foreign direct investment_in_real_estate_sector

Foreign Direct Foreign Direct Investment in Real Investment in Real

Estate SectorEstate Sector

Jyotsna ChaturvediJyotsna Chaturvedi Senior AssociateSenior Associate

MAHESHWARI & CO.MAHESHWARI & CO. Advocates & Legal ConsultantsAdvocates & Legal Consultants

Telephone: 91-11-2610 1906Telephone: 91-11-2610 1906Fax: 91-11-2617 1201Fax: 91-11-2617 1201

E-mail: [email protected]: [email protected]

MAHESHWARI & CO. MAHESHWARI & CO. Advocates & Legal ConsultantsAdvocates & Legal Consultants


BackgroundBackground

Prior to 2005, only NRI's and PIO's were allowed to Prior to 2005, only NRI's and PIO's were allowed to invest in the housing and the real estate sectors. invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to Foreign investors other than NRIs were allowed to invest only in invest only in development of integrated development of integrated townships and settlementstownships and settlements either through a either through a wholly-owned subsidiary or through a joint wholly-owned subsidiary or through a joint venture (JV) company along with a local partner. venture (JV) company along with a local partner.

India fully opened doors for FDI in real estate in India fully opened doors for FDI in real estate in 2005.2005.


Investing in India

Automatic RouteGovernment Route

(FIPB)

General RuleNo prior Permission Required

Only informing RBI within 30 days of issue and reciept of funds

Prior Permission Required


FDI permitted 100% under FDI permitted 100% under Automatic RouteAutomatic Route

Projects AllowedProjects Allowed TownshipsTownships HousingHousing Built-up InfrastructureBuilt-up Infrastructure Construction DevelopmentConstruction Development

which would include but not limited to housing, which would include but not limited to housing, Commercial Premises, Hotels, resorts, Hospitals Commercial Premises, Hotels, resorts, Hospitals etcetc


FDI Current ScenarioFDI Current Scenario

Foreign direct investment (FDI) in India's real Foreign direct investment (FDI) in India's real estate and housing market jumped 80 times estate and housing market jumped 80 times between 2005 and 2010 from Rs 171 crore to Rs between 2005 and 2010 from Rs 171 crore to Rs 13,586 crore.13,586 crore.

Of the total 1,614 projects in which foreign Of the total 1,614 projects in which foreign investors have put in money since 2005, 422 investors have put in money since 2005, 422 were cleared by the Reserve Bank of India's were cleared by the Reserve Bank of India's Mumbai office, followed closely by 316 in Delhi office, followed closely by 316 in Delhi


Major Foreign Investors in Real Major Foreign Investors in Real Estate Sector in IndiaEstate Sector in India

Emmar Properties, of Dubai Emmar Properties, of Dubai

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

Morgan-Stanley Real EstateMorgan-Stanley Real Estate

Vancouver-based Royal Indian Raj International Vancouver-based Royal Indian Raj International Corporation (RIRIC) Corporation (RIRIC)

Guidelines for FDI Guidelines for FDI Application in Indian Application in Indian

Real EstateReal Estate



Minimum AreaMinimum Area

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

In case of construction-development projects, In case of construction-development projects, built-up area of 50,000 sq m. built-up area of 50,000 sq m.

In case of a combination project, any of the above In case of a combination project, any of the above two conditions two conditions


InvestmentInvestment

Minimum capitalization Minimum capitalization -for wholly owned subsidiaries - US$ 10 million -for wholly owned subsidiaries - US$ 10 million -for JV with Indian partners - US$ 5 million -for JV with Indian partners - US$ 5 million (to be brought in within 6 months of commencement (to be brought in within 6 months of commencement

of business )of business )

Original Investment cannot be repatriated before a Original Investment cannot be repatriated before a period of three years from completion of period of three years from completion of capitalization. capitalization.

The investor may exit earlier with prior approval from The investor may exit earlier with prior approval from Foreign Investment Promotion Board (FIPB). Foreign Investment Promotion Board (FIPB).


Time Frame & RulesTime Frame & Rules

At least 50 per cent of the project to be developed At least 50 per cent of the project to be developed within five years from the date of obtaining all within five years from the date of obtaining all statutory clearances. statutory clearances.

