UNIVERSITY PROJECT FDI in India Specific to Registered Real estate

Project Guide PROF. NITIN KULKARNI

Project prepared by Vijay Dattatraya Alankare (Master in Financial Management) MFM- III Year, Semister I Roll No- 62

METS Institute of Management Bandra (W) - Mumbai Academic Year: 2009-2010

Contents
1)

Introduction - Opportunities for FDI & NRIS in Indian Real Estate as on July 31, 2006.

2) Benefits of FDI in Real Estate 3) Discouraging Aspects of the FDI Policy in Real Estate
4)

FDI in Real Estate: Basic Guidelines Real Estate Laws in India a. Indian Transfer of Property Act Indian Registration Act, 1908 b. Indian Urban Land (Ceiling And Regulation) Act, 1976 c. Stamp Duty d. Rent Control Acts

5)

Foreign Funds Investors in India: RBI puts curbs on FII entry in real estate IPOs

6) SEBI Norms for Real Estate Mutual Funds 7) FDI in Real Estate - Aspects to be considered 8) India and China A Comparison case study

Introduction - Opportunities for FDI & NRIS in Indian Real Estate as on July 31, 2006. Indian real estate has huge potential demand in almost every sector especially commercial, residential, retail, industrial, hospitality, healthcare etc. Commercial office space requirement is led by the burgeoning outsourcing and Information Technology Industry. The leaders of the IT/ITES world have set up or are setting up their centers in India. Estimated demand from IT/ITES sector alone is expected to be 150mn sq.ft. of space across the major cities by 2010. In residential sector there is housing shortage of 19.4 million units out of which 6.7 million are in urban India. The increase in purchasing power and exposure to organized retail formats has redefined the consumption pattern. As a result the country has experienced mushrooming of retail projects across the cities. The main growth thrust is coming due to favorable demographics, increasing purchasing power, existence of customer friendly banks & housing finance companies, professionalism in real estate and favorable reforms initiated by the government to attract global investors.

Foreign Investment (FDI) in Real Estate Sectors in India Foreign Direct Investment is encouraged and permitted, subject to certain conditions, in the following real estate sectors in India:

Hotel Development Tourism Hospitality Township development Developing Commercial Real Estate Built-up infrastructure Housing and construction projects Building Resorts Building Hospitals Building Educational institutions Building Recreational facilities Infrastructure projects: regional and local level Special Economic Zones (SEZ's)

Conditions for Foreign Investment in Real Estate Sector in India Foreign Direct Investment in some of the aforesaid areas (not all) is subject some conditions, some of which are as follows:

Develop a minimum land area of 10 hectares for serviced housing plots, and a minimum built-up area of 50,000 sq m in case of construction projects. The policy does not clearly define built-up, though FSI (Floor Space Index)/FAR (Floor Area Ratio) could be used as a basis for the same. Fulfill the minimum capitalization norm of $10 million for a wholly-owned subsidiary and $5 million for JVs. The funds would have to be brought in within six months of commencement of business (which needs to be defined) of the subsidiary or JV. Complete at least 50% of the integrated project within five years from the date of obtaining all clearances. Do not sell undeveloped plots (with no infrastructural backup). Provide infrastructure and obtain the completion certificate from the concerned local body before disposal. This clause needs amendment because certificates are sometimes not issued for months on end, even years, an uncertainty which tends to raise project cost, often beyond viability. Do not repatriate original investment before three years from completion of minimum capitalization. Early exits require prior approval of the Foreign Investment and Promotion Board.

Conform to all applicable local and state laws, and abide by all regulations and norms.

