India: FDI In Construction Development: Analyzing The Law And Challenges

Last Updated: 9 October 2017
Article by B.R. Srinivas and Raghav Muthanna

'The best investment on earth is earth' - Louis Glickman [a widely known real estate investor and philanthropist]

The Indian real estate market continues to thrive despite regulatory changes, market fluctuations, inflation, tax and other barriers. It is reported that the real estate sector in India has attracted close to US$32 billion in private equity investment with the global capital inflow in the year 2016 alone standing at US$5.7 billion1.

The introduction of the Real Estate (Regulation and Development) Act, 2016, Benami Transaction Prohibition (Amendment) Act, 2016, the Real Estate Investment Trusts (Amendment) Regulation, 2016 and other legislations have brought about greater transparency in what was a largely unregulated sector till recently.

While there is significant clarity to domestic investors in relation to the hurdles that lie under the aforementioned legislations, there continues to remain some ambiguity and challenges on the hurdles faced by foreign investors in the real estate and construction development sector in India which is governed by the Foreign Direct Investment  Policy (FDI Policy) issued by the Department of Industrial Policy and Promotion (DIPP), read with the notifications and circulars issued by the Reserve Bank of India, from time to time.

The focus of this article is to highlight some of the challenges and concerns arising in foreign direct investment (FDI) in the construction development sector in India.

Construction Development vis-a-vis Real Estate Business:

The FDI Policy prohibits a foreign investor from undertaking 'Real Estate Business' in India. 'Real Estate Business' means dealing in land and immovable property with a view to earning profit therefrom but does not include activities constituting 'Construction Development'. 'Construction Development' includes development of townships, construction of residential/ commercial premises, roads or bridges, hotels, resorts, educational institutions, recreational facilities, city and regional level infrastructure and townships.

It is pertinent to note that Construction Development goes hand in glove with Real Estate Business and thus it is imperative to understand as to what would constitute 'Construction Development' and what would constitute 'Real Estate Business'. Identifying the same has led to certain ambiguities, some of which have been briefly highlighted below:

Issue 1: Sale of land acquired for business of the FDI Company

With the liberalization of FDI in the last two decades, FDI has been permitted in most sectors in India.  In order to advance their business needs, companies having FDI in India (FDI Company(ies)), often acquire immovable properties to establish and conduct their business/operations. These FDI Companies may intend to sell portions of their unutilized lands or various properties owned by them, in order to capitalize on their businesses. In this context, a question that arises is whether such sale/transfer of the said lands (on an as is basis, without any further development) by the FDI Company would amount to the FDI Company being engaged in 'Real Estate Business'. In other words, will an FDI Company holding lands (acquired by it for its business) upon selling or transferring the same, be deemed to be 'dealing in land with a view to earning a profit' which is expressly prohibited? 

It may be noted that the land intended to be sold by an FDI Company may already have certain infrastructure and facilities in place and that such land was in any case acquired by the FDI Company solely with the intention of carrying on its business. In terms of Section 9 of the Companies Act, 2013, a company registered in India has the 'power to acquire, hold and dispose of property, both movable and immovable. Therefore the sale of such lands by the FDI Company is within its powers to deal with its assets. A one off sale of an immovable property by an FDI Company is therefore well within the ambit of the provisions of law.

Notwithstanding the above, if the FDI Company undertakes the sale of  several properties  at around the same time, such activity may lead the authorities to believe that the FDI Company is dealing in land with a view to earning profits therefrom and as a result construe that the  said  FDI Company is engaging  in 'Real Estate Business', which is prohibited.

Issue 2: Leasing of land acquired for business of the Company

The FDI Policy expressly stipulates that earning of rent/ income on lease of property, not amounting to transfer2 will not qualify as 'Real Estate Business'.

In the above context, an FDI Company owning several properties in India (acquired by it for the purpose of carrying out its business), may opt to lease out its properties (including by way of a long term lease) with the intention of earning revenues therefrom. In such event, a question that arises is whether the FDI Company engaged in a particular sector where 100% automatic foreign investment is permitted (for instance automobile manufacturing) having several properties in India, can lease out its underutilized properties to third parties, especially if the said leasing activity relates to multiple properties.  A guiding factor in this regard could be the extent of revenue that is generated by such leasing activity, as compared to the revenue generated by the FDI Company from its core business (being manufacturing in the instant case). It appears that the intent of the DIPP may have been to enable the generation of income by way of lease/rent from developed projects only and not from land not being developed/ constructed. However, in the absence of any set standards or clarifications, the issue remains open for interpretation. 

