Thursday, September 30, 2010

Whether 3 -Year Lock -in Period for FDI in Reality Sector should go ?

The three-year lock-in period for Foreign Direct Investment (FDI) in the real estate sector in India is “too restrictive.” This is the comments of many observers.

The real estate industry has long been asking for the dilution of FDI lock-in clause.

Many in the industry have been demanding that the three-year lock-in stipulation for repatriation of foreign investments in SPV projects, be done away with as it deters foreign investors.

A recent study by FICCI-Ernst & Young has also made a case for permitting an early exit with prior Foreign Investment Promotion Board (FIPB) approval in instances where the project is completed; where a dispute arises between the resident and the non-resident, and the non-resident wishes to exit the project; or where the project could not be initiated due to lack of statutory clearances.

Also, the Government should clarify whether the three-year lock-in period is for minimum capitalization amount of the entire investment sum,” the report said.

At present, India allows up to 100 per cent FDI on the automatic route for townships, housing, built-up infrastructure and construction-development projects (including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).

This is, however, subject to certain conditions. For instance, the minimum area to be developed under each project in case of serviced plots is 10 hectares; and for construction development at 50,000 square meters (built-up space).

In addition, there is a minimum capitalization 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. However, such approvals have been rare.

In 2009, the Department of Industrial Policy and Promotion had considered a proposal to do away with the lock-in condition and had even sought the views of Ministries of Urban Development, Housing and Finance, on the issue. However, there is no clarity on the fate of that particular proposal

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