Easing Investor Exit in the Construction Development Sector: A Loss for Domestic Infrastructure?

following guest post is contributed by Abhinav Kumar, who is a 5th
Year, B. A. LL. B (Hons.) student at NLU, Jodhpur]
Department of Industrial Policy and Promotion (“DIPP”) issued Press
Note 12
(“PN12”) in November, being the last of the 2015 series. Titled
“Review of FDI policy on various sectors”, PN12 brought sweeping changes to the
FDI regime pertaining to around 15 sectors, including construction development, defence and single
brand retail. While the changes brought about by PN12 were hailed as an
investor-friendly in the background of liberalization of the overall FDI
regime, this post will discuss the possible adverse effects of the changes
wrought with respect to investor exits in the construction development sector.
Real estate
– that is, dealing in land and immoveable property with the intention of
earning profit – has traditionally remained off-limits for foreign investors. However,
the “construction development” sector, comprising development of townships,
residential/commercial premises, roads, bridges, hotels, resorts etc. was
opened up to 100% FDI under the automatic route by DIPP Press Note 2 of
. The regime pertaining to construction development was further
liberalized by DIPP Press
Note 10 of 2014
Under PN10,
the conditions prescribed for investor exit were as follows. The investor was
permitted to exit either on completion of the project, or after the development
of “trunk infrastructure”, which was defined as defined as
roads, water supply, street lighting, drainage and sewerage
. The
ostensible purpose behind the introduction of the trunk infrastructure
condition was to prevent speculative investments by foreigners without any
proper intention to develop the land. It was additionally provided that the Foreign
Investment Promotion Board (“FIPB”) would consider proposals for investor exit even
before the completion of the project or development of trunk infrastructure on
a case-to-case basis. In other words, the investor could not exit before at least
completing trunk infrastructure without FIPB approval.
conditions have undergone a complete overhaul under PN12. The first, general
condition – that the investor shall be permitted to exit either on completion
of the project or after the development of trunk infrastructure – has been
retained [as Paragraph of the FDI Policy, hereinafter referred
to as “Para (A)(i)”]. However, a new set of conditions has been introduced
thereafter vide Paragraph [hereinafter referred to as
“Para (A)(ii)”], the text of which is reproduced as follows:-
Notwithstanding anything
contained at (A)(i) above, a foreign investor will be permitted to exit and
repatriate foreign investment before the completion of the project under
automatic route, provided that a lock-in period of three years, calculated with
reference to each tranche of foreign investment has been completed. Further,
transfer of stake from one non-resident to another non-resident, without
repatriation of investment will neither be subject to any lock-in period nor
any government approval.
There are
two key takeaways from this insertion. First, notwithstanding the
prescriptions of Para (A)(i), a lock-in period of 3 years with respect
to each tranche of investment has been introduced. Once the lock-in period has
been completed, the investor is permitted to exit the project, even if it is
not complete, without the requirement of government/FIPB approval. In fact, the
very concept of an FIPB-approved investor exit has been completely done away
with. Secondly, the PN10 restrictions on transfer of stake between
non-residents have been done away with: it is now provided that such transfers
(so long as the investment is not repatriated) are not subject to any lock-in,
and do not require government/FIPB approval.
While the
second change with respect to transfer of stake is fairly straightforward, the
first condition pertaining to investor exit merits a closer look. Under PN10
(ignoring the possibility of a government-approved exit), the minimum that an
investor was bound to do before his exit was to develop trunk infrastructure.
PN12, however, operates slightly differently in that it lessens investor
obligations with respect to development of basic infrastructure prior to an
exit. A conjoint reading of Paras (A)(i) and (A)(ii) makes the following
position clear: an investor can now exit upon the completion of the project or
development of trunk infrastructure; or, due to the presence of the
non-obstante clause in Para (A)(ii), he can straightaway exit, even without
government/FIPB approval, before the completion of the project, so long as the
investment has been locked in for 3 years.
Does the
completion of the 3 year lock-in ensure the completion of trunk infrastructure?
It appears not, since PN10 – which introduced the concept of trunk
infrastructure for the first time – made no time-bound prescription for the
development of trunk infrastructure. In other words, the DIPP has never
indicated any time period, let alone 3 years, within which it is assumed
that trunk infrastructure can be comfortably completed. Further, given the
various facets of trunk infrastructure itself – roads, water supply, street
lighting, drainage and sewerage – and assuming that the project pertains to,
say, a large enterprise such as a township, there is no guarantee that the
trunk infrastructure would be completed within 3 years. Thus, the very
introduction of the lock-in linked exit option before completion of the project
means that the new, lower minimum that an investor has to do before his exit is
merely complete the lock-in period, whether or not he completes trunk
infrastructure during that time. Therefore, the changes brought in by PN12
essentially signal a win-win for the investor: it is not only permitted to exit
before completion of the lock-in if the trunk infrastructure (or the project
itself) is completed, but also to leave before even completing trunk
infrastructure, so long as it has served out the lock-in period.
In sum, the
revised conditions under PN12 have diluted the investor obligations as to
development of trunk infrastructure: it may now exit without bringing any
tangible benefit to domestic infrastructure, simply by serving out a lock-in
period. In its zeal to increase the ease of doing business, the government has
gone beyond “striking a balance” between domestic interest and ease of
investment: the scales are clearly tilted in favour of investor convenience.
Therefore, it is hoped that the government introduces, or rather,
re-introduces, certain minimum development obligations for investors even
within the lock-in period, so that domestic infrastructure is assured at least
some gains from foreign investment.
Abhinav Kumar

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


    Easing exit of investor is one thing; but not the same as easing exit by 'promoter' , particularly in construction of 'residential' and 'commercial ' complexes. The most must- -be -of -utmost concern is that the new regulatory law for realty sector, -implicitly, if not explicitly for anyone to readily take a note, more so a conscious note of- is seen to lend scope for such 'exit ' by promoter.

  • The conclusion provided by this article is not entirely correct because:

    1. In the RE industry, if there is a large project, such large projects are typically split into phases. Apart from a few investors who have the appetite/ ability to stay invested for a very long period, most investors limit their investment to one specific phase. The revised policy, considering the above, has limited the requirement of 'trunk infrastructure' development to that specific phase and not the entire project. Hence, there is no question of exit through transfer of other parts of the project and obtaining undue benefit.

    2. If one were to analyse the history of the FDI policy restrictions in the C&D sector, we can observe that the previous policies had placed obligations on both the NR investor and the developer to comply with the FDI policy conditionalities. This meant that the investor had to put all necessary efforts to ensure development of 'trunk infrastructure' before exit. However, this was found impractical in the India RE sphere, since NR investors did not have the wherewithal to step into the shoes of the developer (in case the developer was unnecessarily delaying the development of the project). Hence, the policy now has been revised to place all the obligations only on the resident developer. This was made with the intent to give the benefit of doubt to the investor that in case 'trunk infrastructure' has not been developed in a project and the investor can reasonably demonstrate that he was not the reason for it, he can obtain an exit.

    3. Moreover, if any particular project/ phase of a project cannot have the trunk infrastructure developed within 3 years, it is most probably a bad investment for RE investors or even worse (i.e.write-off situation), except in very rare cases. Hence, exit by investors will anyway not lead to excessive foreign exchange outflow than the original investment. Net-net, there would only be a loss for the investor.

    The changes to the FDI policy, in my view, will serve for the betterment of the RE investment sector.

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