Although the construction sector is a significant contributor to the Indian GDP, there exists aglaring gap between foreign inflows into the sector and Indian infrastructure needs. This gap is rather worrisome since, after the pandemic, the Union government and various state governments have decided to pursue several projects and stabilise the economy. A number of steps remain to be taken to attract foreign inflows and achieve the desired goals.

This article discusses the various routes for bringing foreign investment into the Indian construction-development sector and their associated conditions. These entry routes are (i) foreign direct investment, (ii) foreign portfolio investment, (iii) foreign portfolio investment through the voluntary retention route, and (iv) external commercial borrowings. It serves as a guide to a foreign investor in as much as it sets out the key rules applicable to each of the above routes and helps make a comparative assessment of suitability. While elaborating on the conditions applicable to these routes, the authors also attempt to critically analyse gaps and issues in the frameworks. The result is encapsulated in the final part of the article that sets out the authors’ recommendations and conclusion.


Infrastructure plays an important role in the formation of an economy. It facilitates industrial activity, powers businesses, lowers the cost of doing business, creates employment opportunities, helps with poverty reduction, improves the standard of living, and forms the building block of society. In fact, infrastructure financing can help turn around economies at large. For instance,the New Deal by American President Roosevelt after the Great Depression helped create 90,00,000 jobs and build 6,00,000 kilometres of roads, 1,00,000 buildings, and 75,000 bridges.

While ‘infrastructure’ is a broad term that encompasses telecommunications, urban transport, healthcare, schools, water supply, electric systems, and residential and commercial real estate, the focus of this article will be on the construction-development segment of the infrastructure sector. This segment forms the backbone of infrastructure and is categorised as a separate sector under Indian foreign exchange laws.

Foreign Direct Investment (FDI) 

Foreign Direct Investment (“FDI”) refers to a type of investment made by a non-resident in the capital instruments of an entity in another country. The term ‘capital instrument’ refers to securities in the nature of equity, such as equity shares (fully, compulsorily and, mandatorily convertible), preference shares, (fully, compulsorily and mandatorily) convertible debentures, and warrants. The foreign investor usually acquires a significant equity stake in the investee company and develops a long-lasting ownership interest. Consequently, the investor is generally involved in all aspects of operation and plays a significant role in decision-making. This is quite beneficial for the host country as the foreign investor not just brings cash but also operational models, skills, technologies, et cetera along with itself. 

In India, FDI gained popularity after the 1991 New Economic Policy (NEP) of Liberalisation, Privatisation, and Globalisation (LPG). Pursuant to the country’s policy, there exist two routes under which FDI can be brought in. The first one is the automatic route, under which the Indian investee does not require permission from the Reserve Bank of India (“RBI”) or the Government of India (“GoI”) to bring in FDI. The other route is the government route, under which the approval of the GoI is mandatory for FDI inflow. 

Pursuant to the extant IndianFDI Policy, 100% FDI is permitted in the construction-development sector via the automatic route. Construction-Development projects,under the FDI Policy, refer to projects including “development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships”. However, a distinction is made between construction-development on the one hand and real estate business on the other, with FDI not being permitted in the latter via the FDI policy of 2010. 

The definition of real estate has not been amply clear under India’s FDI Policy. The term ‘real estate businesses’ was not defined in the FDI Policies of 2011, 2012 or 2013. While the 2010 Policy did prescribe a definition, it appeared in relation to the eligibility of resident entities to receive investments from Non-Resident Individuals (NRIs) and Persons of Indian Origin (PIO). After a period of almost four years, the definition of real estate business appeared in the2015 FDI Policy, albeit in the clarifications provided for the construction-development sector.It provided that ‘real estate business’ means dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.” This has been retained under the extant FDI Policy. 

In March 2022, the Department for Promotion of Industry and Internal Trade (DPIIT) issued aPress Note that further clarified that the real estate business does not include earning rent/income on a lease the of property where such a transaction does not amount to a transfer. It also does not include Real Estate Investment Trusts (REITs) registered and regulated by the Securities & Exchange Board of India (“SEBI”). 

Therefore, while real estate businesses dealing with the purchase or sale of immovable property for-profit motive cannot enjoy FDI, 100% FDI is permitted for construction-development activities which do not involve a transfer of ownership of property. This has been done keeping in mind the need for infrastructural development while preventing profit-driven enterprises from establishing a monopoly by dealing in immovable property in India. 

