Foreign Direct Investment in Real Estate Sector

Jyotsna Chaturvedi
Senior Associate
MAHESHWARI & CO.
Telephone: 91-11-2610 1906 Fax: 91-11-2617 1201 E-mail: [email protected]
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Background
Prior to 2005, only NRI's and PIO's were allowed to invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly-owned subsidiary or through a joint venture (JV) company along with a local partner. India fully opened doors for FDI in real estate in 2005.

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Investing in India

Automatic Route

Government Route (FIPB)

General Rule
No prior Permission Required Only informing RBI within 30 days of issue and reciept of funds

Prior Permission Required

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FDI permitted 100% under Automatic Route

Projects Allowed

Townships Housing

Built-up Infrastructure
Construction Development which would include but not limited to housing, Commercial Premises, Hotels, resorts, Hospitals etc

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FDI Current Scenario

Foreign direct investment (FDI) in India's real estate and housing market jumped 80 times between 2005 and 2010 from Rs 171 crore to Rs 13,586 crore. Of the total 1,614 projects in which foreign investors have put in money since 2005, 422 were cleared by the Reserve Bank of India's Mumbai office, followed closely by 316 in Delhi

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Major Foreign Investors in Real Estate Sector in India

Emmar Properties, of Dubai

UK-based construction major, Laing O'Rourke (LOR)

Morgan-Stanley Real Estate

Vancouver-based Royal Corporation (RIRIC) Indian Raj International

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Guidelines for FDI Application in Indian Real Estate

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Minimum Area

In case of development of serviced housing plots, 10 hectares (25 acres)

In case of construction-development projects, built-up area of 50,000 sq m. In case of a combination project, any of the above two conditions

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Investment

Minimum capitalization -for wholly owned subsidiaries - US$ 10 million -for JV with Indian partners - US$ 5 million (to be brought in within 6 months of commencement of business )
Original Investment cannot be repatriated before a period of three years from completion of capitalization. The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB).
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Time Frame & Rules

At least 50 per cent of the project to be developed within five years from the date of obtaining all statutory clearances. Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage, sewerage and other conveniences are not available.
Project to conform to the norms and standards of Local Body concerned
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Time frame & rules Contd.

All necessary approvals including layout plans, infrastructure facilities as per the prevailing laws needs to be procured The Local Body concerned which approves the layouts etc. would monitor compliance by the Developer

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Hotels & Tourism, Hospitals & SEZ Projects

The Hotels & Tourism, Hospitals and SEZ Projects have benefits not attracting conditions as to Minimum Area of Development, Capitalisation and Time frame However, FDI in SEZ will be subject to SEZ Act and Policy of the Department of the Commerce in this regard

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Investment by NRI
The Investments made by NRI in any of the Township, Housing, Built Up, infrastructure and Construction Development Projects also does not attract conditions as to Minimum Area of Development, Capitalisation and Time frame

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FDI not allowed

As per paragraph 5.1. (h) and 5.23.10 of Chapter V of DIPP which expressly prohibits in Real Estate business or Construction of Farm Houses. It should be noted that FDI in any form is prohibited in Real estate business. FDI is not allowed in a partnership or proprietary concern if it is engaged in real estate business. Even investment by a Non Resident India or a Person of Indian Origin in such partnership or concern is not allowed.
Real estate business means buying and selling of real estate or trading in Transferable Development Rights (TDRs)
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Foreign national of non-Indian origin

Such person resident outside India cannot purchase any immovable property in India. But, he/she may take residential accommodation on lease provided the period of lease does not exceed five years. In such cases, there is no requirement of taking any permission of or reporting to Reserve Bank

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Acquisition by NRI & PIO in India

Permitted to purchase Residential and Commercial Property without RBIS Permission

No Limitation on the Number / size of the Property

Purchase of Agricultural Land/ Plantation Property/ Farm Houses requires RBI Permission
PIO should not be a citizen of Pakistan , Bangladesh , Sri Lanka , Afghanistan , China , Iran , Nepal , Bhutan Citizen of above Countries not permitted to acquire Immovable Property except by way of Lease for less than five years without permission of RBI
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Acquisition by NRI & PIO in India Contd.

i.
i. ii.

