Foreign direct investment (FDI) in India’s booming real estate and housing market jumped 80 times between 2005 and 2010. Figures obtained by TOI show that in 2005, FDI in real estate was a mere Rs 171 crore. That soared to Rs 13,586 crore in 2009-10. In April and May this year, Rs 737 crore in FDI was pumped into the sector.

Property in Mumbai biggest draw
<It is no surprise that the largest number of building projects where FDI is in play are in the India’s commercial capital, Mumbai. Of the total 1,614 projects in which foreign investors have put in money since 2005, 422 were cleared by the Reserve Bank of India’s Mumbai office for building property in Mumbai, followed closely by 316 for property in Delhi. Other big cities like Bangalore (225 projects), Hyderabad (105 projects) and Chennai (68 projects) also enjoyed considerable attention of foreign real estate developers.

Largest investment Bandra Kurla Complex
Interestingly, given the booming property market across the country, FDIs are not confined to metros and big cities alone. Thus since 2005, various real estate projects have been given a green signal by RBI’s offices in Bhopal, Kanpur, Kochi, Jaipur and Panaji, amongst other places. The largest FDI in the last five years remains in the construction of a technology park at Bandra Kurla Complex in Mumbai. In this case, $372 million has been brought in through a foreign collaborator based in Mauritius.

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The Indian finance ministry has called for tougher foreign direct investment (FDI) norms in the housing and township sector.

It has also proposed stringent monitoring to ensure FDI rules are strictly followed in this “sensitive” sector according to the Economic Times.

The ministry has said a more effective monitoring mechanism could be set up jointly with the ministries of commerce and urban development to ensure FDI does not “render policy objectives in a sensitive sector of the economy with limited practical significance”.

At present, 100 per cent FDI is allowed in this sector, but with some riders.However, there have been concerns over the lack of clarity of rules, the need to tighten these and the difficulty in monitoring these.

For instance, foreign companies willing to invest in this sector need to have a minimum capitalization of $ 10 million for wholly-owned subsidiaries, and $ 5 million for joint ventures. The funds have to be brought in six months of commencement of business. Also, the minimum area to be developed under each project is 10 hectres.

The government has also imposed a lock-in period of three years for repatriation of investments made in this sector after the minimum capitalization requirements are complete. Also, 50 per cent of the project must be completed in five years from the date of statutory clearances and the investor is not permitted to sell undeveloped plots.

The finance ministry has now suggested that rules governing repatriation of funds from India should be tightened to protect consumers. The ministry has suggested that a clause should be added to say that repatriation of the original investment would be permitted either in three years, which is the current rule, or after the conditions which stipulate that 50 per cent of the project is developed in five years is completed, whichever is later.

It simply means that the date of repatriation of funds from India could go up to even five years if the investor has not completed half the project. To ensure that rules are not violated and make monitoring easier, the departments has made it clear that the “minimum capitalization” norm for FDI in the sector would be on a project-wise basis and not at the company level.

Indian real estate companies looking for FDI should set up a special purpose vehicle (SPV) for the specific project and ensure that the minimum capitalization norms are adhered to in the new company floated for the project for which FDI is being sought.

The commerce ministry had earlier proposed that a holding company, implementing several Indian real estate projects, could comply with the overall minimum capitalization requirement by aggregating the minimum capitalization of all the projects.

The finance ministry, however, said considering the weak oversight mechanism, monitoring of compliance is a herculean task and not amenable to practical implementation.

Also, the government has clarified that if the minimum capital required is brought in installments or tranches, the date of completion of the minimum capitalization norms would be reckoned to be the day of the last tranche. It is from this date that the lock-in period would be calculated.

The Indian government plans to tighten investment norms for non-resident Indians (NRI) in companies to ensure that they do not violate foreign direct investment (FDI) where such investment is banned such as with Indian real estate.

The Reserve Bank of India (RBI) has also mooted a proposal to withdraw the special status given to NRIs for investing in sectors such as aviation, housing and real estate.

NRIs, for example, are permitted to invest up to 100 per cent in air transport services as against only 49 per cent allowed to other foreign investors. Also, NRIs are exempt from the conditions imposed on minimum capitalisation norms in real estate as well as the minimum size of area to be developed for housing.

