Foreign Investment in Real Estate – Part II

In our previous post (available here), we had explored the options available to Non Resident Indians (“NRIs”) and Persons of Indian Origin (“PIOs”) to acquire and transfer immovable properties in India and repatriate proceeds from the same.

This issue covers the aspects relating to the acquisition of immovable property by way of purchase and options available to foreign nationals for acquiring immovable property in India.

NRIs as well as PIOs have been accorded general permission to acquire immovable property in India by way of purchase as long as such immovable property is residential or commercial property and not agricultural land, plantation property or farm house. No documentation is required to be filed for such purchase. Payment for such acquisition may be made:

1. Out of funds received by inward remittance through normal banking channels or by debt to his/her NRE/FCNR(B) /NRO account

2. Traveller’s cheque or foreign currency notes

Non residents, not being an NRI or PIO, can invest in real estate in India either directly or indirectly in a manner described below:

I. Direct investment:

• A non resident may acquire immovable property in India for carrying on the activities of its branch office or other place of business established under the Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) regulations, 2000. This property can also be transferred by way of mortgage to an authorized dealer as a security for any borrowings;
• A foreign embassy/diplomat/consulate general may deal with immovable property other than agricultural land/plantation property/ farm house provided that the permission of the ministry of external commerce is obtained and the consideration for the same is paid out of funds remitted from abroad through normal banking channels.
• In all other cases, permission of Foreign Investment Promotion Board (“FIPB”) is required.

II. Indirect Investment through construction development projects:

At the outset it is pertinent to note that investment in real estate is different from “real estate business” i.e. dealing in land and immovable property with a view to earn profit or income therefrom. While the former is completely prohibited, the latter is allowed subject to the conditions described below.

The extant Foreign Direct Investment Policy (“FDI Policy”)[1] allows foreign investment in Construction Development Projects upto 100% under the automatic route i.e. without approval from the FIPB on satisfaction of the following conditions[2]:

1. The minimum area to be developed in case of service housing plots would be 10 (ten) hectares and in case of construction development projects it would be a built up area of 20,000 Sq. Mtrs;
2. The foreign investor must bring in minimum capitalization of at least US $10 million in case of wholly owned subsidiaries and US $ 5 Million in case of a Joint Venture;

iii. There is a minimum lock in period of 3 years for which foreign investment in the Project cannot be transferred ;

1. At least 50% of the Project must be completed within 5 years from the date of obtaining all statutory clearances;
2. All local guidelines, municipal laws, building control regulations etc. must be adhered to.

All conditions mentioned above are project specific and each project must be compliant with the all of the said conditions. It is pertinent to note that the aforementioned conditions (i) to (iv) are not applicable to Hotels & Tourism, Hospitals, Special Economic Zones (SEZs), Education Sector, Old Age Homes and investment by NRIs.

Semi Finished Projects: There is no specific guideline governing semi finished projects in the FDI Policy. However, the investor must ensure that all the investment funds are only used to cover construction costs and prior FIPB approval is obtained. Investing in a project close to completion would tantamount to “trading in real estate/Real estate business” which is a prohibited sector under the extant FDI policy. In any case, the extant FDI Policy prescribes that the minimum capitalization amount must be brought in within 6 months of commencement of business by the company i.e. within 6 months from the commencement of construction of the project.

Exit from the Project: The investor cannot exit from the Project for a minimum period of three (3) years and 50% of the Project should have been completed before exit. The period of three years will only be calculated from the date of the entire investment into the Project coming in. This lock in period applies even to a transfer between two non-residents, therefore the Investor cannot sell its shares until the aforementioned exit conditions are fulfilled. FIPB approval must be obtained in case of an earlier exit plan. Further, the Company is also prohibited from selling “underdeveloped plots” i.e. plots without any infrastructure such as street lighting, water supply, etc.

Conclusion:

Direct investment and investment in construction development projects are two options that serve different ends to non residents looking to invest in Real Estate in India. It is clear from the above that the extant foreign investment regulations prohibit a foreign national from absolutely owning property in India.

A foreign national who wishes to carry on business in India has the option of acquiring property specifically for establishing a branch office/liaison office etc., however no other activity can be carried on in the said property.

A foreign investor can be a part of a construction project through an Indian joint venture/wholly owned subsidiary. The investor still cannot directly own the property on construction but can only have an interest in the Company that develops such property.

[1] Consolidated FDI Policy Circular of 2014 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry on April 17, 2014

[2] The majority of conditions related to FDI in construction development are sought to be modified and have received the Union Cabinet approval for the same. Official RBI notification on the same is pending. Print Release can be found at http://pib.nic.in/newsite/PrintRelease.aspx?relid=110938

(The Author was a Associate in the Corporate Team, Jayanth Pattanshetti Associates, Bangalore)