FDI in Real Estate in India Previously, only NRI's and PIO's were allowed to invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly-owned subsidiary or through a joint venture (JV) company along with a local partner. India fully opened FDI in real estate in 2005. However, norms issued later made a minimum capitalization of $10 million for wholly-owned subsidiaries and $5 million for joint ventures mandatory. The government also imposed a minimum area requirement. The department of industrial policy and promotion had in March 2005 allowed FDI in real estate in projects in a minimum area of 25 acres. The finance ministry has allowed external commercial borrowing (ECB) in realty projects involving integrated townships of 25 acres or 50,000 sq m. However, the Reserve Bank of India has not yet notified it. At present, the government allows FDI in real estate, but does not permit foreign institutional investment. It is, however, considering a proposal not to view FDI and FII as distinct investment flows while specifying an overall limit. It is yet to permit foreign venture capital investors (FVCI) in the realty sector. To ensure that the concept of special economic zones (SEZs) did not distort the realty market, the

RBI has classified lending to SEZs on par with commercial real estate, according it higher risk weight and provisioning. The RBI allows ECB in real estate projects involving integrated townships of 100 acres or more. In real estate projects, a large portion of money is required for land acquisition, which is classified as working capital. But enduse restrictions like not allowing ECB money to be used for working capital take away its attractiveness.

Real Estate Laws in India Investing in real estate in India require compliance with various laws which run into dozens, some of them more than 100 years old and some very new. In addition to federal laws of India, there are many state laws governing real estate transactions and investment. The federal laws governing real estate include:

Indian Transfer of Property Act The Transfer of Property Act governs the transfer of property by various means. Sales, mortgages (other than by way of deposit of title deeds) and exchanges of immovable property are required to be registered by virtue of the Transfer of Property Act. Therefore, all the above documents must be in writing and registered. Indian Registration Act, 1908 The purpose of this Act is the conservation of evidence, assurances, title, publication of documents and prevention of fraud. It details the formalities for registering an instrument. Instruments which require mandatory registration include:
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(a) Instruments of gift of immovable property; (b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, to or in immovable property; (c) non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of instruments in (2) above. (d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent Sales, mortgages (other than by way of deposit of title deeds) and exchanges of immovable property are required to be registered by virtue of the Transfer of Property Act. Evidently, therefore, all the above documents have to be in writing. Section 17 of the Act provides for optional registration. An unregistered document will not affect the property comprised in it, nor be received as evidence of any transaction affecting such property (except as evidence of a contract in a suit for specific performance or as evidence of part-performance under the Transfer of Property Act or as collateral), unless it has been registered. Thus the doctrine of part performance dealt with under Section 53 A of the Transfer of Property Act and the provision of Section 49 of the Registration Act (which provide that an unregistered document cannot be admissible as evidence in a court of law except as secondary evidence under the Indian Evidence Act) together protect the buyer in possession of an unregistered sale deed and cannot be dispossessed. The net effect has been that a large number of property transactions have been accomplished without proper registration. Further other instruments such as Agreement to Sell, General Power of Attorney and Will have been indiscriminately used to effect change of ownership. Therefore, investors in real estate have to be careful in their due diligence.

Indian Urban Land (Ceiling And Regulation) Act, 1976 This legislation fixed a ceiling on the vacant urban land that a 'person' in urban agglomerations can acquire and hold. A person is defined to include an individual, a family, a firm, a company, or an association or body of individuals, whether incorporated or not. This ceiling limit ranges from 500-2,000 square meters. Excess vacant land is either to be surrendered to the Competent Authority appointed under the Act for a small compensation, or to be developed by its holder only for specified purposes. The Act provides for appropriate documents to show that the provisions of this Act are not attracted or should be produced to the Registering officer before registering instruments compulsorily registrable under the Registration Act. This legislation was repealed by the federal government in 1999. The Repeal Act, however, shall not affect the vesting of the vacant land, which has already been taken possession by the State Government or any person duly authorized by the State Government in this regard under the provisions of Urban Land Act. The repeal of the Act, it is believed, has eliminated the large amount of litigation and released huge chunks of land into the market. However the repeal of the Act has not been carried out in all states. Initially the repeal Act was applicable in Haryana, Punjab and all the Union Territories. Subsequently, it has been adopted by the State Governments of Uttar Pradesh, Gujarat, Karnataka, Madhya Pradesh and Rajasthan. Andhra Pradesh, Assam, Bihar, Maharashtra, Orissa and West Bengal have not adopted the Repeal Act so far. Stamp Duty Stamp duty is required to be paid on all documents which
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are registered and the rate varies from state to state. With stamp duty rates of 13 per cent in Delhi, 14.5 per cent in Uttar Pradesh and 12.5 per cent in Haryana, India has perhaps one of the highest levels of stamp duty. Some states even have double stamp incidence, first on land and then on its development. Rent Control Acts Rent legislation in India has been in existence for a very long time. Rent control by the government initially came as a temporary measure to protect the exploitation of tenants by landlords after the Second World War. However these rent control acts became almost a permanent feature. Rent legislation provides payment of fair rent to landlords and protection of tenants against eviction. Besides, it effectively allows the tenant to alienate rented property.

