FEMA ISSUES IN REAL ESTATE INVESTMENTS
Legal & Regulatory Issues
By:
Ruchir Sinha
NISHITH DESAI ASSOCIATES
Legal and Tax Counseling Worldwide
Mumbai | Bangalore | Silicon Valley | Singapore
Regulatory Framework


The Regulators
 Reserve Bank of India (RBI)
 Department of Industrial Policy and Promotion (DIPP)
 Foreign Investment Promotion Board (FIPB)
 Cabinet Committee on Economic Affairs (CCEA)
The Regulations
 Foreign Exchange Management Act, 1999
 Foreign Exchange Management (Transfer and Issue of
Securities to persons Resident Outside India)
Regulations, 2000
 Foreign Exchange Management (Acquisition and transfer
of immovable property in India) Regulations, 2000
 Press Notes issued by DIPP
 Now, the Consolidated FDI Policy, 2010
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Foreign Investment in immovable
property


Non residents may acquire
an interest in immovable
property in India through
an Indian entity holding the
immoveable property by
acquiring an interest in
such entity.
Foreign investment in a
partnership, trust or a sole
proprietorship
is
not
permitted without prior
approval of the RBI.
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Foreign Co.
Real Estate Co.
Real Estate
Project
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Investment Regimes

FDI
 Purchase or subscription of equity / instruments compulsorily convertible
to equity
 Press Note 2 of 2005: Project level restrictions and entity level
restrictions
 Pricing Restrictions
 Minimum floor price and maximum ceiling
 Discounted free cash flows valuation

FVCI
 New window opened for promoting opportunistic investments
 Pricing restrictions not applicable
 Regime not available for real estate

FII
 Invest in listed securities on the floor of stock exchange
 Press Note 2 not applicable
 Few real estate companies are listed
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Investment Regimes

NRI
 Investment into a Real estate Company - Press Note 2 restrictions not
applicable
 Direct investment in real estate
 NRI can repatriate up to USD 1 million from their NRO account
 Investments through a Company not regarded as NRI Investment
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Regulatory Milestones
Press Note 4
(2001)
Press Note 2
(2000)
- FDI by NRI
in housing &
RE
Relaxation of
investment
norms for
NRIs
1999
- FDI in
integrated
township
(100 acres)
April 2004
Amendment to
VCF & FVCI
Regulations
removing RE
from negative
list
- FDI in
hotels &
tourism
Banks – inv. in
VCF priority
sector
- FDI in IT
Parks (2002)
Opening of
FDI in select
projects
REMF
Regulati
ons,
2008
Press
Note 2
(2005)
FDI in real
estate
further
relaxed
Real Estate
VCFs
SEBI
propose
d draft
REIT
Regul
Press Note 2
(2009) and
Press Note 4
(2009)
Indirect
foreign
investment
in India
2009
2008
2007
2005
2004
2002
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Press Note 2 (2005 Series)
MINIMUM AREA TO BE DEVELOPED

Serviced housing plots: Min.10 hectares/ 25 acres area

Construction-development projects: Min built-up area of 50,000 sq mts

Combination project: Any one of above two conditions
INVESTMENT CONDITIONS



Min. capitalization: 1) WOS- US$ 10 million and 2) JV with Indian partner: US$ 5 million
Funds to be brought in within 6 months of commencement of business
Original investment cannot be repatriated before a period of 3 years from completion of minimum capitalization.
Investor may be permitted to exit earlier with prior Government approval
OTHER CONDITIONS





At least 50% of project must be developed within of 5 years from date of obtaining all statutory clearances
Investor not permitted to sell undeveloped plots**
Project to conform to norms & standards laid down by respective State authorities
Investor responsible for obtaining all necessary approvals as prescribed under applicable rules/bye-Iaws/regulations of
the State
Concerned Authority to monitor compliance of prescribed conditions by developer
** “Undeveloped” plot means where roads, water supply, street lighting, drainage, sewerage & other conveniences have not been made available. It will be
necessary that investor provides this infrastructure & obtains a completion certificate prior to sale of serviced housing plot
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Press Note 2: Few Issues



What comprises ‘built-up area’?

Ambiguity; Term not defined or standardized;

Only FSI or also below grade areas that are not included for FSI
Lock – in: Does “original investment” mean “minimum
capitalization”?

Press Note 2 – industry view – minimum capitalization

FDI Policy 2010 – each tranche of foreign investment locked in from
the date of infusion
Is premium on shares counted towards minimum capitalization?

