India: FDI In Real Estate Sector

Last Updated: 3 April 2017
Article by Gagan Kumar and Amit Kaushik

Real Estate Sector in India has been going through a rough weather for the last few years due to lack of funds and sluggish demand.

Real Estate Business1 is one of the nine activities where Foreign Direct Investment ("FDI") is prohibited. However, considering that "Housing for all" is one of the key objectives of the Government, an exception has been carved out permitting FDI in Construction-Development projects2.

Until October 2015, 100% FDI was permitted in Construction-Development projects with following conditions:-

  1. Minimum floor area to be developed of 20,000 sq. metres.
  2. Mandatory infusion of FDI of minimum USD 5 million within 6 months of the commencement of the project.
  3. The investor was permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
  4. Transfer of investment from the foreign investor to another non-resident investor required government approval.

However, despite the fact that 100% FDI was permitted under automatic route, this sector was not showing any sign of recovery as the minimum thresholds were suggesting that the FDI was permitted only in new projects and not permitted in the existing projects which were pending because of availability of funds.

However, the Government in November, 2015 has re-looked at the policy and relaxed it. The amended policy broadly provides as follows:-

  1. Minimum thresholds related to the area to be developed and the amount to be infused was removed.
  2. The foreign investor has been given liberty to exit the project even before its completion or development of basic infrastructure subject to lock-in period of 3 years.
  3. No prior approval is required for the sale of investment by the foreign investor to another non-resident wherein no repatriation of investment is involved.
  4. Each phase of the project would be considered as a separate project for the purpose of investment.

Therefore it would imply that any project regardless of size which is under construction can have access to any amount of FDI. Apart from the above, it has also been clarified that 100% FDI under automatic route is permitted in completed project for operation and management activities etc. It has been further clarified that earning of rent / income on lease of the property will not be regarded as 'Real Estate Business'. Accordingly, FDI would also be permitted in completed projects where intention is to earn rental income.

The Government had also introduced the concept of Real Estate Investment Trust ("REITs") in 2014 for attracting retail funding in real estate sector. REITs were given a pass through status for the purpose of taxation under the Indian Taxation Laws. However, it is important to note that REITs are subjected to some minimum thresholds like the value of asset owned by such entities should not be less than INR 500 crore and the initial offer size of unit is required to be atleast 250 crore. Since 2016, REITs have been allowed to invest up to 20% of its investments in under-construction projects, up from a maximum of 10% allowed earlier.

However, despite various steps taken by the Government, the sector has not witnessed revival so far owing to other macro-economic factors.

Footnotes

1. "Real estate business" means dealing in land and immovable property with a view to earning profit there from It shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014

2. Such projects would include development of townships, construction of residential/commercial premises, roads, bridges, hotels, hospitals, educational institutions and other basic infrastructure.

(Assisted by Mr. Amit Kaushik, FCA, LL.B.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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