Property Tax Property tax is a levy charged by the municipal authorities for the upkeep of basic civic services in the city. In India it is the owners of property who are liable for the payment of municipal taxes. Generally, the property tax is levied on the basis of reasonable rent at which the property might be let from year to year. The reasonable rent can be actual rent if it is found to be fair and reasonable. In the case of properties not rented, the rental value is to be estimated on the basis of letting rates in the locality.

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Foreign Funds Investors in India: RBI puts curbs on FII entry in real estate IPOs The foreign portfolio investment in real estate in India has come under regulatory glare. The Reserve Bank of India (RBI) has thrown in a caveat on FII subscription to public equity offerings by real estate companies. The RBI is of the opinion that such firms can sell their initial or follow-on public stock offerings to FIIs, only if the real estate projects being developed fulfill the conditions for foreign direct

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investment. The central bank, which has the last word on cross-border fund inflow, has indicated this to investment bankers and advisors of real estate firms planning to tap the capital market. One of the companies planning an issuance has already dropped the idea of marketing shares of its forthcoming equity issue to FIIs; while another firm has positioned itself as a construction company (one which doesn't own the land as distinct from a real estate company) to sidestep the restriction. The issue has boiled down to subtle differences between FII and FDI. The facts are: real estate projects can attract FDI up to 100 percent, subject to certain conditions which were spelt out by the government in April '05. These conditions include minimum area to be developed, minimum capitalization, no repatriation of original investment before 3 years and ban on sell of under-developed plots. If a project meets these conditions, the concerned company can attract FII subscription up to 24 percent equity, and later revise it to the sectoral FDI cap, which is 100 percent in this case. However, for a company not willing to meet the stringent project conditions, the FII route could be used to overcome the rules and bring in foreign investment. All the company needs to do is get FIIs that are registered with SEBI to invest in the IPO. This is what the RBI is possibly objecting to. Interestingly, the regulator is not averse to FIIs buying shares in the secondary market. In other words, even though FIIs cannot subscribe to a real estate firm's IPO (if the project concerned is non-FDI compliant), they can buy shares through a registered broker once the company gets listed. Madaan & Co. believes that further clarifications are required by the RBI in order to clear the contradictions in various policies of the Government of India. The foreign Investors should also be careful in investing in real estate in India. A proper legal advice is highly recommended before investing in this sector. In a nutshell:

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INVESTORS

BE

WISE

For More details see FDI in India Sector wise Guide

SEBI Norms for Real Estate Mutual Funds Securities and Exchange Board of India (SEBI) has issued guidelines on real estate mutual funds (REMFs). Once these investment vehicles see the light of the day, small investors will be able to participate in, and profit from, the real estate growth story. The way the policy is evolving in India, initially REMFs will be allowed to invest in listed entities only. The next step will be to set up real estate investment trusts (REITs), which will be allowed to invest directly in real estate assets. This graduated approach is being followed to allow time for the market to mature, and so that public money is not put to undue risk..

