New Delhi, Feb. 24: The reform juggernaut continues to roll.
With just three days to go before the budget, the government today threw open the doors to foreign investors in the country's housing sector by allowing them to establish wholly-owned subsidiaries to construct housing projects without having to seek government approvals.
Foreign direct investment (FDI) in the housing sector was allowed earlier but with tough conditions.
Loosening the fetters, the Union cabinet today permitted foreign investors to handle projects located on smaller plot sizes of 25 acres against 100 acres earlier.
At present, FDI is permitted only for township development with a minimum investment of $10 million.
The cabinet committee on economic affairs (CCEA), chaired by Prime Minister Manmohan Singh, today allowed housing entities abroad to also take up projects with a minimum built-up area of 50,000 square metres.
'The government had decided to allow FDI up to 100 per cent under the automatic route in townships, housing, built-up infrastructure and construction development projects to catalyse investment in a vital infrastructural sector of the economy," commerce minister Kamal Nath said.
'The quality of real estate in India will improve,' said Anshuman Magazine, managing director of CB Richard Ellis, the real estate consultants. 'The entry of foreign investors will increase the housing stock in the country. That is good news for consumers who will not have to pay higher prices.'
The government is hoping that the move will boost all types of construction activity in the country and generate a lot of new jobs in the employment-intensive sector.
'It will create employment not only for skilled and unskilled labourers but also for engineers, architects and designers," said Kamal Nath.
Housing developers reckon that a lot of new money will be funnelled into the sector, giving consumers a range of housing options. It is also expected to correct the supply-demand mismatch which has been largely responsible for soaring apartment prices.
Although foreign investors had been allowed into this sector back in May 2000, they were badly hamstrung by regulations.
According to an official statement, 'The need for a review was necessary. Since opening of this sector, only nine FDI proposals were approved. An interaction with the stakeholders had revealed that requirement of a minimum of 100 acres was a major bottleneck.'
The decision to lower the minimum land size requirement from 100 acres to 25 acres is being seen as a major relaxation. 'It will be easier to find space now. Getting 100 acres of land isn't easy,' said Vijay Vancheswar, spokesperson for DLF Universal Ltd.
There are a few riders that will remain: the minimum capitalisation of wholly-owned subsidiaries of overseas housing giants has been set at $10 million. In the case of joint ventures with Indian partners, the capitalisation norm has been lowered to $5 million.
The original investment cannot be repatriated before a period of three years after the funds start to flow in. However, the investor may be permitted an early exit with the approval of the foreign investment promotion board (FIPB).
The requirement of minimum 100 acres and 2000 dwelling units is being changed to a minimum built-up area of 50,000 square metres for construction development projects.
Sanjay Verma, joint managing director of Cushman and Wakefield (India), said, 'It is not a bad move in the short term for a market like India which has yet to mature in the construction sector. However, as markets mature in the medium to long term, the government will have to eventually allow buying and selling of land as well.'
Housing developers admit that foreign competition will inject a great deal of efficiency in the sector. However, others felt that the FDI relaxation was only one small step; it was necessary to allow venture capital financing of the housing industry which has to scramble for funds.
'More than FDI, this sector needs a boost in venture capital financing, which is not very encouraging at present," said Avnish Sood, director of the Eros Group. He felt that the housing industry could see prices rise by 5 to 7 per cent in the initial phase.
There is a spinoff benefit for the manufacturing sector also, particularly for the construction material industries like cement, steel and brick makers.
Hire purchase act
The Union cabinet today approved repealing of the Hire Purchase Act, 1972, which aims at protecting the hirer from exorbitant rate of interest by the lender.
A bill to this effect will be introduced in the budget session of Parliament, starting from tomorrow.