Union Government eases FDI Rules for the construction sector

India has eased Foreign Direct Investment (FDI) rules for the construction sector, the Union Government said on Wednesday, which will inter alia, allow overseas investors to exit a project even before its completion.

(Labourers at a construction site)

Under the new rules, foreign investment is now allowed in projects with a minimum built area of 20,000 square metres, down from a previous 50,000 threshold. The minimum capital investment by foreign companies has also been halved to $5 million, the government said in a statement. Prime Minister Narendra Modi has a vision to create 100 new “smart cities” by 2020, and to make that a reality foreign capital is likely to play a part. India’s construction industry, worth an estimated $126 billion, attracted 11 percent of all foreign investment into the country between 2000 and 2013, the second highest of any sector, but the pace of investment has slowed in recent years. India received $1.2 billion of Foreign Direct Investment in the year to March 31 compared with $1.3 billion the previous year. Between April and August this year, foreign investment totalled $446 million.

Previously, India allowed 100% foreign direct investment in real estate development but with strict conditions, including a lock-in period of three years during which the investment cannot be repatriated. But a press note issued by the Department of Industrial Policy and Promotion has clarified that the three-year lock-in will no longer apply and under normal circumstances, an investor can exit on completion of the project or even after the development of trunk infrastructure, such as construction of roads, water supply and drainage. 

The exit clause was seen as one of the key deterrents for overseas investors to invest in the Indian construction market. The Union Government was keen to ease the rules for building townships, housing, built-up infrastructure and construction development projects as these are sectors with huge employment potential and boost demand for steel and cement.