Real Estate FDI

India of today can be acknowledged as the one of the fastest growing economy in the world and in this current economic status, real estate has emerged as one of the most appealing investment areas for domestic as well as foreign investors. And this high growth curve in the real estate

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sector owes some credit to a booming economy and liberalized Foreign Direct Investments (FDI) regime in the real estate sector. The Government of India in March 2005 amended existing norms to allow 100 per cent FDI in the construction business. This liberalization act cleared the path for foreign investment to meet the demand into development of the commercial and residential real estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector. Until now, only Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly owned subsidiary or through a joint venture company in India along with a local partner. Some of the foreign players who have already tied up with Indian real estate developers are Lee Kim Tah Holdings, CESMA International Pvt Ltd., Evan Lim, and Keppel Land from Singapore, Salim Group from Indonesia, Edaw Ltd., from USA, Emaar Group from Dubai, IJM, Ho Hup Construction Co., from Malaysia etc. Indian Real estate is on the high growth path In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate shares was 10.6%. However, in 2005-06, while total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The Study, nevertheless projects that in 2006-07, total FDIs will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.

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Source: ASSOCHAM report Guidelines for FDI application in Indian real estate The Government of India has set up certain guidelines for investors willing to apply in FDI in real estate, which have conditions like area, investment options and target for completion of a project. 1) Minimum area In case of development of serviced housing plots, 10 hectares (25 acres) In case of construction-development projects, built-up area of 50,000 sq m. In case of a combination project, any of the above two conditions 2) Investment Minimum capitalization

for wholly owned subsidiaries - US$ 10 million

for JV with Indian partners - US$ 5 million, to be brought in within 6 months of commencement of business Original investment cannot be repatriated before a period of three years from completion of capitalization.

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FOREIGN DIRECT INVESTMENTS IN REAL ESTATE Foreign Direct Investment (FDI) basically is the revenue brought into the country by foreign agencies for the purpose of business or investments, through the official Foreign Investment Promotion Board (FIPB) channels. The Indian Government has allowed FDIs for several industries in the recent past. FDI in Real estate is being permitted since January 2002. Despite the fact that it is almost a year, since the FDI was allowed in Real Estate, the response is not encouraging. Lets look at the FDIs norms in real estate, their positive and negative aspects and what needs to be done to encourage FDI, in this paper. Table I gives the policy guidelines for FDI in Real Estate. TABLE I - EXISTING POLICY GUIDELINES FOR FDIs IN REAL ESTATE 1. The minimum capitalization norm will be $10 million for a wholly owned subsidiary and $5 million for joint ventures with Indian partners. 2. The minimum area to be developed by a company will have to be 100 acres.

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3. A minimum lock-in period of 3 years from completion of minimum capitalization shall apply before repatriation of original investment is permitted. 4. A minimum of 50% of the integrated project development must be completed within a period of 5 years from the date of possession of the land. 5. The company must be registered as an Indian company under the Companies Act 1956 and will be allowed to take up land aggregation and development. 6. FIPB under the Ministry of Urban Development & Poverty Alleviation will process all FDI cases and set guidelines for the companies. Rese arch@Indiapr operties Benefits of FDI in Real Estate FDI in real estate can create major inflows of funds that can enhance domestic investment to achieve a higher level of real estate development. FDI can certainly bring in the funds at reasonably cheaper rates, besides new ideas and technologies, which would enhance the efficiency of the Indian construction industry. A major part of the cumbersome procedures of the government and RBI are simplified with the FDI policy. So, the impact on the real estate industry can be significant, leading to increased competition levels among the local developers, in terms of price, quality and timing. The potential of growth and contribution of the real estate industry to the GDP is tremendous in India, as compared to other countries; see Figures I and II. Figure III indicates the breakdown of the cost of construction in India versus the United States. To realize this potential, FDI is a must. All the benefits we mentioned
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above can happen only when a congenial environment is created for FDIs. FIGURE I Comparison of Construction Sector Growth (9498)

Construction Sector Growth (94-98) - Comparisons

15.5% 15.1% 15.0%

10.6% 9.2%

4.2%

China

Brazil

Taiwan

Korea

Thailand

India

Source: McKinsey Report Research@Indiaproperties

18.0% FIGURE II

Construction's Contribution to the GDP( 1999) Constructions Contribution to the GDP (1999) 17.0%
12.5% 12.0% 8.0% 7.8%

7.0%

6.0%

5.2%

18

Portugal

Ireland

Canada

Poland

UK

USA

Japan

Slovak Republic

India

Source: McKinsey Report Research@Indiaproperties

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FIGURE III Breakdown of Cost of Construction in India Vs US

