Monday, July 11, 2011

End 3-Year lock-in on FDI in education infrastructure: DIPP

Foreign direct investment (FDI) in education infrastructure could become easier if a Department of Industrial Policy and Promotion (DIPP) proposal finds favour with the government. The department has recommended dropping the three-year lock-in for FDI in construction if it is for creation of education infrastructure. "The proposal is under consideration," an official told ET. "There is a view that building of education infrastructure needs to be treated differently from construction," he said.

FDI up to 100% is permitted in the construction sector, but is subject to stringent conditions that include a three-year lock-in, minimum capitalisation of US$ 5 million for joint ventures and US$ 10 million for wholly-owned subsidiary and development of at least 10 hectares of land. The FDI policy does not make a distinction on the basis of the end use of the constructed asset even as it has allowed 100% FDI in education per se since February 2000.

DIPP has circulated the proposal to the ministries concerned, seeking their views on dropping these conditions for investment in building infrastructure for education, a priority sector for the government. "This proposal is quite relevant and timely," said Punit Shah, Executive Director, Tax & Regulatory Services (Financial Services), KPMG. "This move is also in line with past waivers of such conditions by DIPP in sectors of strategic importance such as health care and hospitality."

The government has already decided to provide viability gap funding for education projects under the public private partnership ( PPP) route. The DIPP proposal would make investment in education infrastructure even more attractive for foreign investors, who have not been really interested in the construction sector as a whole.

Since April 2000, over US$ 9 billion investment has come into the construction sector, but a big portion of it has been in roads and highways. DIPP argues that relaxation of construction sector norms could give a leg up to overall FDI inflows, which have declined 25% in 2010-11 from a year ago. The country attracted US$ 19.4 billion in FDI in the precious fiscal.

The department has repeatedly pitched for removal or relaxation of the stringent conditions on FDI in construction but has found stiff resistance from the Reserve Bank of India (RBI) and the Ministry of Finance, both of which cite the build-up of an asset bubble that had led to a huge jump in FDI flows and a price rise even in tier three cities soon after the sector was opened up in 2005. In fact, in 2007, the central bank had proposed that the government allow FDI in the sector only after nod from the Foreign Investment Promotion Board (FIPB).

Source: The Economic Times, July 11, 2011
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