) were allowed to invest in development of integrated townships and settlements.

Investments in special economic zones (SEZs) were permitted, but did not flourish for lack of a stable policy regime. Since 2005 however, there have been a spate of policy decisions that have galvanised foreign investments across the spectrum.

In this article, we shall broadly cover the FDI guidelines so far as they relate to foreign investors wanting to participate in Indian realty.

Direct investments
Direct investments refer to investments made directly into the project company, and are guided by specific policies depending on the asset class being developed. The press note (PN) 2 issued by the Department of Industrial Policy and Promotion (DIPP) liberalised investments in real estate projects.

In view of the provisions of PN2, automatic route of FDI has been thrown open to foreign investors for investments in townships, housing, built-up infrastructure and construction development projects. Apart from PN2, there are also specific policies in place for investments into SEZs, industrial parks and hotels.

Real estate
FDI up to 100% is permitted in Greenfield real estate developments such as townships, housing, built-up infrastructure and construction development projects subject to fulfilment of certain conditions, which inter alia include the following: 

• Requirement of minimum developable area; built-up area of 50,000 sq m in case of construction-development projects, land area of 10 hectares in case of serviced housing plots, any one of the above, in case of combination projects.
• Minimum capitalisation of US$ 10 million for a wholly-owned subsidiary and US$ 5 million for JVs with Indian partners; to be brought in within a period of 6 months of commencement.
• A lock-in period of three years for the original investment from the date of completion of minimum capitalisation. Money can be repatriated earlier, but with prior approval of the FIPB;
• Completion of at least 50% of the project within a period of five years from the date of obtaining all statutory clearances.
• Prohibition on sale of undeveloped plots.