FDI is also prohibited in the trading of transferable development rights (TDRs) and the construction of farmhouses. However, 100% FDI is permitted for the operation and management of townships, malls, shopping complexes, and business centres via the automatic route. Furthermore,the FDI Policy clarifies that real-estate broking service does not constitute real estate business and hence, 100% FDI is permitted for the same via the automatic route. 

Some of thekey conditions applicable to FDI in the construction-development sector are as follows:

  • A foreign investor may exit the project after its completion or after the development of the trunk infrastructure, comprising roads, water supply, drainage, street lighting, etc.
  • A lock-in period of three years has been prescribed, which is to be calculated with reference to each tranche of FDI. Therefore, a foreign investor can repatriate its earnings before the completion of the project or development of the trunk infrastructure provided that the three-year lock-in has been completed. Although this is good for the investor, it appears to be problematic from a domestic standpoint as the project’s fate could be left dangling without any investment upon the foreign investor’s premature exit. It is also relevant to note that the Indian investee is only permitted to sell developed plots where the trunk infrastructure has been completed – creating dual standards for foreign investors and domestic developers.
  • The Indian investee is responsible for obtaining all required approvals for the project and complying with all applicable laws, rules, and regulations prescribed by the relevant government, including state governments and local and municipal bodies.
  • Completion of the project is required to be determined as per the local bye-laws or rules prescribed by the relevant state government. 

Foreign Portfolio Investment 

A foreign portfolio investor (“FPI”) is a foreign investor registered with SEBI under theSEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”) that invests in specified Indian securities. These securities include the following:

  • Shares, debentures, warrants (that are listed or to be listed on a recognised stock exchange);
  • Mutual Fund units;
  • Collective Investment Scheme units;
  • Derivatives traded on a recognised stock exchange;
  • Units of INVITs, REITs, AIFs;
  • Indian depository receipts;
  • Any debt securities or other instruments permitted by RBI (this includes inter alia, non-convertible debentures which may or may not be listed, listed non-convertible/ redeemable preference shares or debentures, dated government securities, commercial papers, security receipts issued by asset reconstruction companies, municipal bonds, etc.); and
  • such other instruments as may be specified from time to time.

FPI investment differs from FDI in as much as an FPI does not have a lasting ownership interest in the investee company. The total holding of each FPI together with its investor group (that is entities having common ownership of more than 50% or being under common control) is required to be less than10% of the paid-up capital of the investee company on a fully-diluted basis, or less than10% of the value of each series of debentures, preferences, or warrants. Therefore, an FPI mostly invests in listed securities and has a limited ownership interest in the company. 

Furthermore, the aggregate limit for all FPI investments in an Indian investee is up to the sectoral cap prescribed under the FDI Policy. This means that the aggregate FPI limit for the construction-development sector is 100%. The aggregate limit could have been reduced to 74%, 49% or, 24% by way of passing a board resolution followed by a resolution and a special resolution respectively in the general meeting of the company by 31st March 2020. The companies that have reduced the aggregate limit may increase it to 49%, 74% or the sectoral cap; however, once the limit has been increased it cannot then be reduced to the same lower threshold. Further, the aggregate cap for an investee company engaged in a sector where FDI is prohibited is 24%. 

Therefore, the FPI route does not specify any specific conditions for investments in the construction-development sector but provides generally-applicable rules and conditions. The key characteristic of this route is that investments can be made only in eligible instruments (which are typically listed) and are subject to certain limits that differentiate them from FDI investments.

FPI through the Voluntary Retention Route (VRR) 

In order to encourage FPIs to retain investments in India for longer durations, the government has introduced theVoluntary Retention Route (“VRR-route”) for FPI investments in debt securities. Pursuant to this route, anFPI may voluntarily commit to retaining a required minimum percentage of its investment in India for a lock-in period of at least 3 years (or as decided by RBI for each allotment). Such an investment will be free from the macro-prudential and other regulatory norms otherwise applicable to FPI investments. 

VRR-route investments are categorised as follows: (i) VRR-Govt, which includes investment in government securities such as G-Secs, T-bills, State Development Loans, etc., and (ii) VRR-Corp, which includes investment in the debt instruments mentioned in Schedule 1 to the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (except for items 1A(a) and 1A(d)).

Both, VRR-Govt and VRR-Corp have prescribed investment limits and allocation of investment amount from such a limit is made on tap or through auction. No FPI can be allotted an investment limit greater than 50% of the amount offered for each allotment in the event that there is demand for more than 100% of the amount offered. An FPI is required to invest at least 75% of the committed portfolio size within three months from the date of allotment and retain such investments for the duration of the retention period. 

