Foreign Investment in Real Estate Construction SecForeign Investment in Real Estate & Construction Sector in India tor in India

8/13/2019 Foreign Investment in Real Estate Construction SecForeign Investment in Real Estate & Construction Sector in India tor in India

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Foreign Investment in Real Estate& Construction Sector in India


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RE/MAXMumbai Gujarat Maharashtra

Overview

Indias economic performance has provided a strong impetus to

the real estate sector, which has been witnessing heightenedactivity in recent years. Large scale investment ininfrastructure and rapid urbanization have contributed to thegrowth trajectory of the Indian real estate sector which isevident with urban centers such as Delhi, Mumbai andBangalore acquiring global character and recognition.


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What sections under the Foreign ExchangeManagement Act provide for the acquisition ofimmovable property by persons residing outside India?

Acquiring immovable property in India by persons residing outsideIndia is regulated in terms of section 6(3)(i) of The Foreign ExchangeManagement Act(FEMA), 1999 as well as by the regulations containedin notification issued by RBI viz. Notification No. FEMA 21/2000-RBdated 3rdMay, 2000, as amended from time to time. The personsresident outside India are categorized as Non-Resident Indians (NRIs)

or a foreign national of Indian origin or a foreign national of non-Indian origin. A person resident in India who is not a citizen of India isalso covered by the relevant notifications. Person of Indian Origin[PIO] includes a person, being a citizen of any country other thanPakistan and Bangladesh who:


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Held an Indian passport at any time or

Himself or either of his parents or any of his grand parents were

citizens of India, or

Is a spouse of an Indian citizen, or

Is a spouse of a person covered under the first two clauses abovestatutorily, under the provisions of section 6(5) of FEMA,1999, a

person resident outside India can hold, own, transfer or invest inIndian currency, security or any immovable property was acquired,held or owned by such person when he was a resident of India orinherited from a person who was a resident of India.


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The regulations under the Notification No. 21 FEMA dated 3rdMay, 2000permit an NRI or a PIO to acquire immovable property in India otherthan agricultural land or, plantation property or farm house. Further,foreign companies who have been permitted to open an office in Indiaare also allowed to acquire any immovable property in India, which isnecessary for or incidental to carrying on such activity. Thisstipulation is not available to entities which are permitted to openliaison offices in India.



Who may acquire or transfer immovableproperty in India?

The restrictions on acquiring immovable property in India by a personresident outside India would not apply where the immovable propertyis proposed to be acquired by way of a lease for a period notexceeding five years or where a person is deemed to be resident inIndia. In order to be deemed to be a person resident in India, fromFEMA angle, the person would need to comply with the criterion for

residency as defined in section 2(v) of FEMA, 1999. However, citizensof Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal orBhutan cannot acquire or transfer immovable property in India, (otherthan on lease, not exceeding five years) without prior permission fromthe Reserve Bank.



A person resident outside India who is a citizen of India (NRI)1 canacquire by way of purchase, any immovable property in India otherthan agricultural land/plantation property or farm house to:

A person resident outside India who is citizen of India or

A person of Indian origin resident outside India or

A person resident in India

He may transfer agricultural land/plantation property/farmhouse acquired by way of inheritance, only to Indian citizenspermanently residing in India.



What are the means by which payment maybe made by a PIO for a property acquired inIndia Payment for acquisition of property can be made out of:

Funds received in India through normal banking channels by way ofinward remittance from any place outside India or

Funds held in any non-resident account maintained in accordancewith the provisions of the Foreign Exchange Management Act, 1999and regulations made by Reserve Bank of India from time to time.

Such payment cannot be made either by traveler's cheque or

by foreign currency notes or by other modes other than thosespecially mentioned above.



How can persons residing outside Indiaacquire/transfer property?

A person residing outside India who is a person of Indian Origin (POI)2can acquire any immovable property in India other than agriculturalland/farm house/plantation property:

By the way of purchase out of funds received by inward remittancethrough normal banking channels or by debit to his NRE/FCNR(B)/NRO account.

Such payments cannot made either by travelers cheque or by

foreign currency notes or by other mode other than thosespecifically mentioned above.

By way of gift from a person resident in India or NRI or a PIO.


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A PIO may acquire any immovable property in India by way ofinheritance from a person resident in India or a person residentoutside India who had acquired such property in accordance withthe provisions of the foreign exchange law in force or FEMA

regulations at the time of acquisition of the property.

A PIO may transfer agricultural land/plantation property / farmhouse in India by way sale or gift to a person resident in India whois a citizen of India.


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What are the restrictions on personsbuying real estate?

No person being a citizen of Pakistan, Bangladesh, Sri Lanka,Afghanistan, China, Iran, Nepal or Bhutan, whether resident in Indiaor outside India, shall acquire or transfer immovable property in India,other than lease, not exceeding five years without prior permissionfrom the Reserve Bank of India.

