The biggest relaxation to the FDI policy for the realty sector

The significant reforms announced today can be said to be the biggest relaxation to the FDI policy for the real estate sector since the opening up of this sector for FDI in 2005.

 

Kalpesh Maroo, Partner, BMR & Associates LLP, is of the view, “The policy changes, especially the clarification on leasing/renting of completed assets not constituting real estate activity is going to be a game changer and will fuel the growing appetite in the Indian and international investment community for investments in completed commercial buildings.”

 

Below are the key changes in the real estate sector summarised below –

 

  1. Minimum area (20,000 sqm) and minimum capitalisation (US$ 5 million) removed Conditions of area restriction of floor area of 20,000 sq. mtrs in construction development projects and minimum capitalization of US $ 5 million to be brought in within the period of six months of the commencement of business, have been removed.
  2. Each phase is a different project – Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy.  Exit will therefore be linked to each phase.
  3. Exit linked to 3-years of each FDI tranche (earlier exit possible before 3Y if trunk infra is completed before 3Y) – A foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed.
  4. No lock-in of 3Y for NR – NR transfers – Transfer of stake from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval. Nonetheless, exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period.
  5. Leasing is not “real estate business” (in which FDI is prohibited) – Earning of rent/ income on lease of the property, not amounting to “transfer”, will not amount to real estate business. 

    100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period of 3 years.

‘Transfer’,  for the purposes of above 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 (4 of 1882) ; or

(e) any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.

This means FDI is permitted in rent yielding assets.  The earlier ambiguities on whether activity of renting amounts to “real estate business” (and therefore whether prohibited) is removed .  FDI should therefore be now permitted in a companyholding completed assets yielding rent.

  1. FDI in LLPs now permitted under the Automatic Route – This is however for sectors in which 100% FDI is allowed under the automatic route and there are no FDI performance linked conditions.