In light of the abovementioned Issues 1 and 2, it is unclear on the number of such sale or lease transactions that may be carried out by an FDI company before it may be construed to be  engaged in  'Real Estate Business'. It would be appropriate if the DIPP issues a clarification or a guideline that addresses these concerns.

Issue 3: Joint Development Agreement: Does mere contribution of land amount to construction development?

If an FDI Company proposes to commercially exploit any portion of its unused immovable property, it may do so by entering into a joint development arrangement with a developer. The developer may invest in and develop the property and upon completion of the said construction, an agreed portion of the developed area may be retained by the FDI Company, as its entitlement. In such arrangement, the FDI Company's only contribution to the said joint development, is land, and no construction activity is being carried out by the FDI Company. In this context, a question that may arise is:

'whether the mere contribution of land by the FDI Company towards such joint development would be sufficient for the FDI Company to be construed as being engaged in 'Construction Development' activity, permitted under the FDI Policy?'

Since the focus of the FDI Policy is on 'construction and development', it is imperative that the FDI Company (in the above context), must also be involved actively in the joint development activity, apart from contribution of the land. There is however no clarity on the extent of participation that the FDI Company (contributing land) must have in the said joint development, more so, if the said FDI Company is by itself not engaged in construction development business. 

Issue 4: Transfer of agriculture/ plantation property to a Body Corporate by an NRI/PIO

The FEMA Property Regulations3 places certain restrictions on acquisition and transfer of agricultural land and plantation property by non- residents (including PIO's and NRI's). In terms of the FEMA Property Regulations, while a Non Resident Indian (NRI) is permitted to transfer immovable property (including agricultural and plantation property) to a person resident in India, a Person of Indian Origin (PIO) is permitted to transfer agricultural land and plantation property, by way of gift or sale, only to a resident in India who is a citizen of India. This would mean that PIOs can transfer such agricultural or plantation land only to natural persons. It may be noted that in terms of the FEMA Act4, a person resident in India includes a body corporate and thus in light of the same, while an NRI can transfer agriculture and plantation property to a company or an LLP, a PIO can only transfer the same to an individual Indian citizen and not to a body corporate. It is unclear as to why this distinction has been made. It is quite possible that the aforesaid distinction is an inadvertent error, more so for the reason that the FDI Policy intends to bring about parity between NRIs and PIOs.

Issue 5: Contribution of Immovable Property by an NRI/PIO into an LLP

In terms of PN 75, any investment made by an NRI or a PIO, on a non-repatriation basis is to be treated on par with an investment made by a resident in India and the restrictions otherwise applicable to an NRI / PIO, would not apply to such investment (on a non-repatriation basis).

The LLP Act6 permits the contribution of immovable property as capital contribution by a partner, which may include an NRI or PIO. Taking into account that there are no restrictions on a domestic investor/resident under domestic laws, from transferring immovable property to an LLP, as capital contribution, the question that needs to be addressed is as follows:

'In light of PN 7, whether an NRI and/or a PIO can transfer immovable properties situated in India to an LLP, as his capital contribution into the LLP ?'

A majority view in this regard is that an NRI / PIO cannot contribute his immovable properties situated in India to an LLP, as capital contribution. One of the reasons for arriving at this conclusion is because of the provisions under FEMA 207, issued by the Reserve Bank of India, wherein the mode of payment of capital contribution by a foreign investor in an LLP, is specified as 'money contribution', by inward remittance through banking channels (without contemplating capital contribution by modes other than cash). 

Notwithstanding the above, there is no definitive view as to why an NRI / PIO must be differentiated from a resident investor, when the proposed investment is on a non-repatriation basis.

Conclusion:

Despite the few ambiguities and uncertainties, foreign investment in construction development has now been substantially liberalized, more so with the recent amendments introduced to the FDI Policy. Clarifications on the above issues and other grey areas may however need to be addressed by the DIPP in order to enable more foreign investment in the Construction Development sector.

B.R. Srinivas, Partner ( srini@duaassociates.com)

Raghav Muthanna, Associate ( raghav@duaassociates.com

*The views expressed are personal and may not necessarily reflect the views of the Firm.

Dua Associates, 130/1, 2nd Floor, Ulsoor Road, Bangalore 560042, India

Tel: +91 80 2558 8799

Fax: +91 80 2558 8801

Footnotes

1 Economics Times Report dated April 11, 2017.

2 The term 'transfer' has been defined in the FDI policy in an inclusive manner, to include, not only direct transfers by way of any sale, exchange or relinquishment of any asset, but also indirect transfer by way of transfer of shares of a company which owns any immovable property.

3 Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.

4 The Foreign Exchange Management Act, 1999.

5 Press Note 7 issued by the DIPP on May 12, 2015.

6 The Limited Liability Partnership Act, 2008.

7 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2000.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions