Real Estate Investing in India
Investing in Real Estate in India, Real Estate Investment laws in India for Foreign Investors, Real Estate Sector
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Indian real estate has huge potential demand in
almost every sector especially commercial, residential, retail,
industrial, hospitality, healthcare etc.
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:
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:
FDI in Real Estate in India
Previously, 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 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.
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
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 attractiveness.
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:
Indian 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.
proper legal advise regarding corporate planning and tax planning should be
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
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..
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