Navigating The Relationship Between Foreign Direct Investments And Real Estate In India

Real Estate in India is one of the country’s largest contributors to employment and the GDP – with an estimated growth spurt over in the upcoming decades. Historically, it was one of the most strictly protected and guarded sectors – with heavy regulations and rules to avoid speculations and restrict foreign involvement and investment. However, over the last two decades, the Government of India has taken diligent and strategic steps to liberalise the industry. It is essential to understand who can purchase immovable property in India to understand what changes have been made; persons other than residents, such as non-resident Indians and foreign nationals of Indian origin can purchase, while foreign nationals of foreign origin can only acquire property by way of inheritance or lease (for no more than 5 years). The concern of Foreign Direct Investments relates to foreign companies and not individuals, however – which begs the question – can they procure immovable property?

In the past, foreign investors were only permitted to invest, through a wholly owned subsidiary or joint venture with an Indian partner, in the development of townships or settlements. However, in a monumental move, a Press Note issued in 2005 by the Ministry of Commerce and Industry, a distinction was drawn between construction and real estate – allowing the formerly forbidden foreign investment into the sector. This meant that subject to certain conditions, 100% of FDIs under the automatic route were allowed in various areas such as housing, townships, construction development projects including resorts, hospitals, educational and recreational institutions, city and regional infrastructures, and more.

However, it was essential that certain guidelines be followed:

1. The minimum area sought to be developed must be ten hectares in case of serviced housing, 50,000 square meters in case of construction development projects, and in case of a combination of the two above, any of the conditions must be fulfilled.
2. For wholly owned subsidiaries, the minimum capitalisation norm must be USD 10 Million and for joint ventures with local partners, USD 5 million; within 6 months of commencement of business, the funds must be brought in.
3. The original investment made cannot be returned before a period of three years has been completed; however, special permission can be sought before the Foreign Investment Promotion Board.
4. Within a period of five years of obtaining all legal clearances, at least 50% of plots must be completely developed; investors are not allowed to sell underdeveloped plots – they must seek permission from the appropriate local regulatory body before disposing of the serviced plots.
5. The project must conform to all rules, norms, regulations and standards and will be subject to monitoring by any government, local or municipal bodies.

Despite the leaps and bounds of progress that has been made in the real estate and FDI relationship, there is a barrage of grey areas left untouched by the law and the government, leading to confusion and overlaps. FDI in completed assets is not permitted if the intent of the investor is to transfer the property – however if the intent is to earn income via rent. In this light, there are questions as to whether the current FDI norms are indeed liberal or if they have remained conservative.

The only possible solution appears to be a complete restructuring of FDI policies and norms – especially considering the damages that have been caused by the COVID-19 pandemic to the real estate industry. The new policy will ideally comprise regulations regarding FDIs for completed assets as well; allowing for the real estate industry to develop further by way of foreign investments