All about Foreign Direct Investment in Real Estate Sector

The Author, Shweta Pathania, is a 5th year BA LLB student at Faculty of Law College, Uttaranchal University, Dehradun. She is currently interning with LatestLaws.com.

Introduction

Real Estate is significant because it is a significant business driver. Economic development and growth not only depend but are majorly influenced by the Real Estate Sector. This is because of the chain of backward and forward linkages that the sector has with other sectors of the economy. About 250 ancillary units such as cement, steel, brick, timber, building materials etc. are dependent on the real estate industry.^[1] It has been studied that one rupee invested in this sector results in 78 paise added to the GDP.^[2]

FDI Policy in the Real Estate Sector

The first step towards the opening of the real estate sector for foreign investors was taken by the Government of India vide issue of Press Note No. 4 (2001 series)^[3] by the Department of Industrial Policy and Promotion (hereafter referred to as ‘DIPP’) which permitted FDI up to 100% for the development of integrated townships, including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities. However, it was subject to prior Foreign Investment Promotion Board (FIPB) approval.^[4]

Governing authority for FDI in Real Estate Sector in India^[5]

FDI in Real Estate Sector in India is governed by:

• Reserve Bank of India
• Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
• FDI Policies

FDI in Real Estate in India^[6]

Permitted: 100% FDI under automatic route is allowable in construction-development projects, which include:

• development of townships,
• construction of residential/commercial premises,
• city/regional level infrastructure,
• townships,
• roads or bridges,
• educational institutes,
• recreational facilities

Not Permitted:^[7] FDI is not allowable in an entity which is involved or proposed to be involved in:

• any Real Estate Business, or
• construction of farmhouses, or
• trading in transferable development rights.

Present Scenario of FDI In Real Estate India

According to the Press Note of the Department for Promotion of Industry and Internal Trade (DPIIT), changes have been made in the norms for the acquisition of shares under the scheme of merger/demerger/amalgamation. It clarified that "the merged or new entity may issue capital instruments to the existing shareholders of the transferor company resident outside India". It further mentions that earning of rent/income on lease of a property, not amounting to transfer, will not amount to real estate business^[8] but it is still not clear whether foreign investors can invest in companies holding completed assets which do not fall within the stated exceptions in the policy applicable to the construction development sector.^[9]

Growth of Real Estate in India ^[10]

The Indian real estate development sector has witnessed a mammoth revolution, driven by the booming economy, favourable demographics, and a liberalized foreign direct investment regime. It is the second-largest employer next only to agriculture and its size is close to the US $ 12 billion. Furthermore, such growth is projected to continue at a compound annual growth rate of 30% between 2008 and 2013, with investment in real estate projected to reach the US $ 50 billion by 2010.^[11]

Real Estate Market and the Foreign Direct Investment in India

Real estate was not open for FDI till 2005. By press note 2 of 200514, FDI under the purview of real estate was allowed under the Automatic Route and no cap was put on the level of foreign investment through this route. "Foreign investors in the Indian real estate market" are fractionated into three categories:

 1. NRIs;

 2. PIOs; and

 3. Other foreign investors (which include individuals and companies)

Investment by foreign investors is possible under the following three modes:

• FDI by an NRI/PIO of an immovable property placed in India
• FDI directly by an NRI/PIO in an Indian company and
• FDI through a foreign company in an Indian company or branch office.

FDI policy: An Overview^[12]

The Foreign Direct Investment (FDI) policy is laid down in the Consolidated Policy of 1st October 2010. (The policy has been there for the past few years. It is just that every 6 months, the Government comes out with a Consolidated FDI Policy which replaces the earlier Consolidated FDI Policy.) The FDI Policy has to be read with FEMA Regulations. The original policy was laid down vide Press Note 2 dated 3rd March 2005. In this policy, reference has been given to the Consolidated FDI policy or the original press note or FEMA regulation as relevant.^[13]

            Non-residents are permitted to invest in Real Estate Development activities through Indian companies. Investment through LLPs, partnership firms, branches, or in any other manner is not permitted. Direct business by non-residents is not permitted. The investment is subject to a few conditions discussed in subsequent paragraphs. Non-residents can invest up to 100% of the equity capital of the Indian company. Investment is permitted on an automatic basis. Investment can be in equity shares, or Fully and Compulsorily Convertible instruments (preference shares or debentures).^[14]

                 For NRIs, there is a separate policy. The theme of the policy is that non-residents are not allowed to hoard or speculate on immovable property. They cannot create “Land Banks” and hold them. At the same time, they are welcome to develop real estate.^[15]

India Foreign Direct Investment 1970-2022^[16]

Foreign direct investment refers to direct investment equity flows in the reporting economy. It is the sum of equity capital, reinvestment of earnings, and other capital. Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. Ownership of 10 per cent or more of the ordinary shares of voting stock is the criterion for determining the existence of a direct investment relationship. Data are in current U.S. dollars.^[17]

• India's foreign direct investment for 2019^[18] was $50.61B, a 20.17% increase from 2018.
• India's foreign direct investment for 2018 was $42.12B, a 5.38% increase from 2017.
• India's foreign direct investment for 2017 was $39.97B, a 10.1% decline from 2016.
• India's foreign direct investment for 2016 was $44.46B, a 1.02% increase from 2015.