Counted for primary

Premium paid to transferor, in case of secondary not counted
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Press Note 2: Few Issues

Time Limit for Minimum Capitalization: When does the
6-month period for capitalization commence with
respect to projects undertaken by existing companies?

Up to what stage in a project can an FDI investor
participate?

What does repatriation mean?


Will lock-in apply even from a transfer from a non-resident to
another non-resident?
Can an FII subscribe to shares of a real estate
company?

Pre-IPO

Post IPO
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Permitted Investments

Construction Development Projects
 (PN 2 of 2005)

Hotel, Hospitals and Tourism
 (PN 4 of 2001 and PN 2 of 2006)

Industrial Park
 (PN 3 of 2008)
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Types of Instruments
Equity
Equity Shares with equal rights
Equity Shares with differential rights
Fully / Compulsorily Convertible
Preference
Shares
Partly / Optionally Convertible
Non – Convertible
Fully / Compulsorily convertible
Debentures
Debt
Partly / Optionally convertible
Non – convertible
Other External Commercial Borrowings
Warrants
Infusion of Debt
 June 2007 – RBI issued a circular clarifying that only equity,
CCPS and CCDs shall be regarded as FDI, and all other
instruments shall be regarded as debt, and hence will be
regarded as ECB.
 ECB not permitted for real estate; limited window for integrated
townships of 100 acres until December 31, 2010
 CCD v. CCPS
 Compulsorily Convertible Preference Shares
 Dividends – SBI PLR + 300 basis points;
 Interest on CCDs? Unclear, Benchmark – same as CCPS
 CCD Tax Advantages
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YES into Real Estate Co.?
Can FDI be infused
Foreign Co.
Real Estate Co.
Non FDI
Compliant Project
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Solution
Foreign Entity
Hold Co.
Real Estate Co.
Non-FDI Compliant
project
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If Hold Co.(in which a foreign entity has invested in)
is owned and controlled by an Indian Citizen or
Company, then investment can be made by such
Hold Co. into real estate sector, as the investment of
the Hold Co. shall be considered as domestic
investment and thus, does not fall under the purview
of FDI policy.
However keep in mind:
• Press Note 4 of 2009:If the Hold Co. is only an
investment company then prior approval of the
Government/FIPB is required before any foreign
investment is made into the Hold Co. irrespective of
the amount of investment.
•If the Hold Co.’s
(i) Financial Assets is more than 50% of its total
assets; and
(ii) Income from financial assets is more than 50% of
total income of the company; and
(iii)The total value of the financial assets is more than
100 crores thenHold Co. would require to be registered as an
NBFC with the RBI
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Press Note 2 of 2009
Foreign investor(s)
Domestic investor(s)
Indian investing Company (“Hold Co”)
Investment
Indian investee company (“Op Co”)
For calculation of Foreign Investment:
•If Hold Co. is owned and controlled by an Indian citizen or company ,
then, foreign investment through the Hold Co. would not be
considered for calculation of the indirect foreign investment .
•If Hold Co. is owned or controlled by Non-resident entity, the entire
investment by the Hold Co. into the subject Indian Company would be
considered as indirect foreign investment .
Real Estate Project
“Owned” by resident Indian citizens would mean that the resident Indian citizens on a look through basis
beneficially own more than 50% of the equity interest of the Hold Co.
“Controlled” by resident Indian citizens would similarly mean that the resident Indian citizens on a look
through basis have the power to appoint a majority of directors of the Hold Co.
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Structuring – Key Issues



Structuring of investment instruments
 Entity level investment v. project level investment
 Equity, Preference, FCCDs, Warrants, ECBs
 Factors: Ownership, taxes, assurance of returns,
capital investment
Structuring distribution waterfall
 Promote structure
 Shares with differential rights
 Convertibles
Security
 Mortgage of property
 Pledge of shares
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ruchir@nishithdesai.com
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Disclaimer
We acknowledge that this presentation is merely an overview and has been prepared by us for your benefit and should not
be construed as a legal opinion. It may not be relied upon by any other person for any other purpose, nor is it to be quoted
or referred to in any public document or shown to, or filed with any government authority, agency or other official body
without our consent. We are relying upon relevant provisions of the Indian laws, and the regulations thereunder, and the
judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislative,
regulatory, administrative, or judicial decisions.
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