Beyond Check-Ins: Regulatory Considerations For Investments In The Indian Hospitality Sector

1. INTRODUCTION

India's hospitality sector has experienced significant growth in recent years, buoyed by a robust increase in tourism and favourable Government initiatives aimed at bolstering 'ease of doing business' in India. Despite suffering a set-back during the COVID-19 pandemic, the hospitality sector has substantially flourised, with transactions worth USD 340 million in 2024.¹ The hospitality sector is projected to contribute USD 1 trillion to India's GDP by 2047.² This projection also accounts for the rapid growth of the hospitality industry witnessed in Tier II and Tier III cities of India, where 77% of branded hotel signings were concentrated in 2024.³

The expansion of India's hospitality sector is further complemented by foreign direct investment ("FDI") being permitted up to 100% under the automatic route in the hotel industry and other efforts undertaken by the Department for Promotion of Industry & Internal Trade (DPIIT) to enhance the ease of doing business in India by setting up portals like National Single Window System (NSWS).⁴

In this context, there has been a steady rise in interest from several global hotel chains in expanding their presence in India for capitalizing demands for both leisure and business travel. At Hilton's brand showcase in India earlier this year, the global brand announced plans to double its presence in India in the years to come.⁵ Similarly, on May 22, 2025, Marriott announced its first FDI into India with Concept Hospitality Private Limited which serves as the start of its new global brand, 'Series by Marriott'.⁶ At home, India also witnessed an increased public interest in the recent listing of Brookfield Asset Management backed Schloss Bangalore Limited, the owners of the luxury palace resorts, 'Leela'. The initial public offering of INR 3,500 crore was the largest ever in the Indian hospitality sector.⁷

2. STRUCTURING MODELS

Different models have evolved for structuring the ownership, management and operation of hotels and their assets in India. As set out briefly below, each of these models have their own associated risks and rewards, and the choice to opt for a particular model or a combination of the models depends on factors such as regulatory considerations, financial capabilities, branding and operational expertise.

Under the conventional model, the ownership, management and operation of the hotel and its assets remain with the same entity / group ("Ownership and Operation Model"). This model provides complete control to the owner and paves way for the owner to maximize its returns, requiring significant capital investment and operational expertise, and is favoured by long-established hotel groups with market knowledge and integrated capabilities. As discussed below in further detail, this model is structured through a newly incorporated subsidiary of a foreign company in India or as a share purchase transaction of an Indian entity in the hospitality sector.

The second model prevalent in this sector is a lease, management and operations model where the hotel operator leases the property from a third-party owner (governmental or independent) ("Lease and Operate Model"). The management of such hotels on leased premises remains with the lessee hotelier or other third parties engaged by the lessee pursuant to management agreements. This model reduces the upfront capital expenditure for the operator and assists in asset-light expansions. A recent and limited adaption of this model in India is the 'leaseback' model where hotel owners are selling portions of the property to investors and leasing the sold property back from them to maintain operational control of the premises (while generating income for the investors).⁸

Another popular model is the operation and management model, where property owners engage operators and managers for controlling and managing the day-to-day affairs of the hotel property under an agreement, in lieu of fees (such as management fees) ("Operation and Management Model"). This model, being asset-light, incentivizes foreign investment and also provides scope for brand owners to maintain brand consistency and market credibility. In certain instances, hotels are also constructed in accordance with the design and architecture specifications provided by the hotel operators and managers to align with the brand standards. The operators are responsible for day-to-day affairs such as appointment and training employees, maintaining health and safety standards, quality control protocols, implementing operational policies and executing contracts with vendors. Under this model, the hotel asset owners can capitalize on pre-established global brands owned by the hotel operators.

However, in certain cases, the hotel owners prefer to retain control over the day-to-day affairs of the hotel and, enter into agreements for utilization of an established brand while having to comply with the brand requirements ("Brand Licensing Model"). Typically, royalty/license fee payments are made under such arrangements.

3. FEMA CONSIDERATIONS

Foreign investment in the Indian hospitality sector, specifically under the Ownership and Operation Model, is regulated pursuant to the Foreign Exchange Management Act, 1999 ("FEMA") read with the foreign direct investment policy dated October 15, 2020 ("FDI Policy"), Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules") and the respective allied regulations, press notes, circulars, notifications and directions made thereunder (collectively, the "FDI Regime"). Under the FDI Regime, subject to compliance with the attendant conditions and the foreign investor being an eligible investor, FDI into construction-development projects including construction of hotels, resorts and commercial premises is permitted up to 100% under the automatic route in India, i.e., no approval of the Government is required for such investments.⁹ However, FDI is not permitted into entities which are engaged in the 'real estate business', construction of farm houses and trading in transferable development rights.¹⁰ 'Real estate business' has been defined under the FDI Policy as dealing in land and immoveable property with a view to earning profit there from and does not include inter alia construction of commercial premises and recreational facilities.¹¹