Investor cannot sell undeveloped plots - where Investor cannot sell undeveloped plots - where roads, water supply, street lighting, drainage, roads, water supply, street lighting, drainage, sewerage and other conveniences are not sewerage and other conveniences are not available. available.

Project to conform to the norms and standards of Project to conform to the norms and standards of Local Body concernedLocal Body concerned


Time frame & rules Contd.Time frame & rules Contd.

All necessary approvals including layout plans, All necessary approvals including layout plans, infrastructure facilities as per the prevailing laws infrastructure facilities as per the prevailing laws needs to be procuredneeds to be procured

The Local Body concerned which approves the The Local Body concerned which approves the layouts etc. would monitor compliance by the layouts etc. would monitor compliance by the Developer Developer


Hotels & Tourism, Hospitals & Hotels & Tourism, Hospitals & SEZ ProjectsSEZ Projects

The Hotels & Tourism, Hospitals and SEZ Projects The Hotels & Tourism, Hospitals and SEZ Projects have benefits not attracting conditions as to have benefits not attracting conditions as to Minimum Area of Development, Capitalisation Minimum Area of Development, Capitalisation and Time frameand Time frame

However, FDI in SEZ will be subject to SEZ Act However, FDI in SEZ will be subject to SEZ Act and Policy of the Department of the Commerce in and Policy of the Department of the Commerce in this regardthis regard


Investment by NRIInvestment by NRI

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


FDI not allowedFDI not allowed

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

Real estate business means buying and selling of real Real estate business means buying and selling of real estate or trading in Transferable Development Rights estate or trading in Transferable Development Rights (TDR(TDR’’s)s)


Foreign national of non-Indian Foreign national of non-Indian originorigin

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


Acquisition by NRI & PIO in Acquisition by NRI & PIO in IndiaIndia

Permitted to purchase Residential and Commercial Property Permitted to purchase Residential and Commercial Property without RBIwithout RBI’’S PermissionS Permission

No Limitation on the Number / size of the PropertyNo Limitation on the Number / size of the Property

Purchase of Agricultural Land/ Plantation Property/ Farm Purchase of Agricultural Land/ Plantation Property/ Farm Houses requires RBI PermissionHouses requires RBI Permission

PIO should not be a citizen of Pakistan , Bangladesh , Sri PIO should not be a citizen of Pakistan , Bangladesh , Sri Lanka , Afghanistan , China , Iran , Nepal , BhutanLanka , Afghanistan , China , Iran , Nepal , Bhutan

Citizen of above Countries not permitted to acquire Citizen of above Countries not permitted to acquire Immovable Property except by way of Lease for less than Immovable Property except by way of Lease for less than five years without permission of RBIfive years without permission of RBI


Acquisition by NRI & PIO in Acquisition by NRI & PIO in India Contd.India Contd.

i.i. Payment can be made by NRI / PIO out ofPayment can be made by NRI / PIO out ofi.i. Funds remitted to India through normal Funds remitted to India through normal banking banking

channel orchannel or

ii.ii. Funds held in NRE / FCNR / NRO account maintained in Funds held in NRE / FCNR / NRO account maintained in IndiaIndia

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


Transfer of Property by Transfer of Property by NRI/PIONRI/PIOTransferring Transferring

residential/ residential/ commercial commercial propertyproperty

NRINRI PIOPIO

By sale By sale Can sell to person Can sell to person resident in India; NRI resident in India; NRI or PIO or PIO

Can sell only to a Can sell only to a person resident in person resident in India India

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

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


Transfer of Property by NRI/PIO Transfer of Property by NRI/PIO Contd.Contd.

Transferring Transferring agricultural/plantagricultural/plantation/ farm house ation/ farm house propertyproperty

NRINRI PIOPIO

By sale By sale Can sell only to Can sell only to person resident in person resident in IndiaIndia

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

By gift By gift Can gift only to Can gift only to person resident in person resident in India India

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


MortgageMortgage

i.i. NRI / PIO can mortgage to:NRI / PIO can mortgage to:i.i. An authorized dealer / housing finance institution in An authorized dealer / housing finance institution in

India – without the approval of Reserve Bank.India – without the approval of Reserve Bank.ii.ii. A party abroad - with prior approval of Reserve Bank.A party abroad - with prior approval of Reserve Bank.

