India’s government on 10 November 2015 announced significant reforms to further rationalize and simplify the process of foreign direct investment (FDI), putting more FDI proposals under the automatic route and increasing the sectoral caps. The FDI policy was later amended in line with the announcements, via Press Note 12 of 2015.
Some of the biggest changes are in the construction development sector. While 100% FDI under the automatic route was permitted in completed projects for the operation and management of townships, malls/shopping complexes and business centres, it was unclear whether foreign investors could enjoy ownership rights in such completed projects. Under the FDI reforms, real estate developers can sell their completed projects to foreign investors. This will give the developers an opportunity to monetize and ease their heavily leveraged balance sheets and will allow foreign investors to invest in completed projects where there is no execution risk and to enjoy rental income. This will also provide the banking sector with better possibilities for repayment of outstanding debts. Additionally, the dispensation and easing of requirements in relation to minimum area and capitalization will significantly expand the number of projects eligible to receive FDI, thereby boosting the inflow of FDI.
Another key change, which becomes apparent only on a careful review of the FDI reforms, is that as a general rule, for sectors with FDI caps of 26% (except for the print media sector) and 74% (except for the banking sector), the cap of has been raised to 49% and 100% respectively. This is a welcome move as the earlier restrictive measures limited the inflow of foreign investment and a cap of 26% served no purpose, since investors holding less than 50% could enjoy the same set of governance rights, while a sectoral cap of 74% was meaningless unless the remaining 26% was held by one Indian group.
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Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Sundeep Dudeja is a partner and Avisha Gupta is an associate at the firm. The views of the authors are personal. This article is intended for general informational purposes only and is not a substitute for legal advice.