The recent spate of scams, which involved money laundering, is set to make life a little more difficult for the cashstrapped real estate sector.
The
government has firmed up plans to tighten the
foreign direct investment (FDI) norms for the sector.
The measures, jointly proposed by the finance ministry and department of industrial policy and promotion (DIPP) will not only make rules stricter but will also make exit norms stiffer for foreign firms
investing in the sector. These rules are expected to be notified by the last week of March or the first week of April.
"This is the direct fallout of the recent money laundering cases and scams involving the realty sector. These norms will make it easy to monitor the FDI flows into the sector, which has been under constant scrutiny for some time," a senior finance ministry official told MAIL TODAY. According to the official, the new rules are based on the recommendations by the Reserve Bank of India (RBI) to prevent cases of money laundering. It proposes higher minimum capitalisation norm for each real estate project. Currently, a realty company is required to have a minimum capital of $10 million, while a joint venture (JV) firm should have $5 million.
TIGHTENING THE NOOSE
It proposes higher minimum capitalisation norm for each real estate project.
Currently, a realty firm has to have a minimum capital of $10 mn, while a JV firm should have $5 mn
The three years lock-in period will remain unchanged but no refund will be allowed until 50% of the construction is completed.
So, investors will not be able to exit the venture even if the lock-in period is at an end
Another rule proposed is stricter norm for foreign investors buying non-convertible debentures |
Also, now the minimum capitalisation will be calculated by each project and not just by the total project cost.
"The rule is aimed to ensure that the money pumped into the company is used in the project and should not be diverted for other purposes," the officials said.
Currently, the government has allowed 100 per cent FDI in realty projects via the automatic route with a three-year lock-in period on investments.
The norms also specify the minimum area required for the project to be qualified for FDI. The new rules also lay out stricter exit norms for companies that invest in the projects.
The lock-in period will remain unchanged but the refund of the money will not be possible before 50 per cent of the construction work is completed.
As a result, in cases where the project is not at least 50 per cent complete, investors will not be able to exit the venture even if the lock-in period is at an end.
"This rule will put pressure on the companies to ensure timely execution of the project which will ensure that the money goes to construction and not anywhere else," the official said.
Another rules proposed is stricter norms for foreign investors buying non-convertible debentures (NCDs).
"These rules are not going to pose any problem for companies that raise funds for completing projects. The problem, if any, will be for those who are diverting the fund for either debt repayment or to some other project which is not FDI-compliant," the official said.
However, experts said that the move will dampen the general sentiment in the realty sector that was asking the government to relax the FDI norms in order to attract more funds and ease their heavy debt burden.
"This would be a retrograde measure for the realty sector particularly at a time when the country needs foreign direct investment desperately," said Akash Gupt, executive director, Pricewaterhouse-Coopers (PwC).
The sector, in its budgetary expectations, has asked the government to allow FDI funds to be used in non-FDI compliant projects as well and ease rules for external commercial borrowings (ECBs), in the present tight project finance situation and rising cost of loans.
Courtesy: Mail Today 
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