The government plans to widen the definition of real estate in its foreign direct investment (FDI) policy to include consultants, advisers , valuers and brokers, a move experts say could restrict entry of foreign players in these specialized services. The department of industrial policy and promotion, or DIPP, has circulated a draft note for comments of various ministries on the proposal.

“The idea is to explicitly state what all services does the definition (of real estate) cover,” a government official privy to the discussions said. The wider definition is likely to be included in the half-yearly update of FDI policy due to be released by the end of this month. The current FDI policy lacks clarity on several issues, including what constitutes real estate. The policy prohibits FDI in real estate business but allows 100% foreign investment in construction and housing development. In construction and housing, the FDI is subject to several riders including a three-year lock-in period, minimum capitalisation of $10 million for wholly-owned subsidiaries and $5 million in case of joint ventures.

The government hopes to clear the air by defining the scope of the real estate business. According to the proposal, consultancy or advisory services related to locational space and property issues of any kind will be included in the real estate business. Agents, advisers, brokers and consultants dealing with any facet of residential, commercial and industrial property will also be included if they offer certain services. To preclude any chances of misinterpretation, the policy will mention a comprehensive list of services.
The move follows queries received by the Foreign Investment Promotion Board and DIPP from foreign investors asking if FDI was permitted in broking services in the realty sector. Experts, however, say the changes, if accepted, could make the FDI policy more restrictive. “This would be a retrograde measure particularly at a time when the country needs foreign direct investment,” said Akash Gupt, executive director at PwC. The proposal could affect even the existing players who largely offer advisory services.

“It will have a dampening impact on the services sector as the lot of players who are waiting to tap the booming sector will have problems entering the country” said Anuj Puri, chairman and country head at real estate consultancy firm Jones Lang LaSalle India.

Some of the players said the restrictions made no sense for service providers. “We do not control liquidity in any way, nor do we make investments in the sector,” said Anurag Mathur, managing director at Cushman & Wakefield. “We just offer our advisory services to the sector.”
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  • Policy focus should be on FDI

    The government's move to allow foreign retail investors to invest directly in equities is welcome, but only an incremental step to shore up capital inflows. Already, qualified financial investors ( QFI) including individuals, pension funds and trusts are allowed to invest up to $10 billion a year in the stock market through mutual funds instead of having to come through foreign institutional investors. So, allowing QFIs to directly own Indian stocks - each of them can own up to 5% in an Indian company but their cumulative investment is capped at 10% - is an incremental step.

    It will open up another avenue for portfolio investment inflow, but does not guarantee such flows. Excessive dependence on foreign fund inflows only makes the stock market more volatile. Ideally, the government should encourage long-term domestic savings into the equities market. An institutional mechanism is already in place, with the National Pension System (NPS) that allows subscribers to invest in equities and generates superior returns. Workers should be allowed to voluntarily migrate to the NPS from the Employees Provident Fund Organisation (EPFO) that does not invest in stocks.

    Two, the government should also enhance foreign direct investment rather than FII investment . It should resume talks with its allies and the Opposition to forge a consensus on FDI in retail and insurance. Last year, FII outflows were the highest from India compared to BRICs and emerging markets. According to EPFR Global that tracks foreign fund flows across markets , FIIs withdrew over $4 billion from India in 2011, against an inflow of $1.35 billion in 2010. Our stock markets have also been among the worst performers, with the BSE Sen shedding close to 25% in 2011. However, market forecast will look up as the economy is expected to grow by 8-9 % in the medium to long term. So, easing curbs on investment makes sense. It should be backed up with sound macroeconomic management to restore confidence among foreign investors and also ensure that their returns are not eroded by a falling rupee. Reforms brook no delay, to contain and prioritise spending.

    Policy focus should be on FDI - The Economic Times