India: Evolution Of Liberalisation Of Foreign Direct Investment ("FDI") In Construction And Development

FDI in India is regulated by Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 ("FEMA 20"), along with the instructions issued by the Reserve Bank of India ("RBI"), and the Consolidated FDI Policy issued by the Department of Industrial Policy and Promotion ("DIPP").

The legal and regulatory position with respect to FDI in the construction and development sector took a leap in the year 2005 with the release of Press Note No. 2 of (2005 Series) ("PN 2/2005") which permitted 100% FDI through the automatic route for construction and development of townships, housing, built-up infrastructure, and construction development projects. However, despite all Governmental efforts to act otherwise, the investment conditions contained in PN 2/2005 weighed heavily against the investor due to stringent minimum area development, capitalization, and exit norms.

In 2014, after almost a decade of issuance of PN 2/2005, the Government to a certain extent, relaxed the investment conditions contained in PN 2/2005, by issuing Press Note 10 of (2014 series) ("PN 10/2014"). Thereafter, on the eve of Diwali festivities in November 2015, the Government of India, vide Press Note 12 of (2015 series), further diluted the investment conditions contained in PN 10/2014, thereby presenting foreign investors with opportunities galore to invest in the construction and development sector with considerable ease.

Investor opportunities

A detailed insight into the key investment opportunities presented by the aforementioned amendments introduced by the Government vide PN 12/2015 has been provided below:

Removal of minimum land requirement: PN 12/2015 brought much needed relief to foreign investors by removing the minimum land area requirement (which stood at 20,000 square meters in PN10/2014) as a condition for FDI in construction and development. Removal of this minimum area requirement gives investors the freedom to take up smaller projects which can be developed and completed in a timely manner, and it may further result in substantially reducing the land cost associated with bigger projects. This change has the potential of making foreign investments easily available to small and midlevel developers, primarily engaged in small ticket projects.

Removal of minimum capitalization norms: Another condition imposed by PN 10/2014 mandating a minimum capitalization of $5 million (to be invested within 6 months of commencement of business1) in construction and development projects has also been done away with in PN 12/2015, thereby granting the investor complete freedom to decide the quantum of investment, and the time period within which this investment has to be brought in. This also provides greater flexibility to the investors to plan their investments into a single or multiple projects.

Easier exit options: One of the major bottlenecks to the growth of FDI in the construction and development sector were the stringent conditions imposed on exit and repatriation of funds by foreign investors. However, with a view to encourage foreign investment in the sector, the aforementioned conditions on exit and repatriation of foreign investment have been substantially diluted by the Government in PN 12/2015 in the following manner:

  • In terms of PN 12/2015, each phase of the construction development project shall be considered a separate project, and consequently, each foreign investor shall be permitted to exit the project and repatriate funds without any prior permission from the Foreign Investment Promotion Board ("FIPB"), upon completion of trunk infrastructure of the project, or after a time period of 3 years has lapsed from the date of foreign investment (the 3 year lock in is calculated separately with reference to each tranche of foreign investment). It has been further clarified that the 3 year lock in period requirement is not applicable to construction and development of hotels, tourist resorts, hospitals, special economic zone, educational institutions, old age homes, and investments by NRIs, who can exit upon completion of trunk infrastructure, or by transfer of stake without repatriation of funds, to another non-resident investor.
  • Transfer of foreign investment from one non-resident investor to another non-resident investor without repatriation of funds is also permitted without any lock-in period or prior approval of the FIPB.

Clarity on the scope of the definition of 'real estate business': The legal framework governing FDI in India, prohibits FDI in real estate business, and prior to the issuance of PN 12/2015, 'real estate business' was defined to mean "dealing in land and immovable property with a view to earning profit or earning income therefrom, and does not include the development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city or regional level infrastructure, townships". The aforementioned definition being broadly worded gave rise to speculation and ambiguity with respect to the nature of transactions that may be viewed as real estate business, and created an overall negative sentiment with respect to a certain kinds of FDI inter alia including FDI in completed construction and development projects generating rental income. However, in PN 12/2015, the Government has introduced the following two amendments that serve as a necessary corollary to clear the ambiguity in relation to the definition of 'real estate business':

  • PN 12/2015 clarifies that, transfer of ownership and / or control of the investee company from residents to non-residents is permitted, in cases of FDI in completed projects for operation and management of townships, malls / shopping complexes and business centers, after completion of a three year lock-in period (calculated with reference to each tranche of FDI). It is also clarified that any transfer2 of immovable property, or part thereof in the ownership of the investee company is also not permitted during this lock-in period.
  • The definition of 'real estate business' under PN 12/2015 has been amended to state that earning of rent/income on lease of the property, not amounting to transfer will not amount to real estate business.

The abovementioned clarifications are expected to provide the necessary impetus to FDI in completed projects for operation and management of townships, malls / shopping complexes and business centers.


1 The Policy provides for further clarity by defining commencement of business as the date on which approval of the building / layout plan is obtained from the relevant authority.

2 'Transfer', has been defined to be inclusive of any sale, exchange, relinquishment, transfer by part possession, or any other form of extinguishment of rights in assets of the investee company, or, compulsory acquisition under law, or any other arrangement which may have the effect of transferring or enabling the enjoyment of any immovable property, etc.

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.

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