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Real estate redefinition to hit FDI

Deepshikha Sikarwar & Paramita Chatterjee, New Delhi, The Economic Times

March 07, 2011


The government plans to widen the definition of real estate in its foreign direct investment (FDI) policy to include consultants, advisers, valuers and brokers, a move experts say could restrict entry of foreign players in these specialized services. The department of industrial policy and promotion, or DIPP, has circulated a draft note for comments of various ministries on the proposal.

"The idea is to explicitly state what all services does the definition (of real estate) cover," a government official privy to the discussions said. The wider definition is likely to be included in the half-yearly update of FDI policy due to be released by the end of this month.

The current FDI policy lacks clarity on several issues, including what constitutes real estate. The policy prohibits FDI in real estate business but allows 100 percent foreign investment in construction and housing development. In construction and housing, the FDI is subject to several riders including a three-year lock-in period, minimum capitalisation of $10 million for wholly owned subsidiaries and $5 million in case of joint ventures.

The government hopes to clear the air by defining the scope of the real estate business.

According to the proposal, consultancy or advisory services related to locational space and property issues of any kind will be included in the real estate business.

Agents, advisers, brokers and consultants dealing with any facet of residential, commercial and industrial property will also be included if they offer certain services.

To preclude any chances of misinterpretation, the policy will mention a comprehensive list of services.

The move follows queries received by the Foreign Investment Promotion Board and DIPP from foreign investors asking if FDI was permitted in broking services in the realty sector.

Experts, however, say the changes, if accepted, could make the FDI policy more restrictive.

"This would be a retrograde measure particularly at a time when the country needs foreign direct investment," said Akash Gupt, executive director at PwC.

The proposal could affect even the existing players who largely offer advisory services.

"It will have a dampening impact on the services sector as the lot of players who are waiting to tap the booming sector will have problems entering the country" said Anuj Puri, chairman and country head at real estate consultancy firm Jones Lang LaSalle India.

Some of the players said the restrictions made no sense for service providers.

"We do not control liquidity in any way, nor do we make investments in the sector," said Anurag Mathur, managing director at Cushman & Wakefield. "We just offer our advisory services to the sector."