Foreign nationals of non-Indian origin resident outside India are not

permitted to acquire any immovable property in India unless suchproperty is acquired by way of inheritance from a person who wasresiding in India. Foreign nationals of non-Indian origin who haveacquired immovable property in India by way of inheritance orpurchase with the specific approval of the Reserve Bank cannottransfer such property without prior permission from the ReserveBank.


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What are the significant government policies thathave made an impact on the real estate market?

some of the key legislations that have a significant impact on the realestate market are summarized as under:

The department of industrial policy and promotion (DIPP) vide Press NoteNo. 2 (2005) permitted FDI up to 100% under automatic route inConstruction Development Projects including townships, housing,built-up infrastructure and construction development projects (which

would include, but not be restricted to, housing, commercialpremises, hotels, resorts, hospitals, educational institutions,recreational facilities, city and regional level infrastructure facilities,such as roads and bridges, transit systems et al), subject to thefollowing guidelines:


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The minimum area to be developed under each project would be as follows:

In case of development of serviced housing plots, a minimum land area of10 hectares.

In case of construction development projects, a minimum built-up area of50,000 sq.mts.

In case of a combination of the above two projects, any one of the above twoconditions would suffice.

The minimum capitalization norm shall be US $ 10 million for a wholly ownedsubsidiary and US $ 5 million for joint ventures with Indian partner/s. Thefunds would have to be brought in within six months of commencement ofbusiness of the company.


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Original investment cannot be repatriated before a period of threeyears from completion of minimum capitalization. However, theinvestor may be permitted to exit earlier with prior approval of theGovernment through the FIPB.

Development of at least 50% of the integrated project within a periodof five years from the date of obtaining all statutory clearances has tobe completed. The investor would not be permitted to sellunderdeveloped plots (underdeveloped connotes, where roads, watersupply, street lighting, drainage, sewerage and other conveniences asapplicable under prescribed regulations, have not been madeavailable). The investor must provide this infrastructure and obtainthe completion certificate from the concerned local body/serviceagency before being allowed to dispose of the serviced housing plots.


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The project shall conform to the norms and standards, including land userequirements and provision of community amenities and commonfacilities as laid down in the applicable building control regulations, bye-laws, rules and other regulations of the state Govt./Municipal/Local Bodyconcerned.

The investor shall be responsible for obtaining all necessary approvals,including those of the building/layout plans, developing internal andperipheral areas and other infrastructure facilities, payment ofdevelopment, external development and other charges and complyingwith all other requirements as prescribed under applicable rules/bye

laws/regulations of the State Government/Municipal Body/Local Bodyconcerned.

The State Government/Municipal/Local Body concerned, which approvesthe building/development plans, will monitor the developers compliance

with the above conditions.


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As per Press Note 7 (2008), the Government has reiterated that forinvestment by Non-Resident Indians, SEZs, Hotels & Hospitals theconditions mentioned in Press Note 2/2005 are not applicable.

As per Press Note 2 (2009), the Government has made the followingclarifications:

All investments directly by a non-resident entity into the Indian companywould be counted towards direct foreign investment.

The foreign investment through the investing Indian company would notbe considered for calculation of the indirect foreign investment incase of Indian companies which are owned and controlled by

resident Indian citizens and/or Indian companies which are owned andcontrolled by resident Indian citizens.


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For this purpose, an Indian company may be taken as being:

owned by resident Indian citizens and Indian companies, which are

owned and controlled by resident Indian citizens, if more than 50% of

the equity interest in it is beneficially owned by resident Indiancitizens and Indian companies, which are owned and controlledultimately by resident Indian citizens; and

controlled by resident Indian citizens and Indian companies, which

are owned and controlled by resident Indian citizens, if the resident

Indian citizens and Indian companies, which are owned and controlledby resident Indian citizens and Indian companies, which are ownedand controlled by resident Indian citizens, have the power to appointa majority of its directors.


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For cases where conditions above are not satisfied or if the investingcompany is owned or controlled by non-resident entities, the entireinvestment by the investing company into the subject Indian companywould be considered as indirect foreign investment.

Provided that, as an exception, the indirect foreign investment in onlythe 100% owned subsidiaries of operating-cum-investing/investingcompanies, will be limited to the foreign investment in the operating-cum-investing/investing company. For the purpose of explanation, it isclarified that this exception is being made since the downstreaminvestment of a 100% owned subsidiary of company and the

downstream investment should be a mirror image of the holdingcompany.