ii.ii. A foreign national of non-Indian origin can mortgage A foreign national of non-Indian origin can mortgage only with prior approval of Reserve Bankonly with prior approval of Reserve Bank

iii.iii. A foreign company which has established a Branch A foreign company which has established a Branch Office or other place of business in accordance with Office or other place of business in accordance with FERA/FEMA regulations has general permission to FERA/FEMA regulations has general permission to mortgage the property with an authorized dealer in mortgage the property with an authorized dealer in India India


Sale / Purchase by Foreign Sale / Purchase by Foreign Embassies/ Embassies/

Diplomats/Consulate Diplomats/Consulate

May purchase/sell Immovable Property in India May purchase/sell Immovable Property in India other than agricultural/plantation/ farm house other than agricultural/plantation/ farm house property property

They should obtain clearance from Ministry of They should obtain clearance from Ministry of External Affairs through inward remittance of External Affairs through inward remittance of Foreign ExchangeForeign Exchange


Repatriation of Sale Proceeds Repatriation of Sale Proceeds by NRI/PIOby NRI/PIO

Property acquired as per rules prevalent 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 repatriate the sale proceeds abroad up to US$ 1 million per financial proceeds abroad up to US$ 1 million per financial year subject to tax complianceyear subject to tax compliance

Repatriation of Sale Proceeds Repatriation of Sale Proceeds by NRI/PIO Contd.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 repatriate the sale proceeds abroad up to US$ 1 million per financial year subject to tax US$ 1 million per financial year subject to tax compliancecompliance

Remittance will be permitted on submission of certificate Remittance will be permitted on submission of certificate of CA in form prescribed by CBDTof CA in form prescribed by CBDT

Repatriation in the above cases are also restricted to not more than two such residential properties.

MAHESHWARI & CO.MAHESHWARI & CO. Advocates & Legal ConsultantsAdvocates & Legal Consultants


Case LawCase Law

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


Immovable Property purchase Immovable Property purchase by Foreign Company in India by Foreign Company in India

A foreign company establishing Branch Office or other place of A foreign company establishing Branch Office or other place of business in India, can acquire any immovable property in India, business in India, can acquire any immovable property in India, which is necessary for or incidental to carrying on such activity.which is necessary for or incidental to carrying on such activity.

The payment for acquiring such property to be made by way of The payment for acquiring such property to be made by way of foreign inward remittance through proper banking channel. A foreign inward remittance through proper banking channel. A declaration in declaration in form IPIform IPI should be filed with Reserve Bank within should be filed with Reserve Bank within ninety days from the date of acquiring the property. ninety days from the date of acquiring the property.

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


Immovable Property purchase Immovable Property purchase by Foreign Company in Indiaby Foreign Company in India

Acquisition of immovable property by entities who had set Acquisition of immovable property by entities who had set up Branch Offices in India and incorporated in Pakistan, up Branch Offices in India and incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval of RBIBhutan would require prior approval of RBI

Foreign Company has establishing Liaison Office can not Foreign Company has establishing Liaison Office can not acquire immovable property . In such cases, Liaison Offices, acquire immovable property . In such cases, Liaison Offices, can take property by way of lease not exceeding 5 years.can take property by way of lease not exceeding 5 years.

Foreign company which has established a Branch Office or Foreign company which has established a Branch Office or other place of business in accordance with FERA/FEMA other place of business in accordance with FERA/FEMA regulations has general permission to mortgage the regulations has general permission to mortgage the property with an authorized dealer in Indiaproperty with an authorized dealer in India


FII Vs FDIFII Vs FDI

Real Estate projects can attract FDI up to 100 percent, Real Estate projects can attract FDI up to 100 percent, subject to certain conditions. Previously company not subject to certain conditions. Previously company not willing to meet the stringent project conditions, the FII willing to meet the stringent project conditions, the FII route was used to overcome the rules and bring in foreign route was used to overcome the rules and bring in foreign investment. All the company needs to do was get FIIs that investment. All the company needs to do was get FIIs that are registered with SEBI to invest in the IPO are registered with SEBI to invest in the IPO

Though RBI has objected towards the IPO investment Though RBI has objected towards the IPO investment through FII where the conditions are not fulfilled however through FII where the conditions are not fulfilled however still FII are been done through the secondary marketstill FII are been done through the secondary market

THANK YOU!THANK YOU!


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