Challenges and Way Forward in the Real Estate Sector

1)The Property Titles: When it comes to "property titles" laying out a legal title is something that creates a hindrance in the processing of transparency as it is often a prolonged process with escalating the expenditure involved during the transactions in the Indian Real Estate.

The need of the hour is due diligence and scrutiny in the following:

1) Registries

2) Sale deed

3) Encumbrances/non- encumbrances Certificates

4)To cross-check that property is qualified under FDI laws.

One of the issues before the Bombay High Court was whether the FDI in the Real Estate Sector with a fixed return is permissible or not? The high court observed that the law permits FDI investment in real estate development only, thus seeking assured returns under FDI in real estate is not only prohibited but also inconsistent with the public interest.^[19]

2) The greatest impediment to the development of Indian Real Estate is that it is profoundly disorganised. For successful growth the necessity is to have a transparent process, accuracy in the database, ensuring work ethics, and an integrated effort with data management skills. All these factors club together thus resulting in stagnant growth and keeping the global financial backers off. It is a prerequisite to establishing an authority to have vigilance over the working of this sector. The benefit can be two-folded to curb malpractices and aid the investors to have a better understanding before the investment.

          Plus there are stumbling blocks such as high stamp duties, varying rent control acts and property tax. There is an urgent need to appoint an independent regulator, which has a clear mandate to ensure fair competition and protection of the interest of consumers, investors and developers.^[20]

3) Another area that requires concern is the "Policy Framework" in addition to the "complex approval process". An integrated Private - Public Partnership, is an agency to regulate the actions of various stakeholders, on the other hand empowering the local government with human resources to tackle the problem of real estate.

              The approval^[21] the process should be streamlined by introducing a single-window clearance mechanism backed by technology.

Building development norms such as low FAR/FSI, density norms etc., should be reconsidered.

4) Another challenging area is the "compulsory acquisition of land" under the Land Acquisition (Amendment Act 1984). The shortcoming in the act lies in that it is open to interpretation as to what contemplates 'public purpose'. Thus the ambiguity became a tool in the hands of authorities for letting out the subsidised land to the latter.

             It is suggested to make it feasible for real estate developers, who mean to utilize the land as real estate thus modification in the land reforms regulations via each state is pivotal. On the other hand, to foster the expected period for the land leeway process the government must aim at the discharge of land to increment the supply of the land area.

 5) According to FDI policy the Indian Investee Company can sell only developed land.^[22] Consequently, investors are under monetary strain because of failure of any sort of development of un-sell land which prompts unsystematic turn of events, financial backers impediment and stagnation of land parcels.

Proposed changes in FDI policy ^[23]

The Government is considering relaxation in FDI policy, including 100 per cent FDI in completed RERA registered projects with over 100 apartments. This has been a long-pending demand and will create an overall positive sentiment for the real estate industry. RERA registered projects anyway are known to deliver a sense of transparency to foreign buyers and investors.^[24]

The trend of FDI in India

According to the latest data from the Department of Industrial Policy and Promotion (DIPP), FDI in 2017-18 grew by only 3 per cent to USD 44.85 billion. Foreign inflows in the country grew by 8.67 per cent in 2016-17, 29 per cent in 2015-16, 27 per cent in 2014-15, and 8 per cent in 2013-14. However, FDI inflows recorded negative growth of 38 per cent in 2012-13. A UNCTAD report, too, has recently stated that the foreign direct investment in India decreased to USD 40 billion in 2017 from USD 44 billion in the 2016 fiscal.^[25]

                In April 2020, the government of India introduces a new rule Press Note 3 (2020 series) whereby any foreign investment from a non-resident entity from a country sharing a land border with India or where the beneficial owner of investment in India is situated or is a citizen of any such country would fall under the government route prior approval from the Ministry of Home Affairs, the government of India is required for such investments.^[26]

Reasons for caution^[27]

Hausmann and Fernández-Arias^[28] point to reasons why a high share of FDI in total capital inflows may be a sign of a host country's weakness rather than its strength. One explanation is that FDI is more likely than other forms of capital flows to take place in countries with missing or inefficient markets. In such settings, foreign investors will prefer to operate directly instead of relying on local financial markets, suppliers, or legal arrangements.

                In a similar vein, Hausmann and Fernández-Arias suggest that "Countries should concentrate on improving the environment for investment and the functioning of markets. They are likely to be rewarded with increasingly efficient overall investment as well as with more capital inflows."

Conclusion

The restrictions that fall under the Press Note 3 (2020 series) to curb the opportunistic takeovers of Indian companies due to the epidemic of foreign investment proposals have slowed down considerably.^[29] It can be concluded that the focal point must be upon implementation of strategies that could remove roadblocks and promote clear and transparent policy commitments. The need of the hour is to have a systematic approach to a proactive approach focusing on a favourable climate in domestic and foreign investment sectors.