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Importance of the FDI in Real Estate Sector in India

Neelansh Gupta

| Updated: May 17, 2019 | Category: Compliances

FDI in Real Estate

In a growing economy, the Real Estate sector invites a lot of attention from all quarters, including foreigners. India has a policy for non-residents which encourage them to invest in this sector. In the year 2005, Reserve Bank of India (RBI) issued a notification and the township, housing, construction development project sector and built up infrastructure was opened for 100% FDI with specific terms and conditions.

The Foreign Direct Investment (FDI) route has involved overseas investor’s interest in this sector because of the ban on the infusion of funds into this sector by any other modes. Moreover, using External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs) to raise finances for investment into real estate has been completely barred. Hence, FDI in the real estate sector gains importance.

Introduction of FDI

Governing authority for FDI in Real Estate Sector in India

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

Are foreign company allowed investing in the Real Estate Sector in India?

Investment by Foreign Company
  • The decision to liberalize the FDI norms in the Real Estate business is possibly the most important economic policy decision taken by the Indian Government. Earlier, only Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were allowable to invest in the real estate sector and the housing projects.
  • Foreign investors, other than NRIs, were permitted to invest only in the development of integrated townships and settlements, either through a wholly owned subsidiary or a joint venture company in India, with a local partner.
  • However, the guidelines prescribed via Press Note 2 (2005) series, issued by Ministry of Commerce & Industry, have further open out FDI in townships, housing, built-up infrastructure and construction-development projects.
  • Hence, Major corporations are taking the scheme and are wooing global players for investments in important projects.

Basic Guidelines for FDI in Real Estate in India

Basic Guidelines

Currently, 100% FDI is allowable through automatic route for any construction development project which would include:

  • development of townships,
  • construction of residential/commercial premises,
  • roads or bridges,
  • hotels,
  • resorts,
  • hospitals,
  • educational institutions,
  • recreational facilities,
  • city and regional level infrastructure and townships

FDI in Real Estate in India

We can study FDI in Real Estate sector into two parts:

FDI in Real Estate

Permitted:

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

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

Not Permitted:

 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
Real Estate Business

Applicable Conditions for FDI in Real Estate Sector in India

Following conditions should be taken care of:

  • Minimum Area Requirement:

There is no minimum land requirement in case of development of serviced housing plots. However, a minimum floor area of 20,000 square meters is required in case of construction-development projects.

  • Amount of Investment:

 A minimum FDI of USD 5 million is required within six months of commencement of the project. Please note that the commencement of the project will be the date of approval of the building plan/layout plan by the relevant legal authority.

  • Exit Route:

The investor is allowable to depart from the investment on the completion of the project or development of roads, water supply, drainage, sewerage and street lighting.

  • Compliance with other regulatory principles:

The project shall be acceptable to the norms and standards, including land use requirements and terms of community facilities and shared facilities, as laid down in the applicable building control regulations, bye-laws, rules and other regulations of any government authority.

  • Sale of plots which are developed:

The Indian investee company will be allowable to sell developed plots only. Under this policy, developed plots will mean scenarios where roads, water supply, street lighting, drainage and sewerage, has been made accessible

  • The responsibility of obtaining approvals:

The Indian investee company shall be accountable for securing necessary permissions including those of building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and additional charges, and complying with all other requirements prescribed under applicable rules, bye-laws and regulations of the state government/municipal/local body concerned.

  • Monitoring Authority:

The concerned state government/municipal/local body which approves the building/development plans will monitor compliance of the conditions mentioned above by the developer.

Advantages of FDI in Real Estate Sector in India

Advantages of FDI
  • International brokerage companies will be able to invest in Indian counterparts and can also set up their subsidiaries in India
  • The Unorganized sector will largely be formalized
  • More jobs will be created, and property buyers can avail professional services
  • 100% FDI (Foreign Direct Investment) through the automatic route, i.e. no approval from Reserve Bank of India for owning 100% company in India for real estate broking services.
  • Improvement in the scope and probability of NRI investors in Indian real estate market.
  • It will lower real estate costs in the long run
  • It will improve the quality of the related infrastructure.

Take Away

RBI has been regularly improving the real estate sector for FDI, which will hold great potential for formation of employment and generation of income. Furthermore, considering the urgent need to enhance the affordable housing stock, the government has provided definite relaxations to conditions for FDI in Real Estate sector. It also clarified that real estate broking services do not amount to real estate business and are, therefore, eligible for 100 per cent FDI under the automatic route.

Enterslice helps and offers advice on over all categories of foreign direct investment in real estate business in India, through the Governmental and Automatic Routes. Our services for FDI in Indian Real Estate, fundamentally deal with all Central and State Laws governing the real estate transactions and investments in India, Property Taxation, and Stamp Duty applicable.

Neelansh Gupta

Mr. Neelansh Gupta is a Legal Counsel having extensive in-depth knowledge of various laws. He has completed his graduation in law and has experience in IPR, Taxation and Corporate laws.

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