BRIEF IDEA ON FDI IN REAL ESTATE SECTOR

Foreign Direct Investment (“FDI”) in India principally is the revenue brought into the country by foreign agencies for the purpose of business or investments.

Previously FDI in real estate was not allowed and?only Non-Resident Indians and Persons of Indian Origin were allowed to invest in the real estate sector and the housing projects.

Foreign investors were permitted to invest only in the development of integrated townships and settlements, either through a wholly owned subsidiary or a joint venture company in India, with a local partner.

On March 3, 2005,?vide?Press Note 2, 2005 series, the real estate policy 2005 the Department of Industrial Policy and Promotion and Government of India, replaced the integrated township policy to permit FDI up to 100% in the real estate sector which included township, housing, built-up infrastructure and construction development projects.?

Liberalising the FDI norms?vide?these 2005 guidelines opened the gateway to invest in the real estate sector.?

T??Present Scenario:

At present, 100% FDI is allowed, through automatic route for any construction development project which includes:

§??Development of townships,

§??Construction of residential/commercial premises

§??Roads or bridges

§??Recreational facilities

§??City and regional level infrastructure and townships

§??Hotels

§??Resorts

§??Hospitals

§??Educational institutions

On the other hand FDI is not allowed to invest into any entity which is involved in;

§??Real estate business (which includes dealing in land and immovable property to earn income or profit from it). Further, in a recent amendment its clarified that earning rent or income on lease of a property which does not amount to transfer, will not fall under the bracket of real estate business.?

§??Construction of farmhouse

§??Trading in transferable development rights.?

T??Now, even though FDI is permissible in the real estate sector, they are subject to certain conditions, which state as:

§??The investor will only be?able to exit after completion of the project or after the trunk infrastructure is completed?(?trunk infrastructure includes roads, drainage, sewage, water supply, street lights). Selling of undeveloped land is not permissible.?

§??The Indian investees will only be able to sell developed plots wherein trunk infrastructure is completed.

§??There is a lock in period of minimum 3 years, wherein if a company wants to leave earlier instead of cancelling the project it requires??approval of the foreign investment promotion board.?

§??There is a minimum floor area requirement of 20,000 square meters to be followed in case of construction-development projects.

§??There has to be a minimum amount of investment i.e., USD 5 million within 6 months of commencement of the project.

(However, the real estate policy 2005 is not clear whether FDI of USD 5 million is in relation to a single foreign investor or if it is the total contribution of multiple foreign investors in the project in India).