Construction development: Press note a fresh lifeline?

The construction development sector (township, housing and built-up infrastructure) has been the second highest recipient of foreign direct investment (FDI) in India since April 2000, with investment of about US$23 billion (10% of the total FDI received). Yet some projects are stalled and investors cite difficulties on account of land issues, prolonged approval processes and complicated exit. Given the sector’s importance and its effect on growth, the government issued Press Note 10 of 2014 in December, intending to ease sectoral conditions.

FDI policy prohibits FDI in “real estate business”, defined by the Reserve Bank of India as “dealing in land and immovable property with a view to earning profit or earning income therefrom”, but excluding construction development activities. This exception for construction development is subject to stringent conditions as to minimum area requirements, capitalization thresholds and investor lock-in, which have now been revised by the press note. Certain exemptions from complying with such norms are not affected.

Minimum area and capitalization: Earlier, an Indian company with FDI undertaking a serviced plots project had to develop a minimum land area of 10 hectares. The press note removes this prescription. In other construction development projects, a minimum built-up area of 50,000 square metres was required, which is now modified to a minimum floor area of 20,000 square metres. Interestingly, for both joint ventures and wholly owned subsidiaries (WOS) of foreign investors, a minimum FDI threshold of US$5 million is now uniformly applicable, vis-à-vis US$10 million earlier required for WOS.

Luthra & Luthra Law Offices is a full-service law firm with offices in New Delhi, Mumbai and Bangalore. Sundeep Dudeja is a partner and Saurabh Tiwari is a managing associate at the firm. This article is intended for general informational purposes only and is not a substitute for legal advice.