UK: Review Of FDI Policy – Construction Development Sector

Last Updated: 23 December 2014
Article by Sakate Khaitan

With the objective to attract higher foreign investments and participation, the Government announced its decision to further relax the FDI Policy in the construction development sector ("Sector"). To give effect to such Government decision, the Department of Industrial Policy & Promotion ("DIPP")1, on 3 December 2014, issued a Press Note revising the conditionalities of investment by foreign investors amended in the Sector and their exit from such Sector. While the Reserve Bank of India is yet to issue an appropriate circular amending the exchange control regulations to operationalize the changed policy in our experience once a press note has been issued by DIPP, the same is usually enforced and accordingly, it is recommended that decisions be made on the basis of the amended position.

By way of background, the Sector was first opened for 100% foreign direct investment in May 2001 under the approval route. Subsequently, in 2005 government allowed 100% foreign direct investment in the Sector, subject to certain conditionalities.

The key changes brought about by the Press Note are analyzed below:

1. Minimum area to be developed: Earlier, minimum area to be developed for each serviced housing plots, construction development project and a combination project was prescribed. The revised policy has done away with this condition in case of development of serviced housing project. For construction development projects, the requirement of developing minimum built up area of 50,000 square meters has been reduced to 20,000 square meters.

2. Minimum capitalization requirements: The FDI policy prescribed minimum capitalization norms. USD 10 million was prescribed for a wholly owned subsidiary and USD 5 million for ventures undertaken with Indian partners. The funds were required to be infused in the venture within 6 months from the date of commencement of business.

The Policy has been revised and difference in minimum capitalization norms for wholly owned subsidiaries and joint ventures have been done away with. The revised policy now provides that the investee company is required to bring minimum FDI of USD 5 million within 6 months of commencement of business. Press Note has rendered further clarity by clearly defining "Commencement of business", as the date of date of approval of the building plan/ lay out plan by the relevant statutory authority.

As regards subsequent tranches of foreign direct investment, the position has now been clarified. The policy has been amended to restrict subsequent investment to a period of 10 years from the commencement of the project or before the completion of project, whichever is earlier.

Now, requirements with respect to minimum area to be developed and minimum foreign capitalization do not apply to investees or joint venture companies which commit 30% of the total project cost for low-cost affordable housing.

3. Lock-in Period and Exit: A lock-in period of three years was provided for the entire amount brought in as foreign direct investment. Lock-in period of three years was applied from the date

of receipt of each installment / tranche of FDI or from the date of minimum capitalization, whichever is later. However, foreign investors were permitted to exit prior to the expiry of the lock-in period with the permission of the Government through the FIPB.

The conditionality relating to exit of foreign investors have been significantly altered allowing investors to exit only upon completion of project or after development of trunk infrastructure (i.e. roads, water supply, street lighting, drainage and sewerage).

As regards exit of foreign investors prior to the above stated period, permission of the Government is required. Further, sale of stake to another non-resident investor during such period will also require approval of the Government. Such proposals will be now considered by FIPB on case to case basis.

4. The requirement of completing at least 50% of every project within 5 years from the date of obtaining all statutory clearances has been done away with. However, restriction on selling undeveloped plots continues.


1. Easing of the requirements of minimum area to be developed and bringing parity between wholly owned subsidiaries and joint ventures in a welcome step and a move towards further liberalization of FDI policy.

2. The Press Note grants clarity on various aspects including the meaning of "commencement of business". Further, the Press Notes clearly sets out the policy of the Government is regards subsequent tranches of investment by the foreign investor.

3. The Government is expecting to build investor confidence in the Sector and attract foreign investment into the newly elected Government's infrastructure plans for the 100 smart cities it proposes to create, as well as its affordable housing plans.

4. Lock-in of foreign investment which was earlier linked to the duration of investment i.e., three years has now also been linked to development of trunk infrastructure. This revision will facilitate the exit of investors associated with project where trunk infrastructure has been developed prior to the expiry of three year lock-in period earlier prescribed. However, investors who have completed three years with the project will now be compelled to wait till the time development of truck infrastructure is complete. Such investors will need to approach the Government for approval if they wish to exit. This requirement in many ways could be regarded as a retrograde step since in the recent past delay in obtaining permissions and financial closure has caused significant delays in developing large construction and development projects. The requirement for developing of trunk infrastructure prior to exit by a foreign investor has now created significant exit risks. Further, most PE funds have minority stake in construction and development projects. As is widely known there have been significant defaults of the developer partners in meeting agreed financing and construction time lines. Given the limited life of PE funds the change may cause reduced investments in the sector negatively impacting valuations.


1 DIPP is a division of ministry of commerce and industry, Government of India.

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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