Foreign Investment in Real Estate & Construction Sector in India

Foreign Investment in Real Estate & Construction Sector

in India

RE/MAX Mumbai Gujarat Maharashtra

Overview

India’s economic performance has provided a strong impetus to the real estate sector, which has been witnessing heightened activity in recent years. Large scale investment in infrastructure and rapid urbanization have contributed to the growth trajectory of the Indian real estate sector which is evident with urban centers such as Delhi, Mumbai and Bangalore acquiring global character and recognition.


What sections under the Foreign Exchange Management Act provide for the acquisition of immovable property by persons residing outside India? Acquiring immovable property in India by persons residing

outside India is regulated in terms of section 6(3)(i) of The Foreign Exchange Management Act(FEMA), 1999 as well as by the regulations contained in notification issued by RBI viz. Notification No. FEMA 21/2000-RB dated 3rd May, 2000, as amended from time to time. The persons resident 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 is also covered by the relevant notifications. Person of Indian Origin [PIO] includes a person, being a citizen of any country other than Pakistan and Bangladesh who:


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 above statutorily, under the provisions of section 6(5) of FEMA,1999, a person resident outside India can hold, own, transfer or invest in Indian currency, security or any immovable property was acquired, held or owned by such person when he was a resident of India or inherited from a person who was a resident of India.


The regulations under the Notification No. 21 FEMA dated 3rd May, 2000 permit an NRI or a PIO to acquire immovable property in India other than agricultural land or, plantation property or farm house. Further, foreign companies who have been permitted to open an office in India are also allowed to acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. This stipulation is not available to entities which are permitted to open liaison offices in India.


Who may acquire or transfer immovable property in India?

The restrictions on acquiring immovable property in India by a person resident outside India would not apply where the immovable property is proposed to be acquired by way of a lease for a period not exceeding five years or where a person is deemed to be resident in India. In order to be deemed to be a person resident in India, from FEMA angle, the person would need to comply with the criterion for residency as defined in section 2(v) of FEMA, 1999. However, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan cannot acquire or transfer immovable property in India, (other than on lease, not exceeding five years) without prior permission from the Reserve Bank.


A person resident outside India who is a citizen of India (NRI)1 can acquire by way of purchase, any immovable property in India other than 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/farm house acquired by way of inheritance, only to Indian citizens permanently residing in India.


What are the means by which payment may be made by a PIO for a property acquired in India

Payment for acquisition of property can be made out of:

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

Funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and 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 those specially mentioned above.


How can persons residing outside India acquire/transfer property?

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

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

Such payments cannot made either by traveler’s cheque or by foreign currency notes or by other mode other than those specifically mentioned above.

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


A PIO may acquire any immovable property in India by way of inheritance from a person resident in India or a person resident outside India who had acquired such property in accordance with the 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 / farm house in India by way sale or gift to a person resident in India who is a citizen of India.


What are the restrictions on persons buying real estate?

No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, whether resident in India or outside India, shall acquire or transfer immovable property in India, other than lease, not exceeding five years without prior permission from 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 such property is acquired by way of inheritance from a person who was residing in India. Foreign nationals of non-Indian origin who have acquired immovable property in India by way of inheritance or purchase with the specific approval of the Reserve Bank cannot transfer such property without prior permission from the Reserve Bank.


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

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

The department of industrial policy and promotion (DIPP) vide Press Note No. 2 (2005) permitted FDI up to 100% under automatic route in Construction Development Projects including townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure facilities, such as roads and bridges, transit systems et al), subject to the following guidelines:


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 of 10 hectares.

In case of construction development projects, a minimum built-up area of 50,000 sq.mts.

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

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


Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

Development of at least 50% of the integrated project within a period of five years from the date of obtaining all statutory clearances has to be completed. The investor would not be permitted to sell underdeveloped plots (underdeveloped connotes, where roads, water supply, street lighting, drainage, sewerage and other conveniences as applicable under prescribed regulations, have not been made available). The investor must provide this infrastructure and obtain the completion certificate from the concerned local body/service agency before being allowed to dispose of the serviced housing plots.


The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as laid down in the applicable building control regulations, bye-laws, rules and other regulations of the state Govt./Municipal/Local Body concerned.

The investor shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules/bye laws/regulations of the State Government/Municipal Body/Local Body concerned.

The State Government/Municipal/Local Body concerned, which approves the building/development plans, will monitor the developer’s compliance with the above conditions.


As per Press Note 2 (2006) it has been clarified that FDI up to 100% is allowed under the automatic route in the Hotel and Tourism sector vide Press Note 4 (2001) and in the Hospital sector vide Press Note 2 (2005 Series) shall not apply to Special Economic Zones; neither shall it apply to establishment and operation of hotels and hospitals which shall continue to be governed by Press Note 4 (2001 Series) and Press Note 2 (2000 Series) respectively.

