Govt may do away with lock-in period for FDI in real estate

Govt may do away with lock-in period for FDI in real estate
The Hindu Business Line, November 24, 2009, Page 1

Dept of Industrial Policy and Promotion framing new rules.

Moumita Bakshi Chatterjee, New Delhi

Setting the stage for easier FDI norms in the real estate sector, the Government is considering a proposal to do away with the three-year lock-in stipulation for repatriation of foreign investments in SPV projects.

Industry observers say the move will draw foreign investors — which had avoided project-level or Special Purpose Vehicle funding because of the lock-in condition — into the sector. This will benefit both unlisted as well as listed builders, including such players as DLF, Unitech, Parsvnath Developers, and Ansal API.

At present, portfolio investments do not come with a lock-in clause. The condition is only stipulated for Foreign Direct Investments. Sources said that the condition of a three-year period (from completion of minimum capitalisation) had initially been imposed as a deterrent against speculative investments when the sector was opened up for foreign investment.

In the current context, however, it was felt that there is no similar clause in other sectors, with the exception of Defence. Hence, the Government is considering scrapping the lock-in condition. Other conditions pertaining to minimum area for development of serviced housing plots or construction development, as well as minimum capitalisation norms (Press Note 2 of 2005) are likely to continue.

Sources said the Department of Industrial Policy and Promotion (DIPP) — the nodal Department for framing FDI rules — is also seeking the view of the Urban Development, Housing and Finance Ministries on the issue.

When contacted, a senior official of a large real-estate company told Business Line that dispensing with the lock-in condition would help infuse more capital into projects. “The restriction with regard to repatriation was a deterrent for some foreign investors. If the condition is removed, it will be easier for developers to get more capital for their projects,” the official said, on condition of anonymity.

On the flip side, an analyst pointed out that the move could worry some realtors as their current FDI partners may now find it easier to repatriate investments in projects even before the three-year period is up. “It should not be an easy-come, easy-go policy,” he cautioned.

The Parsvnath Developers Chairman, Mr Pradeep Jain, felt that, depending on the execution, if the project generated internal accruals, the investor would now be free to repatriate his original investment. “I think, it will be good for the sector as a whole…The cost to the project will come down,” he said.

At present, under Press Note 2 (2005), up to 100 per cent FDI is permitted on automatic route in case of integrated township development, housing and construction development activities. This is subject to certain conditions: Minimum area to be developed under each project in case of serviced plots is 10 hectares; minimum area to be developed in the case of construction development project is stipulated at 50,000 square metres (built-up space).

Besides this, there is a minimum capitalisation requirement of $10 million for a wholly-owned subsidiary and $5 million for joint ventures. Although there is a blanket lock-in period stipulated for repatriation, investors are allowed to exit in specific cases, with prior permission of the FIPB.