Desi sleaze and dirty money: Foreign firms will stay away from realty despite new FDI norms

India permits 100 per cent Foreign Direct Investment (FDI) in the construction sector, yet the nation has so far received only passing interest from foreign realtors that is proven by the fact that FDI in the sector till August was just US $23.75 billion, just 10 percent of the total inflow compared to 2000. A few days ago, the government had taken new measures to elicit foreign interest — the minimum built up area in a project has been brought down to 20,000 square meters from the earlier 50,000 square meters and simultaneously the minimum capital infusion requirement has also been brought down to $5 million from $10 million for foreign construction firms.

The government obviously hasn’t diagnosed the problem correctly. The lukewarm interest shown by foreign construction firms has nothing to do with financial and technical minutiae, but has everything to do with the image of India’s realty sector as being steeped in corruption and sleaze. There is no guarantee that a foreign realty firm would not be heckled at every stage in the land acquisition process.

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Title deeds are notoriously defective, and litigation abounds on this ground. Most states still have rudimentary and non-digitalized land records. Land sharks thrive in collusion with the bureaucracy paying court to politicians.

In fact, the Congress government in Haryana lost the recent elections with its comeuppance attributed in large measure to nepotism in land allotments. Land use patterns are changed for the favored few with impunity and with no fear of the law. Agricultural lands can morph into residential plots if you have the right connections and deep pockets. Foreign firms may be accustomed to lobbying but they may be out of their depth in beating the desi challenge of sleaze and corruption.

Construction projects are awarded through the tendering process but once again honest and competent builders can be easily ousted with thinly disguised stratagems. The Punjab and Haryana High Court’s verdict last month, quashing the allotment of a project to DLF that was given purely on the ground that the company alone had the competence to lay golf course, tells its own eloquent story of how main competences can be relegated to the background with a view to accommodating the favored one. The commercial bid-technical bid duality has been latched on to by the corrupt, with the latter presenting itself as a device at stonewalling genuine talent and competence.

Against this backdrop it would be nave to expect foreign constructions firms would come to India in droves and bring much needed capital. The real estate sector regulation bill can only barely scratch the surface because it is essentially meant for the consumers i.e. buyers of properties who are often duped or shortchanged by builders. But what about healthy competition among the builders themselves? Well, the malaise lies precisely here.

The Maharashtra and Haryana state governments earned notoriety in the recent past in showing monumental favoritism in favor of their cronies, but other states aren’t lagging. Land acquisition has never been easy in India especially for industrial and commercial purposes, with defective titles and black money figuring on the top of the list of grievances. Sellers insist on cash compensation to a substantial extent. Indian builders know how to accumulate and use cash but for foreign investors in the construction sector this is a new challenge. From where will they make off-the-book payments?

The much dreaded guideline value, alas, has proved not to be a great deterrent in black money payments, with the stamp duty authorities lagging behind by a couple of years in catching up with the market, resulting in cash still ruling the roost.

In any case FDI in construction is not the need of the hour given there is hardly any cutting edge technology involved. The government therefore must do everything in its power to cleanse the ecosystem in the realty industry. Of course it is a tall order, with some of the state governments likely not to cooperate due political and other compulsions.