Payment can be made by NRI / PIO out of

Funds remitted to India through normal banking channel or Funds held in NRE / FCNR / NRO account maintained in India

ii.

No payment can be made either by traveler's cheque or by foreign currency notes and also no payment can be made outside India.

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Transfer of Property by NRI/PIO

Transferring residential/ commercial property By sale NRI PIO Can sell to person resident in India; NRI or PIO Can sell only to a person resident in India

By gift

Can gift to person resident in India; NRI; or PIO. If property is being gifted to a foreign national of non-Indian origin, prior permission of RBI is required
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Can gift to person resident in India; NRI; or PIO. If property is being gifted to a foreign national of non-Indian origin, prior permission of RBI is required

Transfer of Property by NRI/PIO Contd.

Transferring NRI agricultural/plantat ion/ farm house property
By sale

PIO

Can sell only to person Can sell only to a resident in India person resident in India who is a citizen of India Can gift only to person Can gift only to a resident in India person resident in India who is a citizen of India
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By gift

Mortgage
i.

NRI / PIO can mortgage to: i. An authorized dealer / housing finance institution in India without the approval of Reserve Bank. ii. A party abroad - with prior approval of Reserve Bank.
A foreign national of non-Indian origin can mortgage only with prior approval of Reserve Bank

ii.

iii.

A foreign company which has established a Branch Office or other place of business in accordance with FERA/FEMA regulations has general permission to mortgage the property with an authorized dealer in India
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Sale / Purchase by Foreign Embassies/ Diplomats/Consulate

May purchase/sell Immovable Property in India other than agricultural/plantation/ farm house property They should obtain clearance from Ministry of External Affairs through inward remittance of Foreign Exchange

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Repatriation of Sale Proceeds by NRI/PIO

Property acquired as per rules prevalent

In case the payment is made for acquisition out of foreign exchange sources through normal Banking Channels/NRE/FCNR the amount repatriated should not exceed the foreign currency equivalent paid Capital Gains may be credited to NRO Account from which NRI/PIO may repatriate the sale proceeds abroad up to US$ 1 million per financial year subject to tax compliance
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Repatriation of Sale Proceeds by NRI/PIO Contd.

In case the payment is made for acquisition out of balances held in NRO Account out of rupee sources NRI/PIO may repatriate the sale proceeds abroad up to US$ 1 million per financial year subject to tax compliance
Remittance will be permitted on submission of certificate of CA in form prescribed by CBDT Repatriation in the above cases are also restricted to not more than two such residential properties.
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Case Law

In Geeta Reinboth vs Mrs J Clairs Brohier (2005), it has been held that restriction on Acquisition, holding etc. of immovable property cannot be stretched so as to include prohibition of right of inheritance

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Immovable Property purchase by Foreign Company in India

A foreign company establishing Branch Office or other place of business in India, can acquire any immovable property in India, which is necessary for or incidental to carrying on such activity.
The payment for acquiring such property to be made by way of foreign inward remittance through proper banking channel. A declaration in form IPI should be filed with Reserve Bank within ninety days from the date of acquiring the property.

On winding up of the business, the sale proceeds of such property can be repatriated only with the prior approval of Reserve Bank.

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Immovable Property purchase by Foreign Company in India

Acquisition of immovable property by entities who had set up Branch Offices in India and incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval of RBI Foreign Company has establishing Liaison Office can not acquire immovable property . In such cases, Liaison Offices, can take property by way of lease not exceeding 5 years.
Foreign company which has established a Branch Office or other place of business in accordance with FERA/FEMA regulations has general permission to mortgage the property with an authorized dealer in India
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FII Vs FDI

Real Estate projects can attract FDI up to 100 percent, subject to certain conditions. Previously company not willing to meet the stringent project conditions, the FII route was used to overcome the rules and bring in foreign investment. All the company needs to do was get FIIs that are registered with SEBI to invest in the IPO
Though RBI has objected towards the IPO investment through FII where the conditions are not fulfilled however still FII are been done through the secondary market
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THANK YOU!

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