India: Foreign Investment In Indian Construction Industry

Last Updated: 1 October 2013
Article by Anu Goel

"With the advent of globalization and liberalization in real estates and construction industries, it is essential to have in place a comprehensive legal framework not only to minimize the disputes and risks attached, but also to encourage global investors".

- Hon'ble Mr. Justice P. Sathasivam, Chief Justice of India

Over the years the Indian construction industry has seen tremendous growth. This growth can be associated to various factors such as multinational entrepreneurialism, buoyant local stock markets, robust economy-changing demographics and the overall emergence of India on the global stage.

Consequentially, with improved living standards, there came a growing need for sophisticated commercial spaces and increasing demand for improved housing. This in turn led to policies which encouraged steady supply of power and efficient transport infrastructure, which in turn provided a boost to investments in the construction industry, and made it an attractive sector to both domestic and foreign investors and developers. To maintain consistent growth, foreign investment is crucial for India. The Indian Government has clearly indicated its intention to create an environment, friendly to foreign investors by allowing foreign direct investment (FDI) up to 100 per cent in 2005 in townships, built-up housing and construction development projects with the liberalization of FDI regulations. Also, the recent decision of Indian Government of opening up retail in multi brand will not just benefit the retail industry but will also push up the demand for commercial real estate throughout the country.

According to statistics available with Department of Industrial Policy and Promotion, Construction development (including townships, housing, built-up infrastructure & construction-development projects) sector has attracted a cumulative foreign direct investment worth US$ 22,007.67 million from April 2000 to February 2013. FDI flows into the construction sector for the period April 12 - February 13 stood at US$ 1,260 million. Needless to say, the Indian Construction Industry is an integral part of the economy.

The Indian Government in 2005 liberalized the "FDI Policy" in relation to township, housing, built-up infrastructure and construction development projects by allowing FDI upto 100% under automatic route with the objective to ensure that the foreign investment in these areas would create new employment opportunities and add to the available housing stock and built up infrastructure.

The consolidated FDI Policy effective from April 1, 2013 issued by Indian Government followed the liberalized view adopted in previous policy, with the objective to promote the participation of the foreign investors in construction industry which in turn would have far reaching impact on Indian Economy. Certain conditions were laid out subject to which investments were to be made. The conditions are:

  • Minimum area to be developed under each project would be (a) in case of service housing plots, 10 hectares; (b) in case of Construction development projects, built up area of 50,000 sq. mts. and (c) in case of combination project, any one of the above two conditions would suffice.
  • Minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within 6 months of commencement of business of the company.
  • Original Investment cannot be repatriated before a period of 3 years from completion of capitalization.
  • The investor may exit earlier with the prior approval of the Government through FIPB.
  • At least 50% of the project to be developed within 5 years from the date of obtaining all statutory clearances.
  • The investor/investee company cannot sell undeveloped projects.
  • The project to conform to the norms and standards of Local Body Concerned.
  • The investor/investee company is responsible for all the necessary approvals including layout plans, infrastructural facilities as per the prevailing laws.
  • The Statutory Body approving the building plans would monitor the compliance by the developer.
  • The Hotels and Tourism, Hospitals and SEZ projects have benefits not attracting conditions as to minimum area of development, capitalization and time frame.
  • The Investments made by NRI in any of the Township, Housing, Built Up, infrastructure and Construction Development Projects also does not attract conditions as to Minimum Area of Development, Capitalisation and Time frame.
  • FDI in any form is prohibited in Real estate business. FDI is not allowed in a partnership or proprietary concern if it is engaged in real estate business. Even investment by a Non Resident India or a Person of Indian Origin in such partnership or concern is not allowed.

Impact of FDI in Multi Brand Retail Trading on Indian Construction Industry

The Indian Government vide notification dated September 20, 2012 allowed 51% FDI in multi brand retail subject to certain conditions. It can be expected that FDI approval in multi brand retail will have far reaching impact on the real estate sector as well.

  • The direct impact of FDI in multi brand retail on the Real estate sector would be increase demand for commercial space in the states where the state government agrees to permit foreign retailers.
  • The indirect impact of the investment in multibrand retail would be the demand for the residential space. It can be assumed that the foreign investment in multi brand retail sector will generate employment and thereafter, the need for residential apartments for employer and employee will rise.

One of the conditions laid down by the Indian Government which can have potential impact on the real estate sector is related to "backend investment". The notification stated that:

"At least 50 percent of the total FDI brought in shall be invested in 'backend infrastructure' within three years of the first tranche of FDI, where 'Back-end infrastructure' will includes capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will includes investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, and agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure".

The creation of backend infrastructure proposes investments in resources such as cold storage and warehouses. Presently, very few Indian players operate cold-storage chains or warehouses. An appealing chance may be generated in such a situation, where foreign retailers are likely to approach developers to create and own backend infrastructure.

CONCLUSION

The financial year of 2013-2014 can prove to be a defining moment for India's contrution industry. Liberalization of policies and a deliberate attempt made by the Indian Government can open several doors to the construction companies. Opening up of FDI in relation to township, housing, built-up infrastructure and construction of development projects by allowing FDI upto 100% under automatic route was the first step towards promoting the participation of the foreign investors in construction industry. Needless to say that, further growth in the construction industry looks hopeful.

"The link between infrastructure and economic development is not a once and for all affair. It is a continuous process; and progress in development has to be preceded, accompanied, and followed by progress in infrastructure, if we are to fulfill our declared objectives of generating a self-accelerating process of economic development."

- Dr. V. K. R. V. Rao [noted Indian Economist, Early 1980s]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions