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BY erealto | 05-12-2018

Impact of FDI on Indian Real Estate Sector

Real estate sector is one of the most critical sectors of indian economy due to its huge multiplier effect on economy. Any impact on real estate sector has a direct bearing on economic growth. Until October 2015 , 100% FDI was permitted in construction-development projects with the following conditions :- 1. Minimum floor area to be developed of 20,000 sq metres. 2. Mandatory infusion of FDI of minimum USD 5 million within 6 months of the commencement of the project. 3. The investor was permitted to exit on completion of the project or after development of trunk infrastructure i.e roads , water supply , street lighting , drainage and sewerage . 4. Transfer of investment from the foreign investor to another non- resident investor required government approval. However , despite the fact that 100 % FDI was permitted under automatic route this sector was not showing any sign of recovery as the minimum thresholds were suggesting that the FDI was permitted only in new projects and not permitted in the existing projects which were pending because of availability of funds . However the government in November , 2015 has re-looked at the policy and relaxed it. The amended policy broadly provides as follows : 1. Minimum thresholds related to the area to be developed and the amount to be issued was removed. 2. The foreign investor has been given liberty to exit the projects even before its completion or development of basic infrastructure subject to lock-in period of 3 years. 3. No prior approval is required for the sale of investment by the foreign investor to another non-resident wherein no repatriation of investment is involved . 4. Each phase of the project would be considered as a separate project for the purpose of investment. Therefore it would imply that any project regardless of size which is under construction can have access to any amount of FDI. Apart from the above , it has also been clarified that 100% FDI under automatic route is permitted in complete project for operation and management activities etc. It has been further clarified that earning of rent/income on lease of the property will not be regarded as Real Estate Business. Accordingly FDI would also be permitted in completed projects where intention is to earn rental income. The government had also introduced the concept of Real Estate Investment Trust (REITs) in 2014 for attracting retail funding in real estate sector. REITs were given a pass through status for the purpose of taxation under the Indian Taxation Laws. However , it is important to note that REITs are subjected to some minimum thresholds like the value of asset owned by such entities should not be less than INR 500 crore and the initial offer size of unit is required to be atleast 250 crore. Since 2016 REITs have been allowed to invest up to 20 % of its investments in under construction projects up from a maximum of 10 % allowed earlier. However , despite various steps taken by the government , the sector has not witnessed revival so far owing to other macro-economic factors.

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