FOREIGN DIRECT INVESTMENT IN REAL ESTATE

   
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What Is Foreign Direct Investment?

As per Investopedia “A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.”

The main intent of FDI is to create a lasting interest in an organisation. According to OECD (Organisation for Economic Co-operation and Development), lasting interest is determined when the organisation acquires a minimum of 10% of voting power in another organisation.
For example, in 2018, US based Walmart (A firm located in one country) made an investment of USD 16 Billion in Bengaluru based E-Commerce company Flipkart India Private Ltd (A firm located in another country), for an equity stake of nearly 77% .

There are various forms in which a foreign company can make investment in another foreign country such as through incorporating a subsidiary company in a foreign country, by buying out a stake in an existing foreign company, by means of entering into a joint venture with a domestic company or by means of an outbound merger.

How important is FDI ?


A Quick Flashback on Evolution of FDI In India

Prior to 1991 (known as the License Raj), India followed a fairly restrictive foreign investment policy, major reliance was on the domestic industry. Foreign Exchange and Regulation Act (FERA), 1974 stipulated foreign firms to have equity holding only up to 40 per cent, restrictions were put on proposals of FDI unaccompanied by technology transfer, and exemptions were at the government's discretion. Setting up of branch plants was usually disallowed; foreign subsidiaries were induced to gradually dilute their equity holding to less than 40 per cent in the domestic capital market. The law also prohibited the use of foreign brands, but promoted hybrid domestic brands (Hero-Honda, for instance). 
Such a restrictive policy is believed to have retarded domestic technical capability (as reflected in the poor quality of Indian goods); it also meant a loss of export opportunity of labour intensive manufactures - in contrast to many successful East Asian economies .

1991 proved to be a revolutionary year for India, the appointment of Dr Manmohan Sigh, a non- political figure, as a finance minister signaled a different approach to economics. And in this year India’s new Economic Policy was announced on July 24th, 1991 also known as the LPG or Liberalisation, Privatisation and Globalisation model. The main objective was to plunge Indian economy into the arena of “Globalization” and to open up most of India’s Industrial and business sectors to foreign investments.

Regulatory Framework of FDI In India

Foreign investment in India is principally governed by the Foreign Exchange Management Act 1999 (FEMA) and the regulations framed there under. To regulate foreign investment, the Reserve Bank of India (RBI) had published the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (TISPRO 2000) and thereafter the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2017 [Which was replaced by Foreign Exchange Management (Non-Debt Instruments) Rules, 2019]
The procedural instructions are issued by the Reserve Bank of India vide A.P. DIR. (series) Circulars. Thus, regulatory framework for FDI consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc. Further amendments in the policy are notified from time to time through Press Notes by the Department of Industrial Policy & Promotion. Policy announcement by DIPP are subsequently notified by RBI under FEMA.

Routes of FDI 

FDI in India is regulated by two routes one is the 1) Automatic Route and other is the 2) Approval Route.

Under Automatic Route the foreign investor can invest in the domestic company without any prior approval of the government or the RBI. The foreign investor or the domestic investee company just has to notify the regional office of RBI of receipt of Inward Remittance within 30 days in a prescribed form. However this is subject to the fulfillment of sector wise conditions.

Under the Approval Route the foreign investor has to take the prior approval of the government or the RBI before making any investment in the domestic company. Until 24th May, 2017, the approvals for foreign investment were processed by Foreign Investment Promotion Board (FIPB). However government abolished the FIPB and a Standard Operating Procedure (SOP) was issued in order to ensure uniformity of approach across sectors. The relevant ministries are now directly responsible for processing the applications for FDI.  

FDI  in Real Estate Space

Foreign investments in the Indian real estate space has always been an attractive source for funding, as proceeds from External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCB) are completely banned in India for funding real estate projects. 

According to DIPP, total FDI inflow in construction development sector during 2000 to 2015 has been around US $ 24.16 billion which is about 9% of total FDI inflows (in terms of US $).
For the past five years the Indian real estate space has seen a spike in quality investment in big-ticket projects. This trend shows the confidence of investors in Indian real estate space. Major investors in the Indian real estate space are US based Blackstone, Brookfield, Goldman Sachs, JP Morgan, Singapore based Xander, GIC, Maple Tree Investments, Ascendas and the Canadian Pension Funds.

Source: FICCI

Until 2005 FDI in real estate was allowed only for Non-Resident Indians and Overseas Corporate bodies. However in 2005, RBI issued a notification allowing 100% FDI in township, housing, built-up infrastructure and construction development sector. No approval from FIPB was required. However it was subject to various terms and conditions on minimum area to be developed, minimum capitalization norms, strict repatriation and unreasonable project completion timelines.

Current State of Affairs

The sector has witnessed manifold changes in recent years in terms of easing of conditions for foreign investment and introduction of Real Estate Investment Trusts (‘REITs’).

As on today 100% FDI is allowed through Automatic route in Construction Development projects which includes development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships. 

However it is subject to following riders:


Further the Consolidated policy restricts FDI in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs).  Where “Real Estate Business” means dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.

Chapter 5.1 of the Consolidated FDI policy contains the list of prohibited sectors where FDI is not allowed. Real Estate Business or Construction of Farm Houses has been included in that list.
Under the completed projects space 100% FDI under Automatic route is allowed for operation and management of townships, malls/shopping complexes and business centres.

As quoted in an article of Economic Times “The Ministry of Commerce and Industry is considering100 per cent FDI in completed RERA registered projects with over 100 apartment. The consideration by the government for further relaxation comes in the midst of the coronavirus crisis, lack of business and the resultant liquidity crisis. This will allow real estate players to monetise their completed projects so that focus could be diverted to complete pending housing projects that are struck largely due to shortage of funds.”

To sum up with, FDI in the board sphere of real estate is permissible only if it is used for developmental purposes, and not for buying and selling of land.

"This article is authored by Mr. Rohan Parikh, you can reach out to him at parikhr95@gmail.com."

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