Foreign Direct Investment in Real Estate in India Policy Insight at a glance
The Indian scenario The recent way of reforms of the Government to incentivize Foreign Direct Investment (FDI) in various sectors is brining a new zeal to the investment climate in India. One of the most welcomed reforms is the policy for allowing 100 percent FDI in real estate business. The Real Estate sector witnessed key revival with the implementation of this policy. The investment Real Estate Sector is estimated to be USD 400 billion by the end of the financial year 2012. It is expected to be World s third largest market by the end of the 2020. The real estate sector has also been major contributor to GDP consisting of almost 5% of the GDP of the country. According to statistics available with Department of Industrial Policy and Promotion, Construction development (including townships, housing, built-up infrastructure and constructiondevelopment projects) sector has attracted a cumulative foreign direct investment worth USD 22,007.67 million from April 2000 to February 2013. FDI flows into the construction sector for the period April 12 - February 13 stood at USD 1,260 million. The Indian Government in 2005 liberalized the "FDI Policy" in relation to township, housing, built-up infrastructure and construction development projects by allowing FDI upto 100% under automatic route with the objective to ensure that the foreign investment in these areas would create new employment opportunities and add to the available housing stock and built up infrastructure. The Indian retail realty sector is projected to grow at around 15 per cent year-on-year over the next 3 5 years as against a 12 13 per cent nominal growth of India s GDP estimated by the International Monetary Fund (IMF)
FDI Policy The Foreign Direct Investment Policy is laid down in the Consolidated Policy last amended on 5 th April, 2013. The FDI policy is to be harmoniously interpreted with the regulations of the Foreign Exchange Management Act. The underlying caution of the policy is not to allow non residents to hoard or speculate in immovable property. Non residents are not allowed to create land banks but can participate in real estate development projects. Non- residents are permitted to invest in Real Estate activity in India vide notification no. 136/2005-RB dated July 19 th, 2005. Vide said amendment townships, housing, built-up infrastructure and construction development projects were opened to non residents. Non residents are permitted to invest in Real Estate Development activities only through Indian Company. Investment through LLP s, Partnership Firms, branch or in any other manner is not permitted in India. Investment can be made through equity shares or any fully and compulsorily convertible instruments. Investment by non residents in prescribed real estate projects is permitted under the automatic route and no prior approval of Foreign Investment Promotion Board is required.
Types of Real Estate Business Real Estate business can be broadly classified into three activities. 1. Build and Sell: The Developer builds/ develops the immovable property and then sells the same. 2. Build and Rent: The Developer builds/ develops the immovable property and then leases the same. 3. Trading: The investor purchases the immovable property with the object to sell. FDI investment for trading activity is not permitted in India. Non residents cannot acquire property for leasing activity. However if the property is constructed/ developed and then leased then it is permissible activity.
FDI in Real Estate: Permissible Activity FDI in real estate sector in India is permitted for following activities: Townships projects Housing projects Built up infrastructure and construction development projects Hotel Development Tourism Hospitality Building Resorts Building Hospitals Building Educational institutions Building Recreational facilities Infrastructure projects: regional and local level Special Economic Zones (SEZ) 100% FDI is permissible in the real estate sector.
Regulatory Requirement Minimum Area Requirement: In serviced housing projects a minimum land area to be developed is of 10 hectares In construction development projects a minimum built up area of 50000 sq. mts. is required In combination projects i.e. combination of serviced housing and construction development project either of the requirements i.e. minimum land area of 10 hectares or minimum built up area of 50000 sq. mts. is to be fulfilled. The minimum area guidelines do not apply to infrastructure projects like roads, bridge, ports, SEZs, hotels, tourism and hospitals. Minimum Capitalization The minimum capitalization requirement in wholly owned subsidiary of nonresident is USD10 million. The said capital requirement is reduced to USD 5 million if the non-resident enters into joint venture with the Indian Partners. Time Duration At least 50% of each project must be developed within the period of 5 years from the date of obtaining all the necessary statutory clearances. By-laws The project shall conform to all the applicable norms, regulations, bye laws and rules of the State government and Local Authority.
Repatriation of Funds Original investment cannot be repatriated before a period of three years from the date completion of minimum capitalization. Here the term original investment means the entire amount brought in as FDI. Hence while calculating the period of three years the date later of the two- date of achieving minimum capitalization or the date of each installment of the FDI must be considered. It must be noted that the said lock in period is applicable to whole amount of FDI. The Non-resident investor, if, wishes to exit earlier and repatriate the funds or sell the shares to another Non-resident investor before the completion of lock in period then prior approval of Foreign Investment Promotion Board is required to be obtained. The guidelines are silent on whether the lock in period is applicable to first investors or subsequent investors so it can be harmoniously constructed that lock in period is applicable to all non-resident investors irrespective of first or subsequent investors.
Outward Remittance for Real Estate Project There can be some service procured from abroad for which remittance is required to be made. Normally expenses, being in nature of current account, can be incurred without any prior approval from the RBI. However there are few expenses on which certain restrictions and cap limit are present. Real Estate agents can be appointed outside India for selling flats to Non-resident Indians (NRIs ). The commission can be paid upto 5% of the inward remittance or USD 25000 whichever is higher. It must be noted that the said limit is per transaction. USD 1 million can be paid towards consultancy services procured from foreign consultants.
Acquisition of Immovable Property by NRIs Non Resident Indian (NRI) for this purpose is defined as a person resident outside India who is citizen of India. NRIs are permitted to acquire immovable property by purchasing or through gift from another non-resident or an Indian resident or by inheritance. The property can be residential or commercial property or land. Agricultural land, plantations, farm houses cannot be acquired by the NRI whether by purchase or gift. The NRI may inherit an agricultural property. The NRI can lease the property and earn lease rent. The NRI is not allowed to undertake business in the premises without prior approval of the Reserve Bank of India.
Acquisition of Immovable Property by Foreign National Foreign Nationals residing in India for more than 182 days during the proceeding financial year (April March) for taking up employment in India or for carrying business or vocation in India is considered as person resident in India. Any body corporate registered or incorporated in India or an office, branch or agency in India controlled by person resident outside India and office, branch or agency outside India controlled by person resident in India are also persons resident in India as per provisions of FEMA. The foreign national, who is a person resident in India within the meaning of definition laid down in FEMA, can purchase immovable property in India. Similarly a foreign company which has opened a branch, agency or any other place of business in India in accordance with provisions of FEMA can acquire immovable property in India which is incidental to carrying on such activity. Only an entity incorporated in or foreign national from Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require approval from the Reserve Bank of India prior to acquiring immovable property in India.
Summary Money invested in real estate offers both a regular return on investment as well as a possibility of capital appreciation. With the tax reform measures taken in the last few years, the real estate is considered to be the most lucrative investment sector in the coming years. Opening up of 100% FDI in the real estate sector, setting up real estate mutual funds coupled with other fiscal reforms like rationalization of stamp duty, property taxes etc. initiated by the Government are steps taken to continue to make the real estate a promising investment option. With relaxation in FDI norms to boost investor sentiments, India has emerged as the most attractive investment destination surpassing neighboring China and the U.S.
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