FDI is not authorized in a company that is or intends to be in the real estate business, farmhouse building, or dealing in transferable development rights.

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Disinvestment in India’s real estate market has opened up several prospects for growth and development. The economy has benefited by prioritizing and rewarding foreign investment. However, the current International Direct Investment (‘FDI’) policy imposes rules that make doing business with these overseas investors problematic. This inhibits long-term investment. The present policy framework must be overhauled to keep foreign investors engaged in the long run. This article aims to shed light on the multiple problems that foreign investors face in the Indian real estate market, as well as to give recommendations in light of those challenges.

Also Read: The Indian Real Estate Market is Attracting Foreign Investors – What Are You Missing Out?

FDI Policy in Real Estate

The current FDI Policy allows 100 percent FDI via the automatic method in ‘Construction Development: Townships, Housing, Built-up Infrastructure.’ The policy, however, prohibits FDI in ‘Real Estate Business or Farm House Construction’ and ‘Trading in Transferable Development Rights (‘TDRs’). The FDI Policy specifies that ‘Real Estate Business’ excludes township development, the construction of residential/commercial premises, roads, or bridges, and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014.

  • Before the 2005 rules, foreign investors may only participate in township and settlement development through a joint venture with an Indian corporation, a wholly-owned subsidiary, or a local partner.
  • It has been clarified that for FDI policy, each phase of the construction development project would be treated as a distinct project. ” The investment will then be subject to the following terms and conditions:
  • The investor will be able to depart after the project is completed or after the creation of trunk infrastructures, such as roads, water supply, street lighting, drainage, and sewage.
  • Regardless of what is mentioned in me, a foreign investor may exit and repatriate foreign investment via the automated method before the completion of a project, provided that a three-year lock-in term, computed concerning each tranche of foreign investment, has been completed. Furthermore, the transfer of a stake from one non-resident to another non-resident is not subject to any lock-in period or government approval; the project must adhere to the norms and standards, including land use requirements and provisions for community amenities and common facilities, as outlined in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Government.
  • The Indian investee company will only sell developed plots. For the FDI Policy, “Developed Plots” will mean plots where trunk infrastructure, such as roads, water supply, street lighting, drainage, and sewerage, has been made available; the Indian investee company will be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal, peripheral areas, and other infrastructure facilities, paying development, external development, and other charges, and complying with all applicable laws.

Also Read Foreign Remittance – New Tax Collected at Source(TCS) Law

It has also been stated that FDI is not authorized in entities involved or proposing to participate in real estate business, farmhouse building, or TDRs. The term “real estate business” refers to dealing in land and immovable property for profit, and excludes the development of townships, the construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships. Furthermore, generating rent/income on the lease of the property will not amount to Real Estate Business because it does not amount to transfer. Furthermore, it has been mentioned that the completion of a project would be decided by local bye-laws/rules and other State Government regulations.

The FDI Policy states unequivocally that 100 percent FDI via the automatic method is permissible in completed projects for the operation and administration of townships, malls/shopping complexes, and business centers. Transfer of ownership and/or management of the investee firm from residents to non-residents is also authorized as a result of foreign investment. However, there would be a three-year lock-in period computed with relation to each tranche of FDI, and transfers of immovable property or parts thereof would be prohibited during this period.

Furthermore, the FDI Policy states unequivocally that “transfer” about FDI policy on the sector includes: (a) the sale, exchange, or relinquishment of the asset; or (b) the extinguishment of any rights therein; or (c) the compulsory acquisition thereof under any law; or (d) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (e) any transaction, whether via the acquisition of shares in a corporation, any agreement or arrangement, or any other means, that has the effect of transferring or permitting the enjoyment of any immovable property.

Government clarification on FDI in Real Estate

The Department for Promotion of Industry and Internal Trade (DPIIT) revised the existing definition of the real estate business in a recent news release to provide better clarity in the sector’s FDI policy. 

Also Read: What Is The Minimum Amount For NRI Real Estate Investments In India?

According to the notification, FDI is not permitted in firms engaged in or attempting to engage in the real estate industry, farmhouse construction, or trading in transferable development rights. It went on to explain that producing rent/income on a property lease does not constitute a real estate business since it does not constitute a transfer. The “real estate business” refers to the sale of land and immovable property for profit. It does not include township development, the building of residential/commercial properties, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships.

FDI is banned in the real estate market and the development of farm homes, according to the press release. Businesses that deal in land and immovable property for profit have been defined as real estate businesses, excluding township development, residential/commercial premises construction, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships, and REITs registered and regulated under the SEBI (REITs) Regulations 2014. Furthermore, producing rent/income through the property’s lease does not constitute a real estate business because it does not constitute a transfer.

Historically, the government has opposed FDI projects that contribute to real estate speculation while favoring investments that lead to growth. Although no changes are made, the press release outlines the current policy.

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The automated technology allows for 100 percent FDI in ‘Construction Development: Townships, Housing, Built-up Infrastructure.’ The policy, however, limits FDI in ‘Real Estate Business or Farm House Construction’ as well as ‘Trading in Transferable Development Rights (‘TDRs’).

The government expanded the definition of “real estate business” under the government’s foreign direct investment (FDI) policy on Monday to include profitable trading in land and immovable property.

The minimal development area for each project would be as follows: a) For the construction of serviced home plots, a minimum land area of 10 hectares is required. b) For construction development projects, a minimum built-up area of 50,000 sq. ft. is required.

According to FERA / FEMA regulations, a foreign firm that has established a Branch Office or other place of business in India may purchase any immovable property in India that is necessary or incidental to carrying out such activity.

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