CA Kamal Garg

Development of Townships, Housing, Built-up infrastructure and Construction Development projects

FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) is allowed subject to the following guidelines (para 5.23.1):

Minimum area to be developed under each project would be as under:

      (i)   In case of development of serviced housing plots, a minimum land area of 10 hectares;

     (ii)   In case of construction-development projects, a minimum built-up area of 50,000 sq.mts;

    (iii)   In case of a combination project, any one of the above two conditions would suffice.

The investment would further be subject to the following conditions (para 5.23.2):

      (i)   Minimum capitalization of US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.

     (ii)   Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

Clarification of the terms ‘original investment’ and ‘lock-in period’ in case of minimum capitalization of construction development projects {Para 5.2.13.2(3)}: It has been clarified that the term “Original investment” means the entire amount brought in as FDI. It has further been clarified that the lock-in-period of three years will be applied from the date of receipt of each installment/tranche of FDI or from the date of completion of minimum capitalization, whichever is later. This was necessary as a number of queries had been received in regard to the coverage of these terms. (Circular 2 of 2010 as on September 30, 2010).

 As per para 5.23.3, at least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor/investee company would not be permitted to sell undeveloped plots. For the purpose of these guidelines, “undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available. It will be necessary that the investor provides this infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of serviced housing plots.

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 (para 5.23.4).

The investor/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. The State Government/ Municipal/Local Body concerned, which approves the building/development plans, would monitor compliance of the above conditions by the developer. The conditions as at paras 5.23.1, 5.23.2 and 5.23.3 would not apply to Hotels & Tourism, Hospitals and SEZ’s. For investment by NRIs, the conditions at paras 5.23.1, 5.23.2 and 5.23.3 would not apply. 100% FDI is allowed under the automatic route in development of Special Economic Zones (SEZ) without the conditionalities at paras 5.23.1, 5.23.2 and 5.23.3 above. This will be subject to the provisions of Special Economic Zones Act, 2005 and the SEZ Policy of the Department of Commerce.

FDI is not allowed in Real Estate Business.

Exemption of construction-development activities in the education sector and in old-age homes, from the general conditionalities in the construction-development sector (FDI Circular of 30-9-2011): FDI into construction development activities in the education sector and in respect of old-age homes has been exempted from the conditionalities imposed on FDI in the construction development sector in general i.e., minimum area and built-up area requirement; minimum capitalization requirement; and lock-in period. These conditionalities perhaps posed a constraint to FDI coming into these areas since educational institutions like schools, colleges, universities etc. as well as old-age homes have their own special requirements which do not necessarily fit these conditionalities. This step should augment the educational infrastructure in the country and bring it up to global standards. Similarly, with growing urbanisation, there is an increasing demand for old-age homes to cater to the needs of senior citizens. The physical infrastructure in this area also is short of the requirements. Hence, it has also been decided to exempt old-age homes also from the general conditionalities applicable to the construction development sector.

Trading:

100% FDI is permitted under the automatic route for trading companies for the following activities:

Cash & Carry trading Wholesale Trading/Wholesale Trading: Cash & Carry Wholesale trading/Wholesale trading, would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, be sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales. Wholesale trading would include resale, processing and thereafter sale, bulk imports with export/ex-bonded warehouse business sales and B2B e-Commerce.

Guidelines for Cash & Carry Wholesale Trading/Wholesale Trading (WT):

     (a)   For undertaking WT, requisite licenses/registration/permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained.

     (b)   Except in case of sales to Government, sales made by the wholesaler would be considered as ‘cash & carry wholesale trading/wholesale trading’ with valid business customers, only when WT are made to the following entities:

           (I)   Entities holding sales tax/VAT registration/service tax/excise duty registration; or

          (II)   Entities holding trade licenses i.e. a license/registration certificate/ membership certificate/registration under Shops and Establishment Act, issued by a Government Authority/Government Body/Local Self-Government Authority, reflecting that the entity/person holding the license/registration certificate/membership certificate, as the case may be, is itself/himself/herself engaged in a business involving commercial activity; or

         (III)   Entities holding permits/license etc. for undertaking retail trade (like tehbazari and similar license for hawkers) from Government Authorities/Local Self Government Bodies; or

         (IV)   Institutions having certificate of incorporation or registration as a society or registration as public trust for their self consumption.

Note: An Entity to whom WT is made, may fulfill any one of the 4 conditions.

     (c)   Full records indicating all the details of such sales like name of entity, kind of entity, registration/license/permit etc. number, amount of sale etc. should be maintained on a day to day basis.

     (d)   WT of goods would be permitted among companies of the same group. However, such WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture and the wholesale made to the group companies should be for their internal use only.

Removal of the condition that ‘wholesale trading made to Group companies should be for internal use only’ in the guidelines for Cash & Carry Wholesale Trading {Para 5.2.24.1.2(d)}: This change has been made in response to requests for simplification of the guidelines received from stakeholders. (Circular 2 of 2010 as on September 30, 2010).

      (e)   WT can be undertaken as per normal business practice, including extending credit facilities subject to applicable regulations.

      (f)   A Wholesale/Cash & carry trader cannot open retail shops to sell to the consumer directly.

34. Trading for exports

(a) E-commerce activities

E-commerce activities refer to the activity of buying and selling by a company through the e-commerce platform. Such companies would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter-alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well. 100% FDI is permitted under the Government route for trading companies for the following activities:

      (i)   Trading of items sourced from small scale sector.

     (ii)   Test marketing of such items for which a company has approval for manufacture, provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facility commences simultaneously with test marketing.

(b) Single Brand product trading

FDI up to 51%, under the Government route is allowed in retail trade of ‘Single Brand’ products. This is, inter alia, aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. FDI up to 51% in retail trade of ‘Single Brand’ products would be subject to the following conditions:

     (a)   Products to be sold should be of a ‘Single Brand’ only.

     (b)   Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.

     (c)   ‘Single Brand’ product-retailing would cover only products which are branded during manufacturing.

Application seeking permission of the Government for FDI in retail trade of ‘Single Brand’ products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application would specifically indicate the product/product categories which are proposed to be sold under a ‘Single Brand’. Any addition to the product/product categories to be sold under ‘Single Brand’ would require a fresh approval of the Government.

Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for Government approval.

The author is the Fellow Member of ICAI. He is engaged in IFRS – Audit and Advisory, FEMA, Valuation and XBRL Services. He can be approached at cakamalgarg@gmail.com.

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