As per Press Note 3 (2008), Government of India has clarified that FDI up to 100% under the automatic route would be allowed both in setting up and in established industrial parks and would not be subject to the conditionalities splet out in Press Note 2 (2005) provided the industrial parks meet with the under mentioned conditions:

It would comprise a minimum of 10 units and no single unit shall occupy more than 50% of the allocable area:

The minimum percentage of the area to be allocated for industrial activity shall not be less than 66% of the total allocable area


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

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

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

The foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are ‘owned and controlled’ by resident Indian citizens and/or Indian companies which are owned and controlled by resident Indian citizens.


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 Indian citizens and Indian companies, which are owned and controlled ultimately 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 controlled by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors.


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

Provided that, as an exception, the indirect foreign investment in only the 100% owned subsidiaries of operating-cum-investing/investing companies, will be limited to the foreign investment in the operating-cum-investing/investing company. For the purpose of explanation, it is clarified that this exception is being made since the downstream investment of a 100% owned subsidiary of company and the downstream investment should be a mirror image of the holding company.


Where an Indian company may be taken as being

“owned” by ‘non-resident entities’, if more than 50% of the equity interest 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 Indian company from resident Indian to non-resident entities


The following are cases wherein the transfer of ownership or control of 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 investment and is owned or controlled by a non-resident entity or:

The control/ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred on to a non-resident entity as consequence of transfer of shares to non-resident entities through amalgamation, merger, acquisition;


It is clarified that these guidelines will not apply for sectors/activities where there are no foreign investment caps, i.e. 100% foreign investment is permitted under the automatic route. These guidelines are 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 is beneficially owned by the resident Indian citizens and Indian company, which is owned by the resident Indian citizens and Indian company, which is owned and controlled ultimately by resident Indian citizens in those circumstances it will be treated as Indian company or company owned by resident Indian citizens


Company shall be treated as controlled by resident Indian

If resident Indian citizens or Indian companies; which are owned and controlled by resident Indian citizens; have the power to appoint a majority of its directors in the Company in those circumstances, such an Indian company will be termed as controlled by resident Indian citizens;

Through Press Note 4 (2009), the Government has issued guidelines for downstream investment by investing Indian Companies ‘owned or controlled by non-resident entities’ as per Press Note 2 of 2009:


The Government of India has clarified:

The policy on downstream investment comprises policy for

Only operating companies

Operating-cum-investing companies

Only investing companies.


The policy in this regard is as below:

Only operating companies: Foreign investment in such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating.

Operating-cum-investing companies: Foreign investment in such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating. Further, the subject Indian companies into which downstream investments are made by such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps in regard of the sector in which the subject Indian companies are operating.


Investing companies:

Foreign Investment in Investing companies will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment. The Indian companies into which downstream investments are made by such investing companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sector in which the subject Indian companies are operating.

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


For Operating-cum-Investing companies and investing companies and for companies which do not have any operations and also do not have any downstream investments can be made subject to the following conditions:

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

Downstream investment by way of induction of foreign equity in an existing Indian company to be duly supported by a resolution of the Board of Directors supporting the said induction as also a Share holders Agreement if any;


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

Investing companies would have to bring in requisite funds from abroad and not leverage funds from domestic market for such investments. This would, however, not preclude downstream operating companies to raise debt in the domestic market.


Guidelines for FDI investment in India

Conditions for Development Conditions for Investments Miscellaneous Conditions

Minimum 10 hectors to be developed for serviced housing plots

Minimum capitalization of US $ 10 million for wholly owned

subsidiaries & US $ 5 million for joint ventures with Indian

partners

Investor not permitted to sell undeveloped plots

For construction-development projects, minimum built-up area of 50,000 square meters prescribed In case of a combination project, any one of the above two conditions should suffice

Infusion of funds within 6 months of commencement of

business

Original investment cannot be repatriated before a period of 3

years from completion of minimum capitalization

Project to confirm to norms and standards laid down by

respective State authorities

Investor is responsible for obtaining all necessary

approvals as prescribed under applicable rules /

bye-laws/regulations of the state At least 50 per cent of the project to be developed within 5 years from the date of statutory clearances.

Investor may be permitted to exit earlier with prior

Government approval

Concerned authority to monitor compliance of above conditions

by developer


Government now allows 100 per cent FDI for townships, housing, built-up infrastructure and construction development projects (including commercial premises, hotels, resorts, hospitals, educational institutions and recreational facilities), subject to certain guidelines.

Thank You