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New exit rules may attract private players to smart cities

Submitted by scc india staff on November 15, 2015

The latest change in foreign direct investment (FDI) norms linked to the construction sector might help attract private players to the government’s ambitious smart city project. Since the Centre has allocated only Rs 500 crore per city under the scheme, funds from companies, especially real estate developers, could give impetus to the 100 smart cities project. 

On Tuesday, the government relaxed several conditions linked to the construction sector in the wake of a sluggish real estate market. The smart city project could benefit from at least two of these conditions — each phase of the construction development project will be considered a separate project and exit will be linked to each phase; and a foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided a lock-in period of three years has been completed.

Although the other clauses that have been eased include minimum area (20,000 sq. m) and minimum capitalisation (approx. Rs 33 crore), these may not have a direct bearing on developing smart cities, as those would be much bigger in scale and size, according to analysts.

Pratap Padode, founder and director, Smart Cities Council India, pointed out that easier rules would come as a lifeline for the fund-starved developers engaged in private township projects. Once they are able to complete these projects with the help of fresh capital, these developers could invest in smart cities, said Padode.

Estimates suggest that around 50-60 township projects being handled by private developers are currently stuck due to lack of capital.

The FDI data compiled by the department of industrial policy & promotion shows construction development, including townships, housing and built-up infrastructure attracted Rs 4,582 crore foreign investments in the financial year 2014-15. This amount is expected to rise significantly after the change in norms.

The government move on construction-linked FDI norms will be useful for raising capital for greenfield smart cities, according to Gulam Zia, executive director, advisory (retail) at Knight Frank India. While the Centre has allocated Rs 500 core for each smart city, that's really like seed money, pointed out Zia. ‘’You need to make it go up to at least a couple of thousand crore for a city to turn smart,’’ he said. And, that could be possible through easier repatriation for investors, with simpler exit route after three-years of lock-in. ‘’Fund raising is the biggest challenge in smart cities project, and the revised rules would help foreign investors feel safe.’’

Agreed Anshuman Magazine, chairman and managing director, CBRE South Asia. Removal of the exit clause for foreign investors is really encouraging for smart cities project of the government and overall real estate sector. "It (relaxed norms) means ease of doing business and foreign capital will start trickling in soon.’’

In smart cities, one needs long term capital with flexibility in norms such as on exit clause. "This will not only boost smart cities project of the government but will also see smart development in residential real estate sector. With liquidity crunch in the sector, these steps will eventually be one of the biggest source of inflows into the sector.’’

In the next six months, the money should start flowing in as the new exit clause has come as a gamechanger, hoped CEO of a real estate company.