Breakdown of Cost of Construction in India Vs US (1999) India
18% 49% 5%
37% 24%

US
9%

28%

30%

Land Cost

Profits

Labour Cost

Material Cost

(1999) Source: McKinsey Report Research@Indiaproperties Discouraging Aspects of the FDI Policy in Real Estate The current FDI norms have receive only lukewarm response from foreign investors. In the past eleven months, the FDI in Real Estate Investment is not encouraging. Only one project has been approved. Why so? Here is a glance at the key issues. 1. Minimum Area of Development The guidelines say that the minimum area to be developed by a company will have to be 100 acres. For a foreign player, finding 100 acres of land around Indian cities will not be too easy. Most local developers have already cornered this market, so the present market conditions are not very attractive to the foreign developers. It will be less restrictive, if this minimum area is reduced from 100 acres to 25 acres. 2. Restriction on Development
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Plus the FDI policy does not allow developers to have a free say on the type of development. Restrictions include areas to be reserved and handed over free for various uses. Plus there are reservations for no-profit-no-loss (NPNL) categories and economically weaker section (EWS) housing. These restrictions must be relaxed for all developers, both local and foreign. 3. Minimum Capitalisation Plus the minimum capitalisation norm is USD 10 million for a wholly owned subsidiary and USD 5 million for joint ventures with Indian partners. This may not be much of an issue. The biggest hurdle is that the housing/township sector does not qualify for the infrastructure sector (Section 80IA) benefits under the Income Tax (IT) Act and unlike other infrastructure projects, it does not get a tax holiday. 4. Other Issues Other issues like high tax rates, weak exchange status, restrictive clauses and high levels of corruption, red tape and bureaucracy make India a less attractive destination for FDIs in real estate. Foreign investors are also worried that essential infrastructure like electricity, water and roads, which are the governments responsibility, may not come through on schedule. Indias real estate markets are far less structured and developed compared to the western countries. Hence, some major changes like repealing the ULCRA and rationalizing the stamp duties during registration are required to be implemented fast. These changes will most likely be in the form of easier financing for development and encouragement of institutional investment in commercial real estate development. Figure IV shows the low levels of labour productivity in India with respect to other nations.

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FIGURE IV Comparison of Labour Productivity in Residential Construction

International Comparison of Labour Productivity in Residential Construction
100 80 70 60 35 25 10 8

US(1 995)

France(1 994)

Germany(1 994)

Korea(1 995)

Brazil(1 995)

P oland(1 997)

Russia(1 997)

India(2000)

Indexed of output per labour hour* : US average= 00 1

Source: Research@Indiaproperties

McKinsey

Report

India and China A Comparison Indias FDI has always been compared with China and this is where the differences stand out. For 2000, FDIs for China and India stand at USD 40 billion and USD 2 billion, respectively, showing India in poor light. But, India considers
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only cash inflows of equity when counting its FDI, but China reflects cash, reinvested earnings and round-tripping routing through Hong Kong in its FDI calculations. Based on the standard IMF methodology, Indias FDI inflows stand at $8 billion while China stands at $22 billion. There is still a wide gap, but one that can be bridged. Of course, about half of Chinas FDIs are in the real estate sector, while India has minimal FDI in this sector. One must understand that there is no private ownership of land in China. Plus differences in the political environment between the two countries may also have an impact on FDIs. The political structure in China still binds politicians strongly to entrepreneurs and infrastructure is able to keep pace with the growth in real estate. But one must keep in mind that India and China are not competing for FDIs from the same sources, but totally different sectors. Though China appears to be outperforming India in FDIs, India is better placed than China in the democratic, financial and business sectors. Table II compares the two giants from the economic point of view.