Notably, FDI in hotel projects is exempt from the attendant condition of an exit being permissible only once the lock-in period of 3 years is completed.¹² However, any exit where transfer of securities is being undertaken to a resident Indian is subject to compliance with the pricing guidelines prescribed under the FDI Regime.¹³ Similarly, any issuance of securities to a foreign investor is also required to be undertaken in compliance with the pricing guidelines, i.e., the issuance is required to be undertaken atleast at the fair market valuation of the securities ("Fair Market Value").¹⁴ Further, a transfer of shares from a resident Indian person to a person resident outside India cannot be undertaken at a price which is more than the Fair Market Value.¹⁵

In the context of both the Ownership and Operation Model, and the Lease and Operation Model, an important consideration under the FDI Regime is that foreign persons (not having a place of business in India) are not permitted to acquire or transfer immoveable property in India.¹⁶ However, a person resident outside India intending to operate under the Ownership and Operation Model or the Lease and Operation Model, may acquire immovable property in India by setting up / acquiring shares in an Indian company which will carry out / is carrying on, permitted business activities¹⁷ (such as owning and/ or operating a hotel). Acquisition of immovable property in India by a person of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Hong Kong, Macau, Nepal, Bhutan or Democratic People's Republic of Korea requires the prior approval of the Reserve Bank, other than for leasing immovable property not exceeding a tenure of 5 years.¹⁸ Accordingly, when structuring foreign investments and operations under the Ownership and Operation Model or the Lease and Operation Model, it is essential to factor in the foregoing restrictions and incorporate / set up an appropriate business vehicle to comply with the FDI Regime.

In the event that a person resident outside India is only providing its services to an Indian hotel owner under the Operation and Management Model, the foregoing real estate restrictions will not apply, and in turn, the export-import laws¹⁹ under FEMA will likely be triggered. Consequently, in addition to the Indian hotel owner requiring to adhere to necessary import related compliances, any payments made by the Indian hotel owner to the foreign service provider would be subject to the applicable foreign exchange laws such as compliances in relation to remittance, filing and pricing of services. All such cross-border payments would have to be routed through authorized dealer banks in India. Typically, contractual arrangements between the parties are also then structured to be compliant with the provisions of the FDI Regime. However, such FDI Regime related considerations will not be applicable if the foreign operators provide their services through Indian business vehicles.

From the perspective of the Brand Licensing Model, it is crucial to highlight that the FDI Regime distinguishes foreign exchange transactions between current account²⁰ and capital account transactions²¹. While capital account transactions are regulated and require approval unless specifically permitted²², current account transactions are generally permitted unless specifically prohibited²³. Presently, there are no financial limits or restrictions in relation to payments of royalty or fee for licensing of intellectual property as a current account transaction, indicating that Indian entities may freely engage in such foreign exchange transactions. Further, under the purpose codes identified in Form A2 (filing to be undertaken with authorized dealer banks for cross border remittances by Indian entities²⁴), franchise services and payment for usage of intellectual property through licensing are classified under the non-capital account transactions category²⁵. In view of this, under the Brand Licensing Model (and in certain instances, under the Operation and Management Model), foreign entities may license their intellectual property (such as their brands, logos) to Indian hotel owners, who will then be freely permitted to make the requisite royalty or license fee payments, subject to applicable foreign exchange requirements such as in relation to valuation of intellectual property and undertaking remittances and filings through the authorized dealer banks.

4. OTHER REGULATORY CONSIDERATIONS

In addition to the FDI Regime, an entity undertaking business in the hospitality sector in India also has to navigate various other regulatory requirements, including central and state specific legislations. These include compliances with environment and construction related norms. Prior to constructing and operationalizing the hotel properties, necessary consents to establish and consents to operate from the relevant state pollution control boards will have to be obtained under the environment protection laws. The Airport Authority of India Act, 1994 regulates construction, erection, placement or raising of any moveable or immoveable structure or fixture on or near any airport premises.²⁶ The Ministry of Civil Aviation has recently issued draft Aircraft (Demolition and Obstructions caused by Buildings and Trees, etc.) Rules, 2025²⁷ inviting public comments. These rules propose empowering the Government to take necessary actions to manage obstructions around aerodromes that pose risks to aviation safety, including demolition of buildings exceeding permissible height limits. Hoteliers proposing construction /operation of airport hotels should be mindful of any additional compliances. Further, the implications of stamp duty and registration-related charges should also be evaluated prior to finalizing the location of the hotel premises. Basis the jurisdiction, differing rates of stamp duty are applicable on lease and sale instruments.