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Where an Indian company may be taken as being

owned by non-resident entities, if more than 50% of the equityinterest in it is beneficially owned by non-residents

controlled by non-resident entities, if non-residents have the power

to appoint a majority of its directors

As per Press Note 3 (2009), the following was clarified:

In sectors with caps-transfer of ownership or control of Indiancompany from resident Indian to non-resident entities


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The following are cases wherein the transfer of ownership or controlof Indian company in sectors with caps from resident India to non-resident entities in sectors takes place;

An Indian company is being established with foreign investmentand is owned or controlled by a non-resident entity or:

The control/ownership of an existing Indian company, currentlyowned or controlled by resident Indian citizens and Indiancompanies, which are owned or controlled by resident Indian

citizens, will be/is being transferred on to a non-resident entity asconsequence of transfer of shares to non-resident entities throughamalgamation, merger, acquisition;


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It is clarified that these guidelines will not apply for sectors/activitieswhere there are no foreign investment caps, i.e. 100% foreigninvestment is permitted under the automatic route. These guidelinesare effective from the date of issue of this press Note and

Indian company owned by Indian citizen means:

If more than 50% of the equity interest in the Indian company isbeneficially owned by the resident Indian citizens and Indiancompany, which is owned by the resident Indian citizens and Indiancompany, which is owned and controlled ultimately by resident Indian

citizens in those circumstances it will be treated as Indian company orcompany owned by resident Indian citizens


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Company shall be treated as controlled by resident Indian

If resident Indian citizens or Indian companies; which are owned andcontrolled by resident Indian citizens; have the power to appoint amajority of its directors in the Company in those circumstances, such

an Indian company will be termed as controlled by resident Indiancitizens;

Through Press Note 4 (2009), the Government has issued guidelines fordownstream investment by investing Indian Companies owned or

controlled by non-resident entities as per Press Note 2 of 2009:


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The Government of India has clarified:

The policy on downstream investment comprises policy for

Only operating companies

Operating-cum-investing companies

Only investing companies.


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The policy in this regard is as below:

Only operating companies: Foreign investment in such companieswould have to comply with the relevant sectoral conditions onentry route, conditionalities and caps with regard to the sectors inwhich such companies are operating.

Operating-cum-investing companies: Foreign investment in suchcompanies would have to comply with the relevant sectoralconditions on entry route, conditionalities and caps with regard to

the sectors in which such companies are operating. Further, thesubject Indian companies into which downstream investments aremade by such companies would have to comply with the relevantsectoral conditions on entry route, conditionalities and caps inregard of the sector in which the subject Indian companies areoperating.


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Investing companies:

Foreign Investment in Investing companies will require priorGovernment/FIPB approval, regardless of the amount or extent of

foreign investment. The Indian companies into which downstreaminvestments are made by such investing companies would have tocomply with the relevant sectoral conditions on entry route,conditionalities and caps with regard to the sector in which thesubject Indian companies are operating.

For companies which do not have any operations and also do not haveany downstream investments, for infusion of foreign investment intosuch companies, Government/FIPB approval would be required,regardless of the amount or extent of foreign investment. Further, asand when downstream investment it will have to comply with therelevant sectoral conditions on entry route, conditionalities and caps.


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For Operating-cum-Investing companies and investing companies and forcompanies which do not have any operations and also do not have anydownstream investments can be made subject to the followingconditions:

Such a company is to notify SIA, DIPP and FIPB of its downstreaminvestment within 30 days of such investment even if equityshares/CCPS/CCD have not been allotted along with the modality ofinvestment in new/existing ventures (with/without expansionprogramme);

Downstream investment by way of induction of foreign equity in anexisting Indian company to be duly supported by a resolution of the Boardof Directors supporting the said induction as also a Share holdersAgreement if any;


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Issue/transfer/pricing/valuation of shares shall be in accordance withapplicable SEBI/RBI guidelines;

Investing companies would have to bring in requisite funds fromabroad and not leverage funds from domestic market for suchinvestments. This would, however, not preclude downstream

operating companies to raise debt in the domestic market.


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Guidelines for FDI investment in India

Conditions for Development Conditions for Investments Miscellaneous Conditions

Minimum 10 hectors to bedeveloped for serviced housingplots

Minimum capitalization of US $ 10million for wholly owned

subsidiaries & US $ 5 million forjoint ventures with Indian partners

Investor not permitted to sellundeveloped plots

For construction-developmentprojects, minimum built-up areaof 50,000 square meters

prescribed In case of acombination project, any one ofthe above two conditions shouldsuffice

Infusion of funds within 6 monthsof commencement of business

Original investment cannot berepatriated before a period of 3

years from completion ofminimum capitalization

Project to confirm to norms andstandards laid down by

respective State authorities

Investor is responsible forobtaining all necessary approvals

as prescribed under applicablerules / bye-laws/regulations of the

state

At least 50 per cent of the projectto be developed within 5 yearsfrom the date of statutoryclearances.

Investor may be permitted to exitearlier with prior Government

approval

Concerned authority to monitorcompliance of above conditions

by developer


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Government now allows 100 per cent FDI for townships, housing, built-upinfrastructure and construction development projects (includingcommercial premises, hotels, resorts, hospitals, educationalinstitutions and recreational facilities), subject to certain guidelines.


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Documents

Foreign Investment in Real Estate Construction SecForeign Investment in Real Estate & Construction Sector in India tor in India