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TABLE II - COMPARATIVE STATISTICS OF CHINA AND INDIA (2000)

NO DESCRIPTION 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Population (billion) Urban Population (%) GDP (Billion $) Per capita income ($) Exports (billion $) Inflation (%) Savings (% of GDP) Labour Laws Corporate Tax (%) Double Taxation Value Added Tax (VAT)

CHINA 1.276 37 1121 990 250 1.3 39 More flexible 15 No Yes

INDIA 1.029 33 440 440 44.1 4.0 22 Less flexible 36.75 Yes No 417

Power Generation (billion 1,166 KW) Electricity ($/100KW) Sea Freight tonnes)

Tariff 4.3 (Rs 7.53 (Rs 1.97/unit) 3.80/unit) (million 922.37 ports) 1.7 68.0 12 (17 251.73 ports) 3.0 81.5 46 10 (12

Roads (million km) Railways (thousand km) People per telephone

Percent FDIs from non 65

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NO DESCRIPTION residents 19 20 Forex Reserves $) Internet (millions)

CHINA

INDIA

(billion 312

67 3

Connections 35

Research@Indiaproperties

What needs to be done? Our wish list: Presently, most foreign companies have a wait and watch approach to this FDI policy. Pressures from the real estate industry lobbies and potential investors will move the government to ease many restrictions, such as minimum acreage and lock-in period. And the authorities must act accordingly and fast, if a large amount of FDI needs to flow into India and boost the real estate industry. Foreign companies will want to minimise risks and maximise the learning process; hence they would prefer smaller schemes. India must offer reasonable returns and flexibility to balance perceived risks to international investors. The government must also allow FDIs in the commercial sector. With 100% FDI, real estate will see increased liquidity and developers will have to deliver in time and as per global standards. Finally, the infrastructure must be in place for foreign investments to flow into the development of new cities and townships in India. Indian real estate developers are of the opinion that these restrictions in the existing guidelines must be relaxed for all developers, both local and foreign, if the government wants to boost the real estate sector in the country. It is also clear that the construction and housing industry should be declared a key infrastructure sector
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considering its growth would have a direct positive impact on the overall sluggish economy of India.

First FDI success Almost a year after opening up the real estate sector to FDI, the FIPB has approved the first FDI project for a 100-acre residential township in Gurgaon. An Indian infrastructure and property consultancy company, Feedback Ventures Ltd. has tied up with Malaysia-based real estate companies, Kontur Bintang and Westport, for the project costing Rs. 800 crore.

Related Developments REITs or REMFs This new concept of Real Estate Investment Trusts (REIT) will be introduced in India. This is one good way of raising funds in the money starved real estate sector. FDIs in Retail Sector: The Industry Ministry has recommended to the government to allow FDI in the retail sector with minimum capitalization conditions for foreign retail companies interested in setting up 100% subsidiaries as well as joint ventures with Indian partners. This will boost the disorganized retail sector as well as the commercial real estate markets. Further Reading: 1. McKinsey Report on India 2000 2. World Investment Report 2000/2001 UNCTAD 3. Srinivas, B. (1996) Foreign Direct Investment and Foreign Debt: Experience of India and China, Economia Internationale, Vol.XLIX No. 2.

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4. UNCTAD (1992) The determinants of Foreign Direct Investment A Survey of the Evidence 5. World Bank (1997) Private Capital flows to Developing Countries - The Road to Financial Integration, World Bank Policy Research Report, Washington DC

Research@indiaproperties

Opportunities for FDI (Foreign Direct Investment) & NRI'S (Non Resident Indians) in Indian Real Estate as on July 31, 2006

Non-resident Indian investments allowed under all categories. Direct FDI allowed in residential townships of more than 25 acres and in construction with approval for projects offering built-up area of more than 50 thousand square meters. Direct and automatic approval for IT park and hotel investments. Foreign and domestic venture capital investment in real estate allowed with prior approval. Within special economic zones, akin to Foreign trade zones in the USA , developments, free capital and dividends allowed with many specific tax exemptions on profits (5 to 10 years), and local taxes. Foreign investors are allowed to invest in Greenfield / Brownfield developments.
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Regulatory Developments

As per a policy initiative of the Securities and Exchange Board of India, Indian venture capital firms are now allowed to invest in real estate companies and projects. The Cabinet Committee of Economic Affairs of India has allowed 100% Foreign Direct Investment (FDI) in the construction sector under the automatic route. Foreign investors can now invest in commercial real estate developments projects with a minimum built area of 50,000 sq. meters. The minimum area threshold for Foreign Direct Investment in Integrated Township projects has now been reduced to 25 acres from 100 acres. A number of projects that were previously stalled for non availability of such contiguous land parcels in major cities are now expected to come on line. Foreign investors are still barred from acquiring and trading in undeveloped land. This regulatory restriction has been imposed primarily to stem the flow of speculative capital that may negatively impact the stability in land markets. The Securities and Exchange Board of India has also recently approved the guidelines for real estate mutual funds, allowing them to invest directly in real estate properties in India.