In the Indian real estate sector FDI policy has imposed certain key conditions like the minimum area to be developed should be 10 hectares in case of development of serviced housing plots, and built up area of 50,000 square metres in case of construction development projects. But these restrictions do not apply on NRIs.

Several controversial Goan real estate deals by foreigners in Goa are being probed and could well have been funded by proceeds from crime and narcotics trade, an Enforcement Directorate official Friday said. Other real estate in Goa purchased by foreign investors illegally may be confiscated

‘We are probing the possibility of money sourced from proceeds of crime and through sale of narcotics being used to purchase of properties in Goa,’ the department’s Assistant Director Jyoti Sharma told media persons here. She said it has also been found that large volumes of money were being illegally routed by several foreign-run companies from tax havens abroad to purchase properties in coastal resort villages in the state.

However, she did not name the countries or financial institutions from where the money was being sourced. Sharma was referring to the 350-odd cases being probed by the ED concerning properties purchased mainly in coastal Goa, by individual foreigners or by companies owned by foreign nationals in violation of the Foreign Exchange Management Act (FEMA) and violation of Reserve Bank of India guidelines. ‘Out of the 350 cases, we have put 45 to 50 cases involving companies on fast track. We will be submitting our report within a few months,’ Sharma said. The official said that in several cases where land in Goa, which was purchased for setting up hospitality industry units by companies headed by foreigners, was being used for ‘other purposes’.

‘In several other cases we have found that no stated business is conducted. And at times no IT returns are filed at all, which is in contravention of FEMA (Foreign Exchange Management Act) norms,’ she said. The state government 2007 had asked the ED to probe the properties bought by foreigners in the period between 2003 and 2007, after public outcry that large chunks of land were being illegally purchased by foreigners, especially in coastal Goa. Sharma also cited several cases where land graded as ‘agricultural holding’ was fraudulently converted to non agricultural used after it was bought by foriegners or companies owned by them.

‘We have already completed investigation involving a Swiss national, August Thommen, in February last month. He had violated FEMA norms while purchasing 1,000 sq metre land at Anjuna (beach village in north Goa). The government has confiscated the property,’ Sharma said, adding that Thommen had been fined Rs.2 lakh for violating the forex law. She further said that a lot of properties were bought by foreigners, while visiting India on a tourist visa, while FEMA stipulated that a foreigner should be a ‘resident of India’ (residing in the country for more than 182

HUNDREDS of Britons may lose their holiday homes and life savings in the Indian tropical paradise of Goa after falling foul of changes in local laws and scams by builders and lawyers.

The Times reports some claim they are victims of racism and have been told to “go home”.

Many invested tens of thousands of pounds a few years ago in legitimate transactions, only to be told the rules had changed and their properties may be confiscated.The threatened land grab is reminiscent of the so-called “Spanish acquisition” in which hundreds of Britons lost their homes in Valencia when developers used compulsory-purchase laws to buy them.

In one of the most common scenarios in Goa, British buyers were told by local lawyers and the Reserve Bank of India that they could legally own property in Goa if they set up an Indian company and made the transaction through it.

By 2007, the rules on foreigners owning property through a business appeared to have changed, though only in Goa.

The region used to be part of the hippie trail, but has reinvented itself as a package holiday centre. It attracts 100,000 British holidaymakers a year, 60% of its foreign tourist trade.

The new interpretation of the law by the Goan authorities has left hundreds, such as Su Peplow, 57, from Bedfordshire, without property deeds and facing large financial losses.

In 2005, Peplow, a quality director for a human tissue research association, decided to retire to Goa with her husband.

They settled on a two-storey flat under construction in Cavelossim, a fishing village, and invested more than £20,000.

The couple signed a contract for a 56-month lease with a right to buy.

Like many others, they hired local lawyers to help them and were advised to set up a business to buy the flat.

Peplow’s husband died in 2006 and she decided to proceed with the purchase alone. She paid the builder for registration of the deeds, transfer of the utilities into her name, land tax and stamp duties. She also handed over £6,500 for furniture and renovation, and paid legal fees.

