A Breather for Construction Industry

Ever since the Press Note 2 of 2005 was introduced in its original form, it has undergone several changes from time to time, with the current Press Note No. 10 of 2014 being a truly liberal one. Minimum Area Reduced: The condition on minimum land for serviced plots has been done away with and the minimum floor area for construction development projects is specified as 20,000 sq. meters. Although the Press Note does not clarify the compliance requirement for combination projects, it would be fair to assume that the minimum floor area of 20,000 sq. meters will be applicable. Minimum FDI Reduced: The requirement of minimum FDI now stands reduced to $5 million for joint ventures as well as wholly owned subsidiaries, which is required to be brought in within 6 months of commencement of the project, which is the date of approval of the building/ lay out plan by the relevant statutory authority. Early Exit: Exit of foreign investors from the project is now permitted upon completion of the project or after development of trunk infrastructure. Trunk infrastructure has been defined to mean roads, water supply, street lighting, drainage and sewerage. This would therefore mean that the 3 year period that was applicable under the old policy as a minimum lock-in period would not apply any more. Background & Comparison: When Press Note 2 of 2005 was issued, it was considered as one of the key regulatory relaxations given the sensitivity of the sector. The old policy was faced with a lot of open points which were resolved from time to time including in the form of clarifications and amendments to the policy. One of the key questions that were raised back then was the extent of the lock-in period. Although initially it was clarified that the 3 year lock-in period would apply from the date when minimum capitalization is satisfied, it was later settled that the 3 year lock-in period would apply for each tranche of investment. Although the above ensured that there were no instances where monies from foreign investors were brought in for a very short period of time, it also in a way discouraged foreign investors from bringing in additional monies if the same would result in the statutory lock-in expiring much beyond the intended date of exit by the foreign investor. The new policy addresses this issue since there is no specified statutory minimum lock-in period for each tranche of investment. This will ensure that the investor will not be discouraged from bringing in or meeting any last mile funding requirement. There is however a specific condition imposed under the new policy that subsequent tranches of foreign investment can be brought in until 10 years from the commencement of the project or before the completion of the project, whichever expires earlier. Under the old policy, in addition to the conditions on minimum area, minimum FDI and exit, there was one additional general condition, which stipulated that at least 50 per cent of the project must be developed within a period of 5 years from the date of obtaining all statutory clearances. It is important to note this condition of 50 per cent development within 5 years has been altogether done away with under the new policy. Under the old policy, there was a restriction on the investor/ investee company from selling undeveloped plots. Under the new policy, the investee company is permitted to sell only developed plots. The term “developed plots” has been defined to mean plots where trunk infrastructure has been made available. The restrictions and conditions under the new policy pertaining to minimum area, minimum capitalisation and exit do not apply to hotels and tourist resorts, hospitals, special economic zones, educational institutions, old age homes and investment by NRIs. The restrictions and conditions under the new policy pertaining to minimum area and minimum capitalisation do not apply to companies which commit at least 30 per cent of the total project cost for low cost affordable housing. The new policy clarifies that, projects using at least 40 per cent of the FAR/ FSI for dwelling units of floor area of not more than 140 square meters will be considered as an affordable housing project. Out of the total FAR/ FSI reserved for affordable housing, at least 1/4th should be for houses of floor area of not more than 60 square meters. Although the relaxation of key provisions like minimum area was suggested at the time of the budget, in October 2014 the Government had approved changes to the old policy vide a press release. The press release had covered most issues that are contained in the new policy, but thankfully a couple of provisions in the press release seem to have been left out in the new policy for the obvious reason that they would have played spoilsport. One of the key points that was left out was the lock in period which was specified in the press release as being ”completion of project or after 3 years from the date of final investment, subject to development of trunk infrastructure”. Effective Date: The new policy is effective from December 3, 2014. The industry and the various stakeholders seem to have welcomed this new policy with open hands, also given the recent relaxation on valuation methodology. One open question that remains is whether a benefit available under the old policy continues for existing projects or whether all matters governing construction development projects would now be governed by the new policy. Under the old policy, a foreign investor could have exited from an investment after 3 years even if the project was not substantially completed since the lock in period in respect of such investment would have expired. Under the new policy however, until the development of trunk infrastructure, there can be no exit under the automatic route. Such cases would however be few and far between, although stakeholders will prefer to have the best of both the old and the new policy. Needless to state, the relaxations under the new policy are intended to provide the required impetus not only towards restoring investor interest in the real estate sector but also towards encouraging further investments into smaller projects that were hitherto not permitted for foreign investments. Significantly, exit, which remains one of the primary considerations at the time of investment, is now permitted without any minimum lock-in requirement if trunk infrastructure is completed. With REITS around the corner and such encouraging legal framework, the sector which was beginning to see some fading interest, seems once again set for renewed attention.