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.

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