After she had paid the final instalment to the builder, however, he said he could not transfer the deeds as he would be “breaking Goan laws”. Her lawyer disappeared and she stands to lose her entire investment when the lease runs out.

Another Briton said that despite a letter from the Reserve Bank of India affirming that she had done everything legally, she was told by the local sub-registrar that he “couldn’t register our property as I was white and a foreigner”.

He told her they had received a circular from the Goan government stating that they were not to register property to Indian companies with foreign directors, or to foreigners at all.

Vikram Varma, a local lawyer, said more than 1,000 people could have been caught out by changes in the laws and by builders’ scams.

More than 400 foreigners, mainly Britons, are being investigated by India’s enforcement directorate for alleged violations of property laws and could have homes confiscated.

They are allowed to live in the homes but, without deeds, cannot sell the properties.

“Most who come here are as trusting in the efficiency of the system in India as they are in the UK. But here it’s entirely different,” said Varma.

The problem has reached such extremes in the past two years that many suspect an anti-British agenda, inspired in part by rising property prices.

The difficulties coincided with a popular movement opposing the purchase of large tracts of land by Indian and Russian developers as Goans fear losing their cultural identity.

In a pub last week in a southern Goan resort, dozens of Britons met to vent their frustration at corruption and red tape.

Even those who had bought property several years ago now face visa problems.

One Birmingham couple, who wanted to be known only as Jo and Sid, said they had lived in Goa for more than 10 years on extendable five-year visas, only to be denied a new one this year. They were offered a tourist visa instead.

“An official in Delhi told us we had no right to live in India because we are not Indian. He told us to go home to our own country, then threw all our papers in the bin,” said Jo.

The British deputy high commissioner is being sent to Goa to hear people’s concerns.

The Foreign Office said it recognised the “distress” caused and had raised concerns with the Indian authorities. “We have made clear that there should be no confiscation of property acquired legally by British nationals,” it said.

The enforcement directorate and the Goan government declined to comment.

The government is weighing the impact of a possible three-year ban on stake sale by foreign investors in real estate projects, a decision that could affect future capital inflows into the sector. Indian real estate developers had recently urged the government to reinterpret a provision in the foreign direct investment (FDI) guidelines, so as to stop overseas investors from withdrawing their funds, beyond the minimum capital of $5 million, before three years of the initial investment.

This, they said, will help them tide over the current liquidity crisis. However, the commerce ministry is concerned that such a measure could be counter-productive. The government wants to keep the foreign investment policy as flexible as possible since the country now needs foreign capital to sustain the growth momentum. For any foreign investor, the exit strategy is as important as the entry strategy. If it is difficult to withdraw capital and redeploy it in another sector, then foreign investors could become reluctant to invest in Indian real estate.

“We examined the proposal, but have not taken any decision and status quo continues. However, we cannot rule out any change in the future,” said an official, who asked not to be named, considering the sensitivity of the subject. The law says that in a cross-border JV in real estate, the foreign partner should bring in a minimum capital of $5 million. The funds would have to be brought in within six months of commencement of business. It also says the “original investment” cannot be repatriated before a period of three years from the completion of “minimum capitalization.”

This has been interpreted in such a way that funds above the minimum capital requirement could be repatriated within the three-year lock in period. Real estate developers now want to restrict this as the sector got badly hit by the economic slowdown and drying up of sources of foreign capital. Besides, players in this sector have very few alternative sources of funding locally.

The government in India wants to make it easier for foreign property investors and in particular for them to put their money into projects that relate to the hospitality sector and tourism. It is looking at changing the rules to allow overseas investors to be part of smaller real estate projects. At present they are limited to investing in projects that cover a minimum of 25 acres. It is hoped it will encourage foreign investment in property developments in places like Mumbia, Delhi, Bangalore, Chennai and Hyderbad where it is generally not possible to find 25 acres of land for development.

The Department of Industrial Policy & Promotion (DIPP), which sets out the guidelines for direct foreign is keen on attracting more investors. It is proposing to waive minimum capitalisation for development projects which have hospitality and tourism facilities such as hotels, restaurants or entertainment facilities for visitors. The waiver would also be available if 50% of the built-up area in a project is devoted to hotel and tourism businesses, such as food courts, resorts and restaurants and if 20% of the total built-up area is used for hotel rooms.

