INDIRECT TAXES
| Financing jitters as govt talks of more curbs on realty FDI Thu, 10 Feb 2011 21:50:51 GMT |
| NEW DELHI: The struggling construction and housing sector will soon find it tougher to raise funds overseas as the government plans to tighten foreign direct investment rules to discourage short-term profiteering. The finance ministry and the Department of Industrial Policy and Promotion (DIPP) have proposed an increase in the minimum capital requirement along with stiffer exit norms for foreign firms investing in the sector. "The idea is to explicitly lay down the object of the FDI policy," a government official privy to the discussions told ET. The new set of rules will be incorporated in the FDI circular due to be issued in March. It will require a firm to fulfill the minimum capitalization norm for each project and not just at the company level as is the rule now. At present, a company operating in the sector is required to have a minimum capital of $10 million if it is 100% foreign owned and $5 million if it is in a joint venture. This change will essentially push up the capital requirement for the sector as most companies have more than one project and make it difficult for the firms to raise funds, an executive with a real estate firm said. Foreign investors will also find it more difficult to repatriate their original investment. Under the new rules, repatriation of the original investment will be allowed only after the project is completed or 50% of the project has been developed within a period of five years, whichever is later. This means that a foreign investor will have to complete at least half of the project before it can make an exit. "Tightening of FDI policy at this stage will deprive the cash strapped industry of the much needed foreign capital," said Akash Gupt, executive director, PwC. The new rules will also provide that companies having FDI can invest in only in FDI-compliant project, rejecting industry demand for relaxed regime. Some developers had written to the DIPP and the Foreign Investment Promotion Board seeking permission to have both FDI compliant and non-compliant projects, which could be ring-fenced. The FIPB had in 2009 rejected a proposal by Unitech to raise $700 million through foreign currency convertible bonds despite the company's assurance that the funds raised would be ring-fenced and used for an integrated township and not for repaying the existing debt. The new rules come amid mounting pressure from the Reserve Bank of India to tighten norms for the sector to prevent money laundering. The central bank has been nudging the government to put curbs on the real estate sector ever since FDI was allowed in it. It had earlier asked the government to remove the construction and housing industry from the list of sectors where FDI was allowed via the automatic route. At present, 100% FDI is allowed in realty projects via the automatic route with certain conditions like a three-year lock-in on investments. Conditions have also been prescribed for minimum area that is required to be developed for such projects. This sector has attracted substantial investor interest since 2005 when the government opened its doors for FDI. The sector had received more than $9 billion of FDI until November 2010. The inflows between April and November 2010 stood at $999 million, 8% of the total FDI flows into the country. |
Online Poll