Realty JV only if local firm holds 25%

Foreign investors in Indian construction and housing projects will now have to give at least 25% stake to Indian partners if they have to be treated as joint ventures and claim the benefit of a low capital infusion norm of $5 million.

The department of economic affairs (DEA) has made this condition mandatory for foreign investment in these projects to prevent wholly-owned subsidiaries of international firms from acting as "joint venture entities" despite shareholding by Indian partner/s being minimal.

Under the existing FDI policy, 100% foreign investment is allowed in "construction development" projects that includes construction of townships and housing infrastructure. But FDI in "real estate companies" is barred. While the minimum capitalisation norm of $ 10 million is applicable for wholly-owned subsidiaries, only $ 5 million capital needs to be brought in for joint venture with Indian partners in the projects specified above.

Sources said the department of industrial policy and promotion (DIPP), the nodal government agency for finalising the sectoral FDI policy, would soon come out with a press note on the matter after consulting the ministry of housing and urban poverty alleviation and the ministry of urban development.

With this move, the Centre has brought clarity in the definition of joint venture operations in the housing sector. Several government agencies, including the Reserve Bank of India, had raised concerns over the ambiguity in provisions, saying it could be easily misused by investors.

In fact, in an earlier letter to DIPP, the RBI had raised concerns about overseas firms taking the benefits of lower capitalisation available to JVs by keeping just 0.1% equity or just one share holding with an Indian entity. Experts feel such clarification will further plug loopholes in the sector. "It does bring in transparency in the policy. However, we must see that not much of investment is flowing in the country and such a policy should not discourage investor interest.

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