India relaxes investment rules to pull foreign capital into smart cities

India has this week relaxed its rules for foreign direct investment (FDI) in an attempt to increase the money flowing into the country’s built environment. 

In the past, external investors were forbidden to own 100% of projects that were smaller than 50,000 square metres, and they had to put in at least $10m. In addition, the investment was locked in for three years, which meant the investor was unable to withdraw their money.  

Under the new rules, the minimum area is reduced to 20,000 square metres, and the minimum capital sum is halved to $5m.  

The move is intended to address a stagnation in capital inflows into India. In the 2013/14 financial year, it received $1.2bn of FDI compared with $1.3bn the previous year. Between April and August this year, the sum received was $446m. 

A government statement said: "The investor will be permitted to exit on completion of the project or after three years from the date of final investment, subject to development of trunk infrastructure." 

The legislation is aimed at increasing demand for smaller, urban projects such as those that will make up the 100 smart cities that Modi’s government is promoting, and which in turn will boost affordable housing. 

Neeraj Bansal, a partner at KPMG India, said that the changes were "expected to provide an immediate breather to the cash-strapped real estate sector".  

He said: "In near term, we expect the policy to support housing and commercial office projects in metro cities such as Delhi and Mumbai, where project size is generally small yet requires heavy investment owing to expensive land parcels and high construction costs."   

Akash Gupt, an executive director at PricewaterhouseCooper said smaller developments would no longer face long delays.