Author Name:   sivaandroy

This Article explains the current legal position after the consolidated FDI Policy, April 2010 regarding Foreign Direct Investment in Real Estate Business....

Foreign Direct Investment in Real Estate Business

Background:
The gates of Real Estate business were thrown open to the Foreign Direct Investment in 2001.Initially, it reached up to 30% of Foreign Direct Investment through Approval route.

By Press Note No.2 (2005 Series) (‘PN 2/2005’), Foreign Direct Investment in Real Estate Development Sector was allowed under the Automatic Route. In other words Persons Resident Outside India (‘Foreign Investors’) were allowed to invest to an extent of 100% into an Indian entity involved in real estate development in the country without seeking prior permission of the Government of India or the Reserve Bank of India or the Foreign Investment Promotion Board or the Ministry of Finance, as may be required, subject to the conditions prescribed. This Press Note laid down the policy as regards investment by foreign investors into the Real Estate Development Sector. However, it is pertinent to note that the conditions and requisites detailed in this Press Note are not applicable to Non Resident Indians (‘NRIs’) investing in real estate or Real Estate Development Sector. NRIs may invest in housing and real estate development projects across the country, without any conditions, for upto an extent of 100%. However, inward remittance of foreign investment in agriculture is prohibited not only for foreign investors but also for NRIs.

Now, the position with regard to the FDI in Real Estate Business has been turned around with the new circular realeased by the RBI in April 2010. The new Consolidated FDI Policy April, 2010 expressly stated that FDI is not allowed in the Real Estate Business.

The Present Scenario:
The Government of India released the new document on Foreign Direct Investment (FDI) policy on March 31, 2010 whereby this document now consolidates all existing regulations related to FDI contained in the Foreign Exchange Management Act (FEMA), RBI Circulars and various press notes issued at various points in time. The comprehensive policy document came into effect from April 1, 2010 and would be replaced every 6 months after incorporating the changes which have been effected during the said period. All earlier Press Notes/Press Releases/Clarifications on FDI issued by DIPP in force and effective as on March 31, 2010 stand rescinded as on March 31, 2010 and are accordingly consolidated and subsumed in the present Circular.

Chapter 5 of the said circular deals with policy on route, caps and entry conditions. As per paragraph 5.1. (h) and 5.23.10 of the aforementioned circular FDI is expressly prohibited in Real Estate business or Construction of Farm Houses. It should be noted that FDI in any form is prohibited in Real estate business. Paragraph 3.3.2 makes it clear that FDI is not allowed in a partnership or proprietary concern if it is engaged in real estate business. Even investment by a Non Resident India or a Person of Indian Origin in such partnership or concern is not allowed.

Real estate business means buying and selling of real estate or trading in Transferable Development Rights (TDR’s) but does not include development of townships, construction of residential/ commercial premises, roads or Bridges.[1] Real estate business shall not include development of townships, construction of residential/commercial premises, roads or bridges.[2] As per the said circular real estate business is the business of dealing in land and immovable property with a view to earning profit or earning income there from.[3]

Development of Townships, Housing, Built up infrastructure and Construction Development projects
FDI is permitted in Development of Townships, Housing, Built up infrastructure and Construction Development projects under the aforementioned circular as per paragraph 5.23.

FDI up to 100% under the automatic route in 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) is allowed subject to the following guidelines:

Minimum area to be developed under each project would be as under:
i. In case of development of serviced housing plots, a minimum land area of 10 hectares
ii. In case of construction-development projects, a minimum built-up area of 50,000 sq.mts
iii. In case of a combination project, any one of the above two conditions would suffice

The investment would further be subject to the following conditions:
i. Minimum capitalization of US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company.

ii. 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 Foreign Investments Promotion Board (FIPB).

Further it should be noted that the circular mandates that at least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor/investee company would not be permitted to sell undeveloped plots[4]. It will be necessary that the investor provides the required infrastructure and obtains the completion certificate from the concerned local body/service agency before he would be allowed to dispose of 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 Government/ Municipal/ Local Body concerned.

It will be the responsibility of the investor/investee company to obtain 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/Local Body concerned.

The above mentioned conditions would not apply to Hotels & Tourism[5], Hospitals and SEZ’s and investment by Non Resident Indians.

It is further provided that 100% FDI is allowed under the automatic route in development of Special Economic Zones (SEZ). But this will be subject to the provisions of Special Economic Zones Act 2005 and the SEZ Policy of the Department of Commerce.
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[1] P. Ramanatha Aiyar, Advanced law lexicon, 3rd ed, 2005 at p.3953
[2] Foreign Exchange Management (Permissible Capital Account Transactions) Regulations.2000/FEM (Borrowing & Lending in Rupees) Regulation 2000, Reg 4, R.6
[3] Paragraph 3.3.2.(iv)
[4] For the purpose of these guidelines, “undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under prescribed regulations, have not been made available.
[5] 100% Foreign Investment is allowed under automatic route for Hotels and Tourism related industry (para 5.27)

The  author can be reached at: mohanroy@legalserviceindia.com

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