The property industry welcomed the initiative and said they are long overdue. These steps, when implemented, will provide relief to high-value projects in cities and projects being developed for the tourism sector. The move comes as a relief at a time when the real estate industry is struggling with high levels of debts, strict lending conditions and a general slowdown in business.

Meanwhile there are signs that the hard hit commercial property sector is on the cusp of recovery. Values have fallen by up to 30% as many corporates have downsized and are not enthusiastic about paying high rents. But according to Anurag Bhatnagar, associate director at DTZ, although those with expansion plans are still staying on the sidelines they are making future plans and when they start spending recovery will follow.

As property markets collapse world-wide, one of the few consolations for real-estate investors is that some governments have become more open to foreign non resident property owners.

A growing number of them are considering loosening or temporarily suspending foreign property-ownership restrictions in a bid to stimulate their real-estate markets. In January, for example, Beijing issued a one-year suspension of a one-year residency requirement for foreign nationals buying a house. The Cayman Islands and Australia have also recently loosened their rules. Meanwhile, the issue is being discussed in numerous other countries, including the Philippines.

In 2005, India began letting foreigners invest directly in Indian residential and commercial real-estate development. And in late 2006, the government lifted a required 10-year lock-in period on repatriating property sale proceeds, although it’s limited to $1 million a year. Slumping property sales in India has given the issue renewed urgency, as Indian property developers strive to find ways to stimulate local demand. Restrictions on foreign ownership exist mainly in emerging property markets. Most Western European countries, including the U.K., France and Italy, don’t restrict foreign nationals from owning real estate. (Notable exceptions are Switzerland and Austria, which have established some foreign-buyer quotas to keep prices down in some ski towns.)

A foreign national of non-Indian origin, resident outside India cannot purchase any immovable property in India unless under they fall under the following circumstances:

1. He/she may take residential accommodation on lease provided the period of lease does not exceed five years.

2. A foreign company which has established a Branch Office or other place of business in India, in accordance with FERA / FEMA regulations, can  acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. The payment for acquiring such a property should be made by way of foreign inward remittance through proper banking channel. A declaration in form IPI should be filed with Reserve Bank of India within ninety days from the date of acquiring the property. Such a property can also be mortgaged with an Authorised Dealer as a security for other borrowings. On winding up of the business, the sale proceeds of such property can be repatriated only with the prior approval of Reserve Bank of India

3. A foreign national resident in India  does not require approval from Reserve Bank as per the provisions of Section 2(v) (i)B of the FEMA, 1999, but approvals if any required in terms of regulations prescribed by other authorities such as the concerned State Government etc. will have to be obtained by him / her. However, a foreign national resident in India who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan requires specific prior approval.

For further information on this please view the Reserve Bank of India’s website.

With India’s GDP growth slowing, many feel relaxing laws on foreign ownership of immovable property in India now, offers the best opportunity to increase foreign direct investment (FDI) into the Indian property market. Others feel that if this happens it will leave the average Indian behind as prices will appreciate strongly and he/she will not be able to afford property in India. The big question though regardless of laws is, who has the money right now to invest?

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Who is an NRI/PIO?

According to the Foreign Exchange Regulation Act of 1973, Non-Resident Indians are:

1. Indian citizens who stay abroad for employment or carrying on business or vocation outside India or for any other purpose in circumstances indicating an indefinite period of stay abroad; OR
2. Government servants who are posted abroad on duty with the Indian missions and similar other agencies set up abroad by the Government of India where the officials draw their salaries out of Government resources; OR
3. Government servants deputed abroad on assignments with foreign Governments or regional/international agencies like the World Bank, United Nations etc.  OR
4. Officials of the State Government and Public Sector Undertakings deputed abroad on temporary assignments or posted to their branches or offices abroad.

Who is a foreign citizen of Indian Origin?

