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.

Analysis

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.

Footnote

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.

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
 
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