FDI Investments Earlier, Foreign Direct Investments in the real estate was restricted to development of industrial parks, hotels, integrated townships and SEZ's. But on March 3, 2005, the

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Government of India replaced the integrated township policy to permit Foreign Direct Investments upto 100% in townships, housing, built-up infrastructure & construction development projects, under automatic route (Press Note 2 (2005 series)). This amendment broadened the scope of FDI in Indian real estate arena & opened path towards investments in :

Townships Housing Commercial Premises Hotels Resorts Hospitals Industrial parks Educational Institutions Recreational Facilities

SEZ's, etc Further, it was ensured that FDI backed projects would be accorded national treatment at par with local developers. The State Government's/ Municipal bodies now approve projects for construction-development involving foreign investment. FDI in Real Estate - Aspects to be considered With the increasing foreign direct investments in the realestate business, minimum built up area in case of construction-development projects - super built up area or covered (carpet) area may be governed by local regulations which is typically based by Floor Space Index (FSI)/ Floor Area Ratio (FAR) The requirement of minimum land area of 25 acres is only for projects where land developed with provision of common facilities & infrastructure for subsequent sale as plots for independent housing i.e serviced housing plots. By implication, for 'constructed housing', criteria of minimum built up area of 50,000 sq mtrs should apply.
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The minimum capitalization requirement of US$ 5 million, i.e., capitalization requirement for JV company or minimum capital contribution by foreign investor refers to capital to be brought in by the foreign investor in the JV Company. FDI in Industrial Parks and Hotels & Tourism Investment by foreign directs in Indian industrial parks, hotels & tourism hold the following the aspects: Industrial Park

FDI upto 100% permitted under automatic route in Industrial Parks (ie Technology Parks, Biotech Parks), approved by State Government

Approval from Department of Industrial Policy & Promotion under Industrial Park Scheme, 2002 is only for availing 100% tax holiday Hotels & Tourism

100% FDI permitted automatic route

in

Hotels

& Tourism

under

FDI in Hotels should not be governed by Press Note 2 (2005 series), clarification still awaited on the issue. FDI in Special Economic Zone (SEZ) Cent percent investment is permitted under automatic route for setting up of SEZs. The SEZ Bill, 2005 passed by Parliament and is awaiting President's assent. This bill:

Provides single window developers & units in SEZs

approval

mechanism

for

Provides fiscal concessions for SEZ units/ developers exemption from customs duty, excise, cess, service tax, income tax, stamp duty (under Indian Stamp Act, 1899), etc. Moreover, the bill is expected to trigger significant inflow of funds in infrastructure, increase production capacity and creation of new employment opportunities in the Indian

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economy. FDI in Construction & Development The State Government's/ Municipal bodies will now approve projects for construction-development involving foreign investment. These projects, backed by FDI, will be accorded national treatment at par with local developers. The various criteria & conditions governing these investments are: Criteria for Development

Minimum 10 hectares/ 25 acres area to be developed for serviced housing plots For construction-development projects, minimum builtup area of 50,000 sq mts prescribed

In case of a combination project, any one of above two conditions would suffice Conditions for Investment

Minimum capitalization of US$ 10 million for wholly owned subsidiaries US$ 5 million for joint ventures with Indian partners Funds to be brought in within 6 months of commencement of business

Original investment cannot be repatriated before a period of 3 years from completion of minimum capitalization. Investor may be permitted to exit earlier with prior Government approval Other Conditions

At least 50% of project must be developed within of 5 years from date of obtaining all statutory clearances Project to conform with norms & standards laid down by respective State authorities Investor is responsible for obtaining all necessary approvals as prescribed under applicable rules/byeLaws/regulations of the State Concerned Authority will monitor compliance of
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prescribed conditions by developer. The active participation of FDI's in the Indian real estate industry has propelled an extensive growth & expansion of the industry, leading to a boom in the real estate investment. Further, enhancing Indian infrastructure & providing a sustainable growth.

