According to Press Note 2 of 2005 issued by the Department of Industrial Policy and Promotion, there are certain conditions for foreign investment in the real estate sector. The relevant conditions are as follows:
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 FIPS.
The lock-in of 3 years, specified in condition (ii) above, has purportedly been introduced to ensure that only investors with a long-term horizon invest in the real estate/ construction sector. There was some doubt as to the meaning of the expression “original investment” as the lock-in applies to that. While it appears that the Government had initially clarified that the lock-in of 3 years would apply to the initial investment only, it has now adopted the position that the lock-in applies to all foreign investment (and not just the initial investment).
The Mint carries a report that explains the position:
The department of industrial policy and promotion (DIPP) has made it clear that the lock-in period of three years applicable on foreign investments in realty projects—under Press Note 2 of 2005 series—is for the entire investment, against a previous understanding that it applied only for the initial investment.
“We do not know what was the interpretation previously. But the press note meant the lock-in period is applicable for the entire investment. We have already clarified that and we stand by that,” said a DIPP official who spoke on condition of anonymity.
The DIPP had clarified on its bulletin board on 15 July that “original investment means the entire investment brought in as FDI (foreign direct investment) for the purpose of taking up PN 2 (2005) compliant construction development projects which would then remain locked in for three years.” Responding to a further query, the department on Thursday clarified on its bulletin board that “the clarification posted recently (on 15 July) is the correct policy position”.
While this interpretation is beneficial to the investee companies, it may curtail exit options that may be contractually available to foreign investors.
Based on discussions with the FIPB, the following is the emergent view on the various concerns:
(i) For the purposes of lock-in on the repatriation of FDI, the term “Original Investment” would not be limited to the minimum capitalization amount of USD 5 Million/10 Million (as the case may be) but it refers to the entire investment brought in by the foreign investor towards the implementation of the project;
(ii) The lock-in period for the FDI would be reckoned in the following rolling-over manner:
(a) For the FDI amount brought into the company prior to reaching the minimum capitalization level, 3 year lock-in would be applicable from the date company achieves minimum capitalization level;
(b) All other tranches of investment which come into the company post the company achieving minimum capitalization level, 3 year lock-in would be applicable on such investment from the date of such investment.
(iii) The lock-in restriction would be applicable to the investment as well as the investor, hence within the lock in period, no transfer from NR to NR would be permitted.
(iv) The aforesaid clarificatins would only have prospective applicability from the date of investment.
Of course this is all based on oral discussions and as it with most issues concerning the FIPB there is no guarantee as to the final outcome from the FIPB.
I have a question:
If the shares are tranferred by the Foreign company to another foreign company after the expiry of three years lock in , does the transferee company also get subjected to the three year lock-in?
Also, if the share transfer takes place on the second year of the three year, will the transferee company be subjected to the remaining 1 year lock-in.. or does the lock in for them start from 3 years?
Please clarify these points..