Foreign Direct Investment:
Investing in Real Estate in India
Indian real estate has huge
potential demand in almost every sector especially commercial,
residential, retail, industrial, hospitality, healthcare etc.
Commercial office space requirement is led by the burgeoning
outsourcing and Information Technology Industry. The leaders of
the IT/ITES world have set up or are setting up their centers in
India. Estimated demand from IT/ITES sector alone is expected to
be 150mn sq.ft. of space across the major cities by 2010.
In residential sector there is housing shortage of 19.4 million
units out of which 6.7 million are in urban India.
The increase in purchasing power and exposure to organized
retail formats has redefined the consumption pattern. As a
result the country has experienced mushrooming of retail
projects across the cities.
The main growth
thrust is coming due to favorable demographics, increasing
purchasing power, existence of customer friendly banks & housing
finance companies, professionalism in real estate and favorable
reforms initiated by the government to attract global investors.
Foreign Investment (FDI) in Real
Estate Sectors in India
Foreign Direct Investment is
encouraged and permitted, subject to certain conditions,
in the following real estate sectors in India:
Commercial Real Estate
Infrastructure projects: regional and local level
Economic Zones (SEZ's)
Conditions for Foreign Investment
in Real Estate Sector in India
Foreign Direct Investment in
some of the aforesaid areas (not all) is subject some
conditions, some of which are as follows:
Develop a minimum
land area of 10 hectares for serviced housing plots, and a
minimum built-up area of 50,000 sq m in case of construction
projects. The policy does not clearly define ‘built-up’, though
FSI (Floor Space Index)/FAR (Floor Area Ratio) could be used as
a basis for the same.
Fulfill the minimum
capitalization norm of $10 million for a wholly-owned subsidiary
and $5 million for JVs. The funds would have to be brought in
within six months of commencement of business (which needs to be
defined) of the subsidiary or JV.
Complete at least
50% of the integrated project within five years from the date of
obtaining all clearances.
Do not sell
undeveloped plots (with no infrastructural backup). Provide
infrastructure and obtain the completion certificate from the
concerned local body before disposal. This clause needs
amendment because certificates are sometimes not issued for
months on end, even years, an uncertainty which tends to raise
project cost, often beyond viability.
Do not repatriate
original investment before three years from completion of
minimum capitalization. Early exits require prior approval of
the Foreign Investment and Promotion Board.
Conform with all
applicable local and state laws, and abide by all regulations
FDI in Real Estate in India
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
FDI in real estate in 2005. However, norms issued later made a
minimum capitalization of $10 million for wholly-owned
subsidiaries and $5 million for joint ventures mandatory. The
government also imposed a minimum area requirement.
The department of
industrial policy and promotion had in March 2005 allowed FDI in
real estate in projects in a minimum area of 25 acres.
The finance ministry has allowed external commercial borrowing
(ECB) in realty projects involving integrated townships of 25
acres or 50,000 sq m. However, the Reserve Bank of India has not
yet notified it.
At present, the
government allows FDI in real estate, but does not permit
foreign institutional investment. It is, however, considering a
proposal not to view FDI and FII as distinct investment flows
while specifying an overall limit.
It is yet to permit foreign venture capital investors (FVCI) in
the realty sector. To ensure that the concept of special
economic zones (SEZs) did not distort the realty market, the RBI
has classified lending to SEZs on par with commercial real
estate, according it higher risk weight and provisioning.
The RBI allows
ECB in real estate projects involving integrated townships of
100 acres or more. In real estate projects, a large portion of
money is required for land acquisition, which is classified as
working capital. But end-use restrictions like not allowing ECB
money to be used for working capital take away its
Real Estate Laws in India
Investing in real estate in
India require compliance with various laws which run into
dozens, some of them more than 100 years old and some very new.
In addition to federal laws of India, there are many state laws
governing real estate transactions and investment. The federal
laws governing real estate include:
Transfer of Property Act
The Transfer of Property Act
governs the transfer of property by various means. Sales,
mortgages (other than by way of deposit of title deeds) and
exchanges of immovable property are required to be registered by
virtue of the Transfer of Property Act. Therefore, all the above
documents must be in writing and registered.
Indian Registration Act, 1908
The purpose of this Act is
the conservation of evidence, assurances, title, publication of
documents and prevention of fraud. It details the formalities
for registering an instrument. Instruments which require
mandatory registration include:
(a) Instruments of gift of immovable property;
(b) other non-testamentary instruments which purport or operate
to create, declare, assign, limit or extinguish, whether in
present or in future, any right, title or interest, whether
vested or contingent, to or in immovable property;
(c) non-testamentary instruments which acknowledge the receipt
or payment of any consideration on account of instruments in (2)
(d) leases of immovable property from year to year, or for any
term exceeding one year, or reserving a yearly rent
Sales, mortgages (other than by way of deposit of title deeds)
and exchanges of immovable property are required to be
registered by virtue of the Transfer of Property Act. Evidently,
therefore, all the above documents have to be in writing.
Section 17 of the Act provides for optional registration. An
unregistered document will not affect the property comprised in
it, nor be received as evidence of any transaction affecting
such property (except as evidence of a contract in a suit for
specific performance or as evidence of part-performance under
the Transfer of Property Act or as collateral), unless it has
been registered. Thus the doctrine of part performance dealt
with under Section 53 A of the Transfer of Property Act and the
provision of Section 49 of the Registration Act (which provide
that an unregistered document cannot be admissible as evidence
in a court of law except as secondary evidence under the Indian
Evidence Act) together protect the buyer in possession of an
unregistered sale deed and cannot be dispossessed. The net
effect has been that a large number of property transactions
have been accomplished without proper registration. Further
other instruments such as Agreement to Sell, General Power of
Attorney and Will have been indiscriminately used to effect
change of ownership. Therefore, investors in real estate
have to be careful in their due diligence.