An FPI is not permitted to exit its investments under the VRR-route prior to the end of the retention period, except by selling them to another FPI that agrees to abide by the terms and conditions applicable to the selling FPI. At the end of the retention period, the FPI may (i) liquidate its investments and exit, (ii) shift its investments to the general category, or (iii) hold its investments till the maturity date or until they are sold. 

To incentivise investments through the VRR-route, the following macro-prudential relaxations are offered:

  • Such investments are not subject to the minimum residual maturity requirement which prescribes those investments in corporate bonds should have a minimum residual maturity of at least 1 year. Further, the short-term investments of an FPI cannot exceed 30% of its total investments in the relevant category – a condition not applicable to FPI-VRR investments.
  • The single / group-wise investor limits are not applicable to investments made through the VRR-route. Otherwise, investments by any FPI, including related FPIs, are not permitted to exceed 50% of any corporate bond issue.
  • The following concentration limits are also not applicable to investments made through the VRR-route:

(i) Long-term FPIs: 15% of prevailing investment limit for that category; and

(ii) Other FPIs: 10% of prevailing investment limit for that category. 

Therefore, the VRR-route offers significant advantages for FPI investments in debt securities and can be effectively utilised for investments in the construction-development sector. The sector typically has long cash conversion cycles and requires long-term investment, which can be ably supported by the VRR-route.

External Commercial Borrowings 

External commercial borrowing (“ECB”), as the name suggests, is a route that allows Indian companies to incur debt from non-residents. Pursuant to theRBI’s Master Direction – External Commercial Borrowings, Trade Credits and, Structured Obligations (“ECB Regulations”), the ECB route cannot be used to raise funds for ‘real estate activities. The term ‘real estate activities’ has been defined as follows: 

Any real estate activity involving own or leased property, for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this would not include, (i) construction/development of industrial parks/integrated townships/SEZ (ii) purchase/long-term leasing of industrial land as part of new project/modernisation of expansion of existing units and, (iii) any activity under ‘infrastructure sector’ definition.” 

While the restriction on real estate activities also exists under the FDI Policy, the definition of ‘real estate activities’ contained in the FDI Policy is considerably different from that prescribed under the ECB Regulations. Most significantly, while the FDI Policy simply states that real estate means dealing in land or immovable property with a view to earning profit therefrom and categorically excludes leasing of property from its purview, the ECB Regulations include leasing of property within the ambit of real estate activities. Consequently, the restriction on real estate activities contained under the ECB Regulations is wider in scope and needs to be kept in mind when considering this route for investments.

ECB borrowing can be foreign currency-denominated or INR-denominated. The eligible ways for raising foreign-currency denominated ECB include loans, notes, bonds, debentures (other than fully and compulsorily convertible instruments), trade credits of more than 3 years, FCCBs, FCEBs, and financial leases. INR-denominated ECB can be raised in the form of preference shares and plain vanilla Rupee-denominated bonds issued overseas, in addition to the instruments eligible for foreign currency-denominated ECB.

The lender isgenerally required to be a resident of a FATF (Financial Action Task Force) or IOSCO (International Organisation of Securities Commissions) compliant country. Some of the other conditions applicable to investments made through the ECB route are as follows:

  • The minimum average maturity period is required to be 3 years;
  • The maximum limit for raising ECB by eligible borrowers is USD 750 million per financial year under the automatic route (else permission will be required from the RBI); and
  • In the case of foreign currency-denominated ECB raised from a direct foreign equity holder, the liability-equity ratio for the ECB raised through the automatic route cannot exceed 7:1. However, this is only applicable where the outstanding amount of all ECB (including the one proposed), is USD 5 million or more. 

It may also be relevant to note that Indian banks and financial institutions are not permitted to issue any type of guarantee in relation to the ECB. AD Category-I banks are allowed to permit the creation/cancellation of charge on immovable or movable assets, financial securities, and issue of guarantees in favour of the overseas lender provided they satisfy themselves that: (i) the ECB complies with the applicable rules and regulations, (ii) the loan agreement contains a security clause, and (iii) a no-objection certificate has been obtained from any existing lenders in India with respect to the creation of charge.