Foreign Direct Investment in Real Estate in India An Introduction Introduction: The size of the real estate industry in India is estimated to be around US$ 12 billion. As per studies, this figure is growing at a pace of 30% for the last few years. Majority of the real estate developed in India (almost 80%) is residential space and the rest comprise office, shopping malls, hotels and hospitals. This incredible growth is mainly attributed to the off-shoring business, including high-end technology consulting, call centres and software programming houses. Evidently, this is the ideal time to invest in the country, even as the policy makers have begun to emphasize on developing adequate infrastructure for the country. After agriculture, the real estate sector is the second largest employment generator in India. The persistent demand from the Information Technology (IT) sector has also impacted the urban landscape in India. As per estimates, there is demand for 66 million square feet of IT space over the next five years. Several multinational companies continue to move their operations to India to make the most of lower costs of skilled manpower and logistics. Human resources being the key element in the IT industry, the hiring and housing of people, both at their work place and home, has assumed great significance. As such, there is a persistent need to

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create space for people to work and live, which in turn sets off the growth of other allied infrastructure. Though the real estate sector in India is asserted to be the most promising sector today, it is still hugely plagued by market uncertainties and traditional inhibitions. The real estate market in India mostly continues to remain unorganized, fairly fragmented, mostly characterized by small players with local presence. Foreign Direct Investment (FDI) in Real Estate The decision to liberalise the FDI norms in the construction sector is perhaps the most significant economic policy decision taken by the Government of India. Until now, only Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors, other than NRIs, were allowed to invest only in development of integrated townships and settlements, either through a wholly owned subsidiary or through a joint venture company in India, along with a local partner. However, the guidelines prescribed via Press Note 2 (2005) series, issued by Ministry of Commerce & Industry, have further opened out FDI in townships, housing, built-up infrastructure and constructiondevelopment projects. Major corporations are taking initiative and are wooing international players soliciting investments for major projects. FDI in Real Estate: Basic Guidelines The Department of Industrial Policy and Promotion (DIPP), vide Press Note No. 2 (2005), has permitted FDI up to 100% under automatic route in townships, housing, built-up infrastructure and construction development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure facilities, such as roads and bridges, transit systems etc.), subject to the following guidelines:
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1. The minimum area to be developed under each project would be as follows: a) In case of development of serviced housing plots, a minimum land area of 10 hectares. b) In case of construction development projects, a minimum built-up area of 50,000 sq.mts. c) In case of a combination of the above two projects, any one of the above two conditions would suffice. 2. The minimum capitalization norm shall be US$ 10 million for a wholly owned subsidiary and US$ 5 million for joint ventures with Indian partner/s. The funds would have to be brought in within six months of commencement of business of the company. 3. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the Foreign Investment Promotion Board (FIPB). 4. Development of at least 50% of the integrated project has to be completed within a period of five years from the date of obtaining all statutory clearances. The investor would not be permitted to sell underdeveloped plots (underdeveloped connotes, where roads, water supply, street lighting, drainage, sewerage and other conveniences as applicable under prescribed regulations, have not been made available). The investor must provide this infrastructure and obtain the completion certificate from the concerned local body/service agency before being allowed to dispose of the serviced housing plots. 5. The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as laid down in the applicable building control regulations, by-laws, rules and

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other regulations of the State Government / Municipal / Local Body concerned. 6. The investor shall be responsible for obtaining all necessary approvals, including those of the building / layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements, as prescribed under applicable rules/byelaws/regulations of the State Government / Municipal Body / Local Body concerned. 7. The State Government / Municipal / Local Body concerned, which approves the building / development plans, will monitor the developers compliance to the above conditions.

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