Requirements for overseas developers are eased

India has relieved rules for foreign investment towards construction and property development, as Prime Minister Narendra Modi continues ahead with his plan to develop smart cities, motivate economic growth and build every citizen a home by 2019.

Companies now only require a minimum project-size of 20,000 square metres to invite overseas investors, rather than the previous 50,000 square metres mandated, as announced by India’s cabinet late yesterday. A previous condition on the minimum size of plots for housing construction was also removed. The cabinet also halved the paid-up capital requirement for projects to $5million.

The decision comes after Modi’s steps earlier this month to scrap subsidies on diesel fuel and shift toward ending a 40 year state monopoly on mining and selling coal. Modi swept to power during May on a campaign pledge to allow more overseas funding in sectors opening jobs and growth within Asia’s third largest economy.

The measure will assist developers and motivate the government’s long term reform upon affordable housing and smart cities, according to economists at Nomura Holdings Inc., including Sonal Varma of Mumbai, who produced the research report. Growth in the construction sector should be boosted, which is critical for India’s infrastructure development plans.

India has attracted overseas direct investment of $23.7billion for the development of houses and towns since April 2000, equating to approximately 10 percent of total inflows. India conditionally permits overseas companies to wholly own local units.

Finance Minister, Arun Jaitley, allocated 71 billion rupees ($1.2 billion) of his budget towards modernising towns into ‘smart cities’. During August, Modi’s administration also raised the foreign investment cap towards railway infrastructure and defence companies from 26% to 49%.

Shares in Sobha Developers Ltd., DLF Ltd., Housing Development & Infrastructure Ltd, and Unitech Ltd. grew by more than 4.5% today, in comparison to a 0.7% gain in the benchmark S&P BSESensex (SENSEX), as of 1:30p.m. in Mumbai.

The relaxation of rules is expected to provide relief for cash-strapped real estate sector, as claimed by Neeraj Bansal, a partner at KPMG India. In the short term, the policy is expected to support commercial and housing office projects in metro cities including Delhi and Mumbai, where project size is typically small, yet requires heavy investment owing to expensive land parcels and high construction cost.

Yesterday, the cabinet also approved raising the minimum support price for wheat by 50 rupees, to 1,450 rupees per 100 kilos.