RECENT REGULATORY CHANGES IN FDI POLICY

The Government of India reviewed the extant FDI Policy and the Press Note 12 (2015 series) was issued by the DIPP on November 24, 2015 (“PN 12”), which revised and introduced some significant amendments to the policy framework on the Construction Development sector. Some of the key regulatory changes introduced by PN 12 have been outlined below:

Minimum Area Requirements: The recent amendments under PN 12 have done away with the any “minimum land area” requirement for construction- development project. This will certainly ease out the stress for smaller projects were FDI was hitherto not allowed.

Minimum Capitalization Requirement: PN 12 has also done away with the minimum capitalization requirement norms. This will enable any FDI for a smaller amount as well where the requirements of project are below the earlier threshholds of minimum capitalizations.

Multiple Phases – Each a separate project: PN 12 has also clarified that each phase of a project (in cases where a project is being developed in multiple phases) would be considered a separate project.

Lock-in Conditions: PN 12 states that an investor will be permitted to exit a project on either (a) the completion of such project or (b) after the development of the trunk infrastructure (i.e. roads, water supply, street lighting, drainage and sewerage).

However, notwithstanding the above, a foreign investor is allowed to exit a project and repatriate its investment before the completion of the project under the automatic route, provided, that such investment has been subject to a lock-in period of 3 years. It is clarified that the lockin period of 3 years will be calculated with reference to each tranche of the investment.

An important take away on PN 12 is that it clarified a much debated issues of transfer of stake from one non-resident to another nonresident. As per PN 12 any such transfer of stake between two non-residents, without the repatriation of investment, will neither be subject to any lock-in period nor require any government approval. PN 12 has thus, eased the regulations in this regard. The intent of the Government is to ensure that even while a foreign investor is free to exit by selling/ transferring its stake to other foreign investors, the foreign investment itself will still be locked-in. The transfer of stake from non-resident to another non-resident investor will not reset the lock-in period.

The lock-in condition mentioned above are not applicable to hotels and tourist resorts, hospitals, Special Economic Zones (SEZs), educational institutions, old age homes and investments by Non Resident Indians (NRIs).

Real Estate Business: FDI is not permitted in an entity, which is, engaged/ proposes to engage in real estate business. ‘Real estate business’ has been defined to mean dealing in land and immovable property with a view to earning profit 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. PN 12 has made an important clarification that, earning rent or income from the lease of a property, which does not amount to ‘transfer’, will not be regarded as engaging in ‘real estate business’. This change will clarify the uncertainties attached to FDI into completed assets (see para (vi) below) where while allowing the FDI in them, the restriction on “earning profits” under the “real estate business” definition took away the sheen.

Completed Assets: 100% FDI (under the automatic route) is permitted in completed projects for operation and management of townships, malls/shopping complexes and the business centers. Additionally, it has been clarified that consequent to such foreign investment, transfer of ownership and/or control of an investee company from resident investors to foreign investors is permissible; however, such foreign investment shall be subject to the lock-in condition of 3 years. During this period, no transfer of immovable property or any part thereof is permitted.

Definition of ‘Transfer’: The term ‘transfer’ has been defined to include (a) the sale, exchange or relinquishment of an asset, or (b) the extinguishment of any rights therein, or (c) compulsory acquisition thereof under any law, or (d) any transaction involving the allowing of possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, or (e) any transaction, by acquiring shares in a company or by way of agreement or any arrangement or in any manner whatsoever, which has the effect of transferring or enabling the enjoyment of any immovable property. This definition for the purposes of the FDI Policy has been synchronized to the definition of transfer under the Income Tax Act, 1961.

The real estate sector continues to struggle in the sluggish markets. The real estate developers were facing a double jeopardy with no or little real demands from customers/ investors, they were having real tough time for raising bank or institutional financing from Indian financial institutions. The paradigm changes in FDI regulations in constriction- development sector are expected to provide much required capital to the real estate developers and for the projects which are hit with the market conditions.

The statistics reflect that the Construction- Development is major contributor to overall FDI inflows in India and this will grow from here with the investor-friendly measures introduced by PN 12, the new regulations on FDI in constriction- development sector.

At the end, or rather a new begging is that, the Real Estate (Regulation and Development), Act 2015 is out for implementation now, pending constitution of authorities by state and notification of relevant rules etc., there will soon be some relief for real estate customers