Hotel operators are also required to maintain various licenses and consents, such as trade licenses, food related registrations and fire safety approvals. Additionally, hotels serving alcohol require state-specific liquor licenses and necessary consents prior to undertaking sale of liquor in the hotel premises. In a recent move to bolster ease of doing business, the Government of New Delhi has issued a directive to exempt hotels, motels, eateries etc. from approaching the police for obtaining a no-objection certificate for operating their businesses.²⁸ The licensing power will henceforth vest with the local bodies which will reduce the burden of obtaining multiple licenses for operating hotels in Delhi.29 Hotels should also ensure that necessary registrations and licenses in relation to their employees, contract labors and apprentices have been obtained under the appropriate central and state specific labour legislations. Furthermore, data protection and consumer protection related compliances also become relevant, from the perspective that in today's world, most hotel operators offer services for online booking and have been increasingly collecting guest data. The yet to be implemented Digital Personal Data Protection Act, 2023 will also be an important tick-in-the box compliance requirement once effective.

Non-compliance with these laws may lead to penalties, or operational restrictions. Accordingly, it becomes crucial to review the regulatory framework in depth for mitigation of risks and ensuring seamless operations. Necessary protections in the form of indemnities, warranties and covenants may be incorporated under the definitive contractual documents being drafted by the stakeholders under the relevant models.

5. CONCLUDING REMARKS

As India's hospitality sector enters a transformative and increasingly investor-friendly phase, stakeholders must be mindful of India's legal and regulatory landscape. Additionally, contractual arrangements between the stakeholders should be carefully drafted considering the allocation of rights, obligations and liabilities amongst parties. While each contract will have to be tailored to reflect the specific structure and commercial understanding between the parties, key aspects related to tenure of the agreement, scope of services, control over operations (including with respect to procurement of licenses / permits for running the hotel), branding, staffing and policy-making in hotels, structuring service fees to (de)link with performance / targets, termination rights and non-compete clauses should be robustly negotiated. A balanced agreement would mitigate any future disputes.

With thorough due diligence, strategic structuring, and contractual safeguards, the hospitality sector is well-positioned to attract deeper foreign investments into India in the near future. Continued inflows of quality capital will not only fuel expansion across urban and emerging markets but also enhance operational standards and provide a boost to tourism nationwide.

Footnotes

1 'Indian hospitality sector sees transactions worth $340 mn in 2024' (Economic Times, January 29, 2025), available here

2 'Hotel industry's contribution to India's GDP to hit $1 trillion by 2047: HAI' (Economic Times, August 20, 2023), available here

3 'India's hospitality booms: Massive investments, 42,000+ new hotel keys' (JLL, April 14, 2025), available here

4 Please refer here

5 'Hilton confirms plans to double brand presence in India in the next five years' (Stories from Hilton, May 06, 2025), available here here

6'Marriott International announces global launch of New Regional collection' (Marriott, May 22, 2025), available here ; 'Marriott makes first direct investment in India, pick stake in Fern hotels operator' (VCCircle, May 06, 2025), available here

7 'Leeela Hotels' ₹3,500 crore IPO to test investor appetite for India's luxury travel boom' (LiveMint, May 26, 2025), available here

8 'The Future of Real Estate Investment for NRIs: Leaseback Models Explained' (Rhythm ResiTel, undated), available here

9 Paragraph 5.2.10.1, FDI Policy

10 Note (i) of paragraph number 5.2.10.2, FDI Policy

11 Ibid

12 Note (ii) of paragraph number 5.2.10.2, FDI Policy

13 Rule 21(2)(c), NDI Rules 14 Rule 21(2)(a), NDI Rules 15 Rule 21(2)(b), NDI Rules 16 Rule 26, NDI Rules read with paragraph 7.1, Master Direction on Acquisition or Transfer of Immovable Property under FEMA

17 Ibid

18 Paragraph 9, Master Direction on Acquisition or Transfer of Immovable Property under FEMA

19 Master Direction on Export of Goods and Services and the Master Direction on Import of Goods and Service

20 Defined under Section 2(j), FEMA

21 Defined under Section 2(e), FEMA

22 Section 6, FEMA

23 Section 5, FEMA

24 Paragraph 6.4, Master Direction – Other Remittance Facilities

25 Please refer here

26 Section 28F(1), Airport Authority of India Act, 1994

27 Draft Aircraft (Carriage of Dangerous Goods) Rules, 2025, Ministry of Civil Aviation, Notification G.S.R. 397(E) dated June 18, 2025

28 Ministry of Home Affairs Notification G.S.R. 430(E) dated June 28, 2025

29 Ibid

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