Liberalisation of FDI rules in India’s construction development sector

Liberalisation of FDI rules in India’s construction

The article was published in The Business Times on 30 December 2015.

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India is considered one of the fastest growing global economies and is ranked among the top three most attractive destinations for inbound investments.

In November 2015, India further liberalised its Foreign Direct Investment (FDI) rules to encourage more foreign investment into the country. The liberalisation is two-fold:

  • New sectors, including plantation activities and duty free shops, have been opened-up for foreign investment
  • Existing FDI conditions have been liberalised in various sectors such as construction development, defence and single brand retail trading.

Of these changes, the liberalisation in the construction development sector is most interesting from Singapore’s perspective. After all, Singapore has had tremendous experience in building its own infrastructure, putting the city state in a good position to share its construction development expertise with India.

 

Key changes in the construction development space for foreign investors

Previously, FDI in the construction development sector in India was permissible under automatic route (without need to seek approval from the Indian Government) only if certain conditions were met.

The critical conditions entailed a minimum development area of 20,000 square metres, minimum capitalisation norms of US$5 million and exit restrictions on investors. All these translated to difficulties for many small and medium players to enter the Indian construction development sector.

While India has started liberalising its FDI rules over the years, this latest round of liberalisations see the removal of restrictions on minimum area development and minimum capitalisation norms for FDI in construction development.

Further, the Indian Government has also decided to permit foreign investors to exit and repatriate foreign investment before the completion of a project under automatic route, provided that a lock-in-period of three years (calculated with reference to each tranche of foreign investment) has been completed. This will allow foreign investors to exit under unforeseen circumstances without requiring any specific approvals.

Additionally, the transfer of stake from one non-resident to another non-resident without repatriation of investment will neither be subject to any lock-in-period nor to any government approval. This also allows foreign investors with more exit options from their investments in the Indian construction development sector.

Businesses may also now establish wholly-owned companies without any conditions relating to minimum capitalisation norms and minimum area development to enter the Indian construction development market. This is good news for foreign investors, including companies from Singapore, whom may have had to exit the market in the past due to Joint Venture issues.

 

Boosting the Singapore-India connection

Beyond Singapore’s experience in construction development, the case for more Singapore-India cooperation is strengthened by the two countries’ physical proximity, as well as historical and cultural ties.

Singapore and India have also been strengthening their economic cooperation over the past two decades. In December 2014, for example, Singapore signed an agreement with the Andhra Pradesh Government to prepare a master plan for a new capital city, Amaravati, in Andhra Pradesh, India. In November 2015, the Singapore Cooperation Enterprise (a subsidiary of IE Singapore) has also signed three Memorandums of Understanding with India to collaborate in developing urban sector projects.

Following the Indian Government’s efforts to liberalise FDI in India, Singapore surpassed Mauritius to emerge as the top foreign investor in India between April and Sep 2015. During this period, total FDI in India from Singapore was about US$6.7 billion.

Moving forward, Singapore investors can expect even more opportunities to surface in India’s construction sector.

Currently, the Indian construction industry is valued at over US$126 billion and expected to grow to approximately US$ 140 billion by 2017. The Indian Government has also projected US$1 trillion worth of investments for the infrastructure sector between 2012 and 2017. Of this, 40 percent has been proposed to be funded by the private sector.

India’s Smart Cities initiative that is expected to drive demand for urban solutions across the country, coupled with the huge demand for funds in real estate and the liberalisation of FDI-related regulations, all mean that the foreign inflow into India in the coming years is likely to further increase.

That said, India’s business environment comes with inherent challenges. The lack of existing infrastructure, a relatively undeveloped intellectual property rights regime and complex tax and administrative processes are all possible roadblocks.

In seizing the new opportunities arising from the liberalisation of FDI rules in India’s construction development sector, investors and construction companies should arm themselves with a good game plan taking into account these obstacles. If they can do so, the outcome should be rewarding.

This article is contributed by Ajay Kumar Sanganeria, Partner, and Vikram Mehta, Manager, at KPMG in Singapore. The views expressed are his own.

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