According to officials, investment proposals are likely to be sanctioned on the basis of construction area with a limit of around 50,000 square metres.
At present, FDI in the sector is restricted to the development of integrated townships with a minimum area of 100 acres.
The minimum capitalisation norm of $10 million was, however, expected to be retained, officials said. Investors see the present limit as extremely restrictive, leading to only a handful of FDI proposals in the last four years.
The proposal to open up FDI in real estate is expected to be taken up by the Cabinet soon and an announcement is expected in the Budget.
The proposed changes in FDI norms have been circulated by the commerce and industry ministry to other ministries for comments.
Officials said the proposal had been finalised after consultation with stakeholders and the urban development ministry.
The proposed norms also seek to do away with the clause of requiring investors to develop a minimum of 2,000 dwelling units for a population of 10,000.
"The new norms will also ensure that the liberalised norms are used for undertaking construction development. It will not allow selling of plots except in the case of housing having reserved plots," an official said.
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As per the present norms, the minimum capitalisation required is $10 million for wholly owned subsidiaries and $5 million for joint ventures with Indian partners along with a lock-in period of three years from the date of capitalisation for repatriation of the investment.
Developers also need to complete 50 per cent of the project from the day they get possession of a part of the land.
Officials said the new norms would seek to do away with the ambiguity in the present norms under which investors were allowed to invest only in integrated townships that included housing, commercial complex, hotels, resorts, mass rapid transport system and infrastructure facilities such as roads and bridges.
"They will now be able to undertake stand alone activity," an official said, adding that the new norms would enhance infrastructure, generate employment and bring state of the art building technology to the country.
So far, only a handful of players have forayed into India, including a consortium of UK's High Point Rendel, US-based Edaw and Tokyo-based Kikken Sekkel and Canada-based Royal Indian Raj International Corporation, Dubai-based Emaar Group, Lee Kim Tah Holdings and CESMA International, a subsidiary of the Singapore government's housing agency.