March, 2005

In a major policy decision aimed at attracting overseas capital, the Government has permitted 100 percent foreign equity in the construction sector, covering a range of areas from hotel resorts to integrated townships. Since May 2001, foreign investment of up to 100 percent was permitted in real estate, but the minimum area to be developed and the number of dwelling units were fixed at 100 acres and 2,000 units, respectively. The need for a review had been felt since only nine foreign equity applications had been received for integrated townships and stakeholders had said the 100-acre minimum area requirement was a major bottleneck in attracting investments.

Investment in this sector has been placed under the automatic route. The incremental investment in the construction sector is expected to trigger employment generation, greater economic activity, a rapid increase in built-up infrastructure and spin-off benefits for manufacturing sector. The projects could cover areas like housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities and city and regional level infrastructure. Some of the significant features of the guidelines issued in this regard are:

. Minimum land area for development to be 10 hectares for serviced housing
plots and 5 hectares for other construction projects. The earlier guidelines specified the minimum area for development at 100 acres with at least 2,000 dwelling units

. Minimum capitalisation of $10 million for 100-percent subsidiaries and $5
million for joint ventures with Indian partners.

. Funds to be brought in within six months of commencing business.

. Original investment not repatriable before a period of three years from the date of completion of minimum capitalization amount. However, the investor may be permitted to exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB).

. In order to forestall speculation in real estate, investors not permitted to sell undeveloped plots - or areas where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available. All projects would have to conform to the norms, including land use requirements and provision, as laid down by regulations of the State governments, municipal corporations and local bodies. This, effectively, means that State governments would have to clear foreign equity projects in construction.