Free real estate FDI from lock-in periods
The Financial Express, December 1, 2009, Page 7
Satvik Varma
Foreign investment in the real estate sector may potentially no longer be subject to the statutory three year lock-in period. It is believed that the department of industrial policy & promotion, ministry of commerce & industry, recently circulated a draft note for consideration of the Cabinet Committee on Economic Affairs, where it has proposed to remove the condition of minimum period for repatriation of the original foreign investment.
Under FDI policy as on date, 100% foreign investment, without government approval (automatic route), is permitted in townships, housing, built-up infrastructure and construction-development projects. Regulated by Press Note 2 (2005), these investments are subject to certain minimum capitalisation norms and conditions prescribing the minimum area to be developed. Press Note 2 also stipulates that the original investment cannot be repatriated before a period of three years from completion of the minimum capitalisation, except with prior government approval. It is pertinent to highlight that investments in SEZs, hotels and hospitals are exempt from all, including inter alia, the investment conditions, as stipulated in Press Note 2.
The instant recommendation appears to be in keeping with the government’s ongoing process to liberalise the FDI regime in India. The original restrictions on repatriation must have been a cautionary measure, intended to prevent speculative investments in the real estate sector. However, this sector has, for some time now, been feeling the pressures of the global economic crisis and has desperately been in need of greater capital and liquidity to fund its existing projects and growth. Thus, the change, if it were approved and eventually implemented, will undoubtedly be a positive development for the realty sector. But what should also be noted is that, greater foreign investments in this sector will also enhance overall employment opportunities and generate greater domestic economic activity.
Some debate appears to be already doing the rounds on whether these norms will be eased with retrospective effect or whether they will only be prospective. Although it would be highly unlikely for them to be retrospective, if and when the government finally decides to do away with the lock-in, it would be helpful that the policy clearly detail the government’s intention vis-à-vis existing investments. Discussions are also ongoing on whether the proposed relaxation will result in a fluctuation of realty stocks and thus lead to market volatility. While some of this may be true in the short term, in the long term it is safe to assume that market dynamics will take over.
Additionally, typically greenfield real estate projects have a time horizon of three to five years from start to finish. Hence, if concerns are raised that the three year lock-in was in fact beneficial for the realty sector, then the foreign investor and domestic realtor are always at liberty to contractually agree with one another to a lock-in. Further, if Indian real estate companies fear that removing the lock-in may lead to the foreign investors jumping from one real estate investment to another, then again the parties can contractually agree to certain limited non-compete obligations with one another.
In conclusion, less restrictions on foreign investments always help investor sentiment, a fact that finds support from economic data. The UPA-II government appears to be taking note of such evidence and it is heartening that Prime Minister Manmohan Singh, while interacting with Indo-American businessmen in Washington last week, affirmed his government’s commitment to facilitate foreign investment in India and to pursue keen reform measures. In a similar vein, it would be helpful if the government also clarified the ambiguity (whether justified or otherwise) around some other Press Notes released earlier this year since that would provide greater fillip to foreign direct investments in India.
—The author is a partner-designate at Amarchand Mangaldas, New Delhi. Views are personal
The Financial Express, December 1, 2009, Page 7
Satvik Varma
Foreign investment in the real estate sector may potentially no longer be subject to the statutory three year lock-in period. It is believed that the department of industrial policy & promotion, ministry of commerce & industry, recently circulated a draft note for consideration of the Cabinet Committee on Economic Affairs, where it has proposed to remove the condition of minimum period for repatriation of the original foreign investment.
Under FDI policy as on date, 100% foreign investment, without government approval (automatic route), is permitted in townships, housing, built-up infrastructure and construction-development projects. Regulated by Press Note 2 (2005), these investments are subject to certain minimum capitalisation norms and conditions prescribing the minimum area to be developed. Press Note 2 also stipulates that the original investment cannot be repatriated before a period of three years from completion of the minimum capitalisation, except with prior government approval. It is pertinent to highlight that investments in SEZs, hotels and hospitals are exempt from all, including inter alia, the investment conditions, as stipulated in Press Note 2.
The instant recommendation appears to be in keeping with the government’s ongoing process to liberalise the FDI regime in India. The original restrictions on repatriation must have been a cautionary measure, intended to prevent speculative investments in the real estate sector. However, this sector has, for some time now, been feeling the pressures of the global economic crisis and has desperately been in need of greater capital and liquidity to fund its existing projects and growth. Thus, the change, if it were approved and eventually implemented, will undoubtedly be a positive development for the realty sector. But what should also be noted is that, greater foreign investments in this sector will also enhance overall employment opportunities and generate greater domestic economic activity.
Some debate appears to be already doing the rounds on whether these norms will be eased with retrospective effect or whether they will only be prospective. Although it would be highly unlikely for them to be retrospective, if and when the government finally decides to do away with the lock-in, it would be helpful that the policy clearly detail the government’s intention vis-à-vis existing investments. Discussions are also ongoing on whether the proposed relaxation will result in a fluctuation of realty stocks and thus lead to market volatility. While some of this may be true in the short term, in the long term it is safe to assume that market dynamics will take over.
Additionally, typically greenfield real estate projects have a time horizon of three to five years from start to finish. Hence, if concerns are raised that the three year lock-in was in fact beneficial for the realty sector, then the foreign investor and domestic realtor are always at liberty to contractually agree with one another to a lock-in. Further, if Indian real estate companies fear that removing the lock-in may lead to the foreign investors jumping from one real estate investment to another, then again the parties can contractually agree to certain limited non-compete obligations with one another.
In conclusion, less restrictions on foreign investments always help investor sentiment, a fact that finds support from economic data. The UPA-II government appears to be taking note of such evidence and it is heartening that Prime Minister Manmohan Singh, while interacting with Indo-American businessmen in Washington last week, affirmed his government’s commitment to facilitate foreign investment in India and to pursue keen reform measures. In a similar vein, it would be helpful if the government also clarified the ambiguity (whether justified or otherwise) around some other Press Notes released earlier this year since that would provide greater fillip to foreign direct investments in India.
—The author is a partner-designate at Amarchand Mangaldas, New Delhi. Views are personal
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