Ministry may end 3-year lock-in for foreign investors in construction

NEW DELHI, 25 Nov, 2014: Overseas investors could get a free run in the construction and development sector with the government considering removal of the three-year lock-in for the overseas investments. The housing ministry's latest proposal is now being examined by stakeholder ministries, including the Department of Industrial Policy and Promotion (DIPP). 

The government is keen to quickly get funds flowing to the troubled sector that is a big contributor to jobs and also hasten development of smart cities, one of the thrust areas identified by the new government." There is a proposal... It's being discussed," said a government official privy to the development. 

The Union Cabinet had on October 29 eased norms for foreign direct investment (FDI) in the construction sector by reducing minimum built-up area, capital requirement and exit norms to boost the cashstarved real estate sector. 

The new rules allow foreign investors to exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure. They also reduced the minimum floor area to 20,000 sq m from 50,000 sq m and brought down the minimum capital requirement to $5 million (about Rs 30 crore) from $10 million. 

However, the ministry of housing and urban poverty alleviation has now pitched for further relaxation for the sector and suggested fresh changes before the DIPP notifies the Cabinet decision. Its fresh proposals were flagged at an inter-ministerial meeting called to discuss the contours of the press note to be issued to give effect to the Cabinet's decision. 

This is not the first time that an attempt to remove this condition is being made. The DIPP had earlier tried to get this condition dropped but it did not succeed. The housing ministry is keen to ensure flow of funds to the sector in keeping with the huge requirement for building 100 smart cities, especially as banking credit flow to the sector remains thin. Overseas flow of funds to the sector has slowed—it attracted $1.2 billion of FDI in 2013-14, down 8% from 2012-13. 

Construction and development is the only sector that now has such a condition after it was scrapped for the defence sector as part of the new government's liberalisation drive. India had thrown open construction sector to 100% FDI in 2005 with stiff conditions, including a three-year lock-in to prevent buildup of asset price bubbles. The condition was introduced to address the RBI and the finance ministry's concerns on large flow of capital fueling speculation in the sector. The North Block and RBI may oppose the move this time around as well over similar concerns. 

Courtesy: The Economic Times