A foreign citizen is deemed to be of Indian Origin if : i) he held an Indian Passport at any time or ii) he or his father or paternal grand father was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955. However this does not apply to citizens of Pakistan, Bangladesh, Afghanistan, Bhutan, Sri Lanka or Nepal

What are the permissions required from RBI for NRI’s to acquire or dispose off immovable property in India?

NRI’s do not require any permission to acquire any immovable property in India. This does not apply to the purchase of agricultural / plantation property or a farm house. The table below gives a better idea of purchases that are possible for NRI’s:

What are the modes of payment for purchase consideration of the immovable property allowed under the general permissions?

The purchase consideration can be transferred to the seller through one of the following methods:

1. Inward remittances in foreign exchange through normal banking channels.
2. Funds can be transferred from any non resident accounts maintained with banks in India.

What are the restrictions on the number of residential properties that can be purchased by an NRI?

There are no restrictions on the number of properties an NRI can purchase. The repatriation of funds is restricted only to two such properties.

What are the guidelines to be followed by NRI’s and foreign citizens of Indian origin while buying agricultural land / plantation property & farmhouse?

All requests must be made to:
The Chief General Manager, Reserve Bank of India,
Central Office, Exchange Control Department,
Foreign Investment Division (III),
Mumbai 400 001.

SALE & REPATRIATION

Do we require permission from RBI to sell such property?

No. RBI has granted general permission for sale of such property. However, where another foreign citizen of Indian origin purchases the property, the purchase consideration should either be remitted to India or paid from balances in non-resident accounts maintained in India.

Can the sale proceeds of such property if and when sold be remitted out of India?

On conclusion of sale of immovable property other than agricultural land / farm house/plantation property in India by either an NRI or PIO, the person can remit the funds provided all the conditions noted below are met:

• All the provisions of the Exchange Control Rules/Regulations/Law in force at the time were met at the time of acquisition, or the provisions of the Regulations framed under the Foreign Exchange Management Act, 1999;
• NRIs/PIOs can remit sale proceeds of immovable property irrespective of how long the property was held. The profits from the sale of such property cannot be repatriated. The repatriation should not be more than the amount remitted to acquire the said property.
• The repatriations are restricted to sale proceeds of two such properties, if the property was purchased from funds held in NRE Account.

RENT & REPATRIATION

Are NRI’s/PIO’s allowed to rent out the properties (residential/commercial)?

Yes, they can freely rent out their immovable property, whether purchased through application of forex or otherwise. Only the after-tax amount of such rental income can be repatriated outside the country without seeking any permission from the RBI.

for further details on the Acquisition and Transfer of Immovable Property in India by a person resident outside India please visit the Reserve Bank of India

The Indian finance ministry has raised questions on the new foreign direct investment (FDI) rules announced earlier this year.

These FDI rules have driven many domestic firms to rework their ownership structure for attracting inflows in areas such as retail through the back door.

The department of industrial policy and promotion (Dipp) is examining the issues raised by the finance ministry, said a top commerce & industry ministry official on Friday. Dipp is the nodal agency for FDI guidelines in the country.

“The finance ministry has raised some generic issues and we should be able to address them properly,” said Dipp joint secretary Gopal Krishna, without specifying the issues raised by the ministry. Mr Krishna was speaking on the sidelines of a function organised jointly by consulting firm Booz & Company and industry body American Chamber of Commerce (AMCHAM) in Delhi.

The government had amended the FDI policy this February, stipulating that if an Indian company with foreign equity of less than 50% invests in another local firm, it would not be considered as FDI.

FDI inflows into India are expected to be $30 billion by the end of March 2010, an increase of 9% over the $27.5 billion recorded in 2008-09. This means the rise in total FDI will be largely due to fresh flows into the country as the reinvested earnings of MNCs operating in India are expected to remain at $10 billion, the same as last year.

Many in the Indian property sector are also lobbying for further relaxation in relation to foreign ownership of Indian property to kick start the Indian property market. This is currently not permitted by the Reserve Bank of India (RBI) but pressure is building on ways to continue India’s boom which has slowed dramatically. Foreign ownership of Indian property is a very contentious issue and will greatly depend on the formation and direction of the next government in India, which will be watched closely by the Indian real estate industry.