Indian Urban Land (Ceiling And Regulation)
This legislation fixed a ceiling on the vacant urban land that a
'person' in urban agglomerations can acquire and hold. A person
is defined to include an individual, a family, a firm, a
company, or an association or body of individuals, whether
incorporated or not. This ceiling limit ranges from 500-2,000
square meters. Excess vacant land is either to be surrendered to
the Competent Authority appointed under the Act for a small
compensation, or to be developed by its holder only for
specified purposes. The Act provides for appropriate documents
to show that the provisions of this Act are not attracted or
should be produced to the Registering officer before registering
instruments compulsorily registrable under the Registration Act.
This legislation was repealed by the federal government in 1999.
The Repeal Act, however, shall not affect the vesting of the
vacant land, which has already been taken possession by the
State Government or any person duly authorized by the State
Government in this regard under the provisions of Urban Land
Act. The repeal of the Act, it is believed, has eliminated the
large amount of litigation and released huge chunks of land into
the market. However the repeal of the Act has not been carried
out in all states. Initially the repeal Act was applicable in
Haryana, Punjab and all the Union Territories. Subsequently, it
has been adopted by the State Governments of Uttar Pradesh,
Gujarat, Karnataka, Madhya Pradesh and Rajasthan. Andhra
Pradesh, Assam, Bihar, Maharashtra, Orissa and West Bengal have
not adopted the Repeal Act so far.
Stamp duty is required to be paid on all documents which are
registered and the rate varies from state to state. With stamp
duty rates of 13 per cent in Delhi, 14.5 per cent in Uttar
Pradesh and 12.5 per cent in Haryana, India has perhaps one of
the highest levels of stamp duty. Some states even have double
stamp incidence, first on land and then on its development.
Rent Control Acts
Rent legislation in India has been in existence for a very long
time. Rent control by the government initially came as a
temporary measure to protect the exploitation of tenants by
landlords after the Second World War. However these rent control
acts became almost a permanent feature. Rent legislation
provides payment of fair rent to landlords and protection of
tenants against eviction. Besides, it effectively allows the
tenant to alienate rented property.
Property tax is a levy charged by the municipal authorities for
the upkeep of basic civic services in the city. In India it is
the owners of property who are liable for the payment of
municipal taxes. Generally, the property tax is levied on the
basis of reasonable rent at which the property might be let from
year to year. The reasonable rent can be actual rent if it is
found to be fair and reasonable. In the case of properties not
rented, the rental value is to be estimated on the basis of
letting rates in the locality.
Funds Investors in India: RBI puts curbs on FII entry in real
The foreign portfolio
investment in real estate in India has come under regulatory
glare. The Reserve Bank of India (RBI) has thrown in a caveat on
FII subscription to public equity offerings by real estate
companies. The RBI is of the opinion that such firms can sell
their initial or follow-on public stock offerings to FIIs, only
if the real estate projects being developed fulfill the
conditions for foreign direct investment. The central bank,
which has the last word on cross-border fund inflow, has
indicated this to investment bankers and advisors of real estate
firms planning to tap the capital market. One of the companies
planning an issuance has already dropped the idea of marketing
shares of its forthcoming equity issue to FIIs; while another
firm has positioned itself as a construction company (one which
doesn't own the land as distinct from a real estate company) to
sidestep the restriction. The issue has boiled down to subtle
differences between FII and FDI.
proper legal advise regarding corporate planning and tax planning should be
sought by foreign investors the real estate sector in India.
The facts are: real estate
projects can attract FDI up to 100 percent, subject to certain
conditions which were spelt out by the government in April '05.
These conditions include minimum area to be developed, minimum
capitalization, no repatriation of original investment before 3
years and ban on sell of under-developed plots. If a project
meets these conditions, the concerned company can attract FII
subscription up to 24 percent equity, and later revise it to the
sectoral FDI cap, which is 100 percent in this case.
However, for a company not willing to meet the stringent project
conditions, the FII route could be used to overcome the rules
and bring in foreign investment. All the company needs to do is
get FIIs that are registered with SEBI to invest in the IPO.
This is what the RBI is possibly objecting to. Interestingly,
the regulator is not averse to FIIs buying shares in the
secondary market. In other words, even though FIIs cannot
subscribe to a real estate firm's IPO (if the project concerned
is non-FDI compliant), they can buy shares through a registered
broker once the company gets listed.
Madaan & Co. believes that further clarifications are required
by the RBI in order to clear the contradictions in various
policies of the Government of India.
The foreign Investors
should also be careful in investing in real estate in India.
A proper legal advice is highly recommended before investing in
this sector. In a nutshell: INVESTORS BE WISE
Norms for Real Estate Mutual Funds
Securities and Exchange Board
of India (SEBI) has issued guidelines on real estate mutual
funds (REMFs). Once these investment vehicles see the light of
the day, small investors will be able to participate in, and
profit from, the real estate growth story.
The way the policy is evolving in India, initially REMFs will be
allowed to invest in listed entities only. The next step will be
to set up real estate investment trusts (REITs), which will be
allowed to invest directly in real estate assets. This graduated
approach is being followed to allow time for the market to
mature, and so that public money is not put to undue risk..