Foreign Direct Investment in Real Estate in India – An Introduction
The size of the real estate industry in India is estimated to be around US$ 12 billion. As per studies, this figure is growing at a pace of 30% for the last few years. Majority of the real estate developed in India (almost 80%) is residential space and the rest comprise office, shopping malls, hotels and hospitals. This incredible growth is mainly attributed to the off-shoring business, including high-end technology consulting, call centres and software programming houses. Evidently, this is the ideal time to invest in the country, even as the policy makers have begun to emphasize on developing adequate infrastructure for the country.
After agriculture, the real estate sector is the second largest employment generator in India. The persistent demand from the Information Technology (IT) sector has also impacted the urban landscape in India. As per estimates, there is demand for 66 million square feet of IT space over the next five years. Several multinational companies continue to move their operations to India to make the most of lower costs of skilled manpower and logistics. Human resources being the key element in the IT industry, the hiring and housing of people, both at their work place and home, has assumed great significance. As such, there is a persistent need to create space for people to work and live, which in turn sets off the growth of other allied infrastructure.
Though the real estate sector in India is asserted to be the most promising sector today, it is still hugely plagued by market uncertainties and traditional inhibitions. The real estate market in India mostly continues to remain unorganized, fairly fragmented, mostly characterized by small players with local presence.
Foreign Direct Investment (FDI) in Real Estate
The decision to liberalise the FDI norms in the construction sector is perhaps the most significant economic policy decision taken by the Government of India. Until now, only Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors, other than NRIs, were allowed to invest only in development of integrated townships and settlements, either through a wholly owned subsidiary or through a joint venture company in India, along with a local partner. However, the guidelines prescribed via Press Note 2 (2005) series, issued by Ministry of Commerce & Industry, have further opened out FDI in townships, housing, built-up infrastructure and construction-development projects. Major corporations are taking initiative and are wooing international players soliciting investments for major projects.
FDI in Real Estate: Basic Guidelines
The Department of Industrial Policy and Promotion (DIPP), vide Press Note No. 2 (2005), has permitted FDI up to 100% under automatic route in townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure facilities, such as roads and bridges, transit systems etc.), subject to the following guidelines:
1. The minimum area to be developed under each project would be as follows:
a) In case of development of serviced housing plots, a minimum land area of 10 hectares.
b) In case of construction development projects, a minimum built-up area of 50,000 sq.mts.
c) In case of a combination of the above two projects, any one of the above two conditions would suffice.
2. The minimum capitalization norm shall be US$ 10 million for a wholly owned subsidiary and US$ 5 million for joint ventures with Indian partner/s. The funds would have to be brought in within six months of commencement of business of the company.
3. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the Foreign Investment Promotion Board (FIPB).
4. Development of at least 50% of the integrated project has to be completed within a period of five years from the date of obtaining all statutory clearances. The investor would not be permitted to sell underdeveloped plots (underdeveloped connotes, where roads, water supply, street lighting, drainage, sewerage and other conveniences as applicable under prescribed regulations, have not been made available). The investor must provide this infrastructure and obtain the completion certificate from the concerned local body/service agency before being allowed to dispose of the serviced housing plots.
5. The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as laid down in the applicable building control regulations, by-laws, rules and other regulations of the State Government / Municipal / Local Body concerned.
6. The investor shall be responsible for obtaining all necessary approvals, including those of the building / layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements, as prescribed under applicable rules/bye-laws/regulations of the State Government / Municipal Body / Local Body concerned.
7. The State Government / Municipal / Local Body concerned, which approves the building / development plans, will monitor the developer’s compliance to the above conditions.