New FDI Regulations Notified by RBI - A Look at Construction Sector & Industrial Parks Policy

The Reserve Bank of India (“RBI”) has come out with new Regulations pertaining to Foreign Investment in India.

The RBI vides its notification FEMA 20(R)/ 2017-RB dated 7th November 2017 has issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“New Regulations”) to govern investment in India by Non Residents by superseding the earlier Regulations in the subject matter being Notification No. FEMA 20/2000-RB and Notification No. FEMA 24/2000-RB both dated May 3, 2000.

The said New Regulations has come into effect from 7th November 2017 except provisions of proviso (ii) to sub-regulation 1 of regulation 10 of these Regulations and proviso (ii) to sub-regulation 2 of regulation 10 of these Regulations (pertaining to breach of investment limits by Foreign Portfolio Investors and NRIs respectively) which would come into effect at a later date to be notified.

A quick look at the Sector Specific policy that the Regulations have laid down:

FDI PROHIBITED SECTORS

i).  Lottery Business (both Government/Private) and Online Lotteries;

ii).  Gambling and Betting as well as Casinos;

iii).  Chit funds;

iv).  Nidhi Company;

v).   Trading in Transferable Development Rights (TDRs);

vi). Real Estate Business or Construction of Farm Houses;

vii). Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;

viii). Activities/ sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations;

ix). Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities;

The New Regulations have provided some Clarifications to the above restricted sectors as follows:

i). Chit Funds:    The Registrar of Chits or an officer authorised by the state government in this behalf, may, in consultation with the State Government concerned, permit any chit fund to accept subscription from Non-resident Indians and Oveseas Citizens of India who shall be eligible to subscribe, through banking channel and on non- repatriation basis, to such chit funds, without limit subject to the conditions stipulated by the Reserve Bank of India from time to time.

ii). Real Estate:    For the purpose of this regulation, “real estate business” shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.

FDI PERMITTED SECTORS

CONSTRUCTION DEVELOPMENT:       100%    Automatic

Construction-development projects would include development of –

 i).            Townships;

ii).           Construction of residential/commercial premises;

iii).          Roads;

iv).          Bridges;

v).           Hotels;

vi)           Resorts;

vii).         Hospitals;

viii).        Educational institutions;

ix).          Recreational facilities;

x).           City and regional level infrastructure, townships.

Subject to following conditions

i).  Each phase of the construction development project would be considered as a separate project;

ii). The investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.

iii). Notwithstanding anything contained at (ii) above, a person resident outside India will be permitted to exit and repatriate foreign investment before the completion of 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. Further, transfer of stake from a person resident outside India to another person resident outside India, without repatriation of foreign investment will neither be subject to any lock-in period nor to any government approval. [Also refer clarification below.]

iv). The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/ Municipal/ Local Body concerned.

v). The Indian investee company will be permitted to sell only developed plots. For the purposes of this policy "developed plots" will mean plots where trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage, have been made available.

vi). The Indian investee company shall be responsible for obtaining all necessary approvals, including those of the building/ layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/ bye-Laws/ regulations of the State Government/ Municipal/ Local Body concerned.

vii). The State Government/ Municipal/ Local Body concerned, which approves the building/ development plans, will monitor compliance of the above conditions by the developer.

Clarifications to the above conditions:

a).     Foreign investment is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs).

b).        Condition of lock-in period will not apply to Hotels and Tourist Resorts, Hospitals, Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs/ OCIs.

c).       Completion of the project will be determined as per the local bye-laws/ rules and other regulations of State Governments.

d).        Foreign investment up to 100 percent under automatic route is permitted in completed projects for operating and managing townships, malls/ shopping complexes and business centres. Consequent to such foreign investment, transfer of ownership and/ or control of the investee company from persons resident in India to persons resident outside India is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of foreign investment and transfer of immovable property or part thereof is not permitted during this period.

e).        "Transfer", in relation to this sector, includes,-

1.         the sale, exchange or relinquishment of the asset; or

2.         the extinguishment of any rights therein; or

3.         the compulsory acquisition thereof under any law; or

4.         any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

5.         any transaction, by acquiring capital instruments in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.

f).         “Real estate business” means dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.

Explanation:

1.       Investment in units of Real Estate Investment Trusts (REITs) registered and regulated under the Securities and Exchange Board of India (REITs) regulations 2014 shall also be excluded from the definition of “real estate business”.

2.         Earning of rent income on lease of the property, not amounting to transfer, will not amount to real estate business.

3.         Transfer in relation to real estate includes,

i).         the sale, exchange or relinquishment of the asset; or

ii).         the extinguishment of any rights therein; or

iii).        the compulsory acquisition thereof under any law; or

iv).    any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

v).        any transaction, by acquiring capital instruments in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.

INDUSTRIAL PARKS:                        100%     Automatic

The New Regulations have defined the concept of "Industrial Parks" as follows: 

Industial Park is a project in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities, is developed and made available to all the allottee units for the purposes of industrial activity.

The terms “infrastructure”, “common facilities” and “industrial activity” used in defining Industrial Parks have further been defined as follows:

i).         "Industrial Activity" means manufacturing; electricity; gas and water supply; post and telecommunications; software publishing, consultancy and supply; data processing, database activities and distribution of electronic content; other computer related activities; basic and applied research and development on bio-technology, pharmaceutical sciences/ life sciences, natural sciences and engineering; business and management consultancy activities; and architectural, engineering and other technical activities.

ii).         “Infrastructure” refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), railway line/ sidings including electrified railway lines and connectivity to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning;

iii).        “Common Facilities” refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), railway line/ sidings including electrified railway lines and connectivity to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/ conference halls, parking, travel desks, security service, first aid centre, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park;

It is pertinent to note that a reading of the definition of the Industrial Parks would come within the purview of the Construction Development sector and hence would need to fulfill the conditions laid down therein.  However, the New Regulations have clarified that Foreign investment in Industrial Parks would not be subject to the conditionalities applicable for construction development projects, provided the Industrial Parks meet with the under-mentioned conditions:

i).        it would comprise of a minimum of 10 units and no single unit shall occupy more than 50 percent of the allocable area; and

ii).     the minimum percentage of the area to be allocated for industrial activity shall not be less than 66 percent of the total allocable area.

The term "Allocable area" used above has been defined to mean as follows-

a).       in the case of plots of developed land - the net site area available for allocation to the units, excluding the area for common facilities.

b).     in the case of built up space - the floor area and built-up space utilized for providing common facilities.

c).        in the case of a combination of developed land and built-up space - the net site and floor area available for allocation to the units excluding the site area and built-up space utilized for providing common facilities.

-  Arkodeb Sinha