Govt may scrap lock-in period for foreign investors in real estate

Good news is in the offing for overseas investors, as the government is considering scrapping of the three-year lock-in period for foreign investments in the construction and development sector. The Ministry of Housing & Urban Poverty Alleviation’s latest proposal is now being examined by stakeholder ministries, including the Department of Industrial Policy and Promotion (DIPP).

The government is keen to get funds flowing to the troubled sector that is a big contributor to jobs and also hasten development of smart cities, one of the thrust areas identified by the Narendra Modi-led NDA Government.

On October 29, the Cabinet had eased norms for foreign direct investment (FDI) in the construction sector by reducing minimum built-up area, capital requirement and exit norms to boost the cash-starved real estate sector.

The new rules allow foreign investors to exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure. They also reduced the minimum floor area to 20,000 sq m from 50,000 sq m and brought down the minimum capital requirement to $5 million or about Rs 30 crore from $10 million.

However, the Ministry of Housing and Urban Poverty Alleviation has now pitched for further relaxation for the sector and suggested fresh changes before the DIPP notifies the Cabinet decision. Its fresh proposals were flagged for an inter-ministerial meeting called to discuss the contours of the press note to be issued to give effect to the Cabinet’s decision.

This is not the first time that an attempt to remove this condition is being made. The DIPP had earlier tried to get this condition dropped but it did not succeed. The housing ministry is keen to ensure flow of funds to the sector in keeping with the huge requirement for building 100 smart cities, especially as banking credit flow to the sector remains low. Overseas flow of funds to the sector has also slowed — it attracted $1.2 billion of FDI in 2013-14, down 8 percent from 2012-13.

Construction and development is the only sector that now has such a condition after it was scrapped for the defence sector as part of the new government’s liberalisation drive. India had thrown open construction sector to 100 percent FDI in 2005 with stiff conditions, including a three-year lock-in to prevent build-up of asset price bubbles. The condition was introduced to address the RBI and the finance ministry’s concerns on large flow of capital fuelling speculation in the sector.