Recommendations and Conclusion 

The construction-development sector carries immense significance for the Indian economy. Well-developed infrastructure not only contributes to industrial activity and employment generation but also has a ripple effect across all other sectors.In addition to being the third-largest contributor to FDI inflows in India, the construction sector also accounts for a significant share of the GDP. Therefore, easy foreign inflows in the construction-development sector are a necessary requirement given the sector’s importance.

Premature Exit from FDI Investments

While efforts should be made to promote foreign investment, adequate safeguards should also be maintained to ensure the protection of domestic interests. In light of this, one of the key recommendations arising out of the research undertaken is with respect to the lock-in period applicable to FDI investments. At present, the FDI Policy prescribes that a foreign investor can exit after the development of trunk infrastructure such as roads, water supply, sewerage, drainage, street lighting, etc. or after a lock-in period of 3 years (calculated with reference to each tranche of foreign investment) has been completed. This implies that a foreign investor can exit after observing the lock-in period of 3 years even if the trunk infrastructure has not been completed. Given that trunk infrastructure is the backbone of any construction-development project and is considered to be a vital component of the project’s functionality/operations, the completion of trunk infrastructure should be a minimum requirement for the exit of the foreign investor. Therefore, the extant investor-centric policy should be modified to prescribe that the investor can exit only after the development of trunk infrastructure. It is hoped that the introduction of this minimum development obligation would help ensure largely complete domestic infrastructure without the addition of any onerously difficult obligations for foreign investors.

Incongruous Definitions of ‘Real Estate’

Further, the definitions of ‘real estate’ as contained in the FDI Policy and the ECB Regulations also need to be made uniform. In particular, while leasing activities are not categorised as real estate under the FDI Policy and are hence eligible for foreign investment, the ECB Regulations include leasing activities within the ambit of real estate. Given that both the FDI Policy and the ECB Regulations are concerned with regulating foreign investments into India (albeit through different routes), the difference in the scope of the two definitions is not rationalised. It is hoped that the ECB Regulations are amended to restrict the scope of the term ‘real estate activities’ and align it with the FDI Policy. 

Other Deficiencies in the Construction-Development Sector

Lastly, the construction-development sector, in general, suffers from various deficiencies which need to be addressed to boost investor confidence and ensure unhindered foreign inflows. One of the issues plaguing the sector is the high number of incomplete projects. These delayed projects are categorised as non-performing assets and creditors are left to pursue insolvency proceedings before the National Company Law Tribunal (“NCLT”). Foreign investors, too, have to face difficulties due to delayed completions and prolonged litigations, often leading to lower rates of return. These factors impact the risk-perception of foreign investors. As per a 2020 report published by the statistics ministry, 442 infrastructure projects had a collective cost overrun of INR 4,00,000 crore and, 536 projects faced an average time overrun of 44 months. To address this, it is extremely important to provide a secure environment for the infrastructure (including construction-development) sector, along with a safe exit mechanism for foreign investors. For this, the insolvency regime should be strengthened with a specific focus on ensuring speedy adjudication of insolvency disputes by the NCLT. In particular, it may be helpful to allow for and encourage more flexible resolution plans for the infrastructure sector.Furthermore, it should be ensured that local laws do not pose hurdles in the way of the timely completion of construction-development projects. State / local authorities should abide by prescribed timelines for grant of approvals, wherever required, and contain provisions for fast-track approvals. 

There is an impending need to boost investor confidence in greenfield infrastructure projects in India. Apart from renewable energy projects, investor interest in other construction-development projects has been limited.To remedy this, the government may consider introducing innovative public-private partnerships or PPP arrangements as a way to indicate its increased risk-appetite and inspire confidence among investors. 

It is hoped that these measures will be successful in boosting investor confidence, ensuring adequate checks and safeguards from a domestic perspective, and providing a much-needed boost to foreign investment in the construction-development sector in India.

About the Authors 

Ms. Devina Srivastava is an independent legal consultant providing advisory services in the domain of corporate and commercial laws. She is also an incoming LLM candidate at the University of Cambridge.

Mr. Abeer Tiwari is a 3rd-year B.A. LL.B student from Balaji Law College, Pune. He is also an Associate Editor at IJPIEL.

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Jhalak Srivastav and Muskaan Singh 

Senior Editor: Hamna Viriyam 

Associate Editor: Abeer Tiwari

Junior Editor: Vedant Bisht

Preferred Method of Citation  

Devina Srivastava and Abeer Tiwari, “Foreign Investment in the Indian Construction-Development Sector: Entry Routes and Associated Conditions” (IJPIEL, 1 July 2022) 


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