Acquisition of Real-Estate in India by Foreign Entities

A lot of non-Indian entities or foreign entities who establish any form of their business in India invariable look towards acquiring some real estate property as well whether through a lease, a licence or even through sale of real estate.

A lot of non-Indian entities or foreign entities who establish any form of their business in India invariable look towards acquiring some real estate property as well whether through a lease, a licence or even through sale of real estate. For example, it has been long seen that Japanese entrepreneurs have established their businesses in India avidly and invariably their interest has also peaked towards acquiring real estate in India as well, whether it is for commercial or industrial purposes. The acquisition of real estate by foreign entities can be undertaken through Foreign Direct Investment (FDI) which must be read along with the Foreign Exchange Management Act, 1999. However it is also important to ensure that these foreign entities comply with the central laws as well as the state or local laws.

Usually a foreign entity sets up a liaison, branch or a subsidiary office in India under the Companies Act, 2013 or even establishes itself as a Limited Liability Partnership (LLP) in order for it to acquire any real estate apart from agricultural land for any of its business activities. In certain countries like Japan, there are no restrictions on foreign entities acquiring any land, however in India a foreign entity is prohibited from engaging in real estate business. Real estate business means dealing in land and immoveable property with a view to earning profit, but does not include development of townships, real estate investment trusts (REIT) registered and regulated under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014, construction of residential and commercial premises, roads, bridges, educational institutions, recreational facilities and city and regional level infrastructure. Any amount earned via rent or income from leases of the property which does not amount to any transfer is not deemed to be a real estate business whatsoever.
 
When can a Foreign Company Acquire or Hold Properties in India?
  • In order to learn about when a foreign entity can acquire real estate in India we must refer to Section 6(5) of the Act, according to which, a person resident outside India may hold, own, transfer or invest in immovable property situated in India only when such property is acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. Only if this above section is satisfied can a foreign entity hold real estate in India
  • Furthermore, Clause 7 of Part II of the Master Direction and Clause 4 of the Notification states that any branch, office or any other place of business, apart from a liaison office, hat has been established by a person resident outside India can acquire immovable property in India. However, such property can only be purchased when it is absolutely essential or incidental to the activity being carried on by the branch or office therein. 
  • Moreover, apart from the aforementioned requirement, any person resident outside of India who has acquired any immovable properties in India must file Form IPI within a period of 90 days from the date of acquisition of such properties. However, any acquisition of immovable properties by any branch offices of persons resident in Pakistan, China, Bangladesh, Sri Lanka, Afghanistan, Iran, Hong Kong, Macau, Nepal, Democratic People’s Republic of Korea and Bhutan has been carved out in these special clauses unless a prior approval has been obtained by these members from the RBI specifically.
  • In addition to these above stipulated requirements, there are some other blanket provisions which very specifically state that any person acquiring immovable property through its branch or office must be compliant with all the laws, rules, regulations and the directions for the time being in force, prior to application for any such acquisition. 
In light of the above, it can be concluded that foreign companies are not allowed to acquire properties through any means including asset sale in India except upon occasions wherein such foreign companies already have a branch or office situated in India. In addition to the requirement of having such a branch or office in India, this immovable property can only be acquired when such an acquisition becomes essential or incidental to the business of such a branch or office and not to the business of the foreign company whatsoever.  

Foreign investment allowed in AIFs, REITs and  InvITs under automatic route
 
A real estate investment trust (REIT) is primarily a company which owns, operates and finances any income-generating real estate in the country. This trust has been incorporated based on the model of mutual funds and thus REITs pool the capital of numerous investors together. This process makes it possible for individual investors to earn dividends from real estate investments even without having to purchase, manage, or finance any properties themselves at all.

Foreign investments in real estate:

According to a notification released by the RBI, the RBI has sought to amend some provisions given under the Foreign Exchange Management (Transfer or Issue of Securities by Persons Resident in Outside India) Regulations, 2000.Schedule 11 has now been inserted within the Regulations.

The key amendments in this regard are as follows which further aid foreign investment are as follows:
 
  • Foreign investors including RFPIs and NRIs are now allowed to invest in units of investment vehicles such as AIFs, REITs and InvITs under the automatic route. However, the citizens of or entities incorporated in Pakistan or Bangladesh are not permitted to make investments under this route in India.
  • The Units acquired under Schedule 11 can be sold, transferred or redeemed as per the regulations framed by SEBI or the directions issued by the RBI for this purpose.
  • If neither the sponsor nor the investment manager is an Indian owned and controlled entity, then the downstream investments by such an investment vehicle shall be regarded as a foreign investment.
  • The ownership and control of such an investment vehicle shall be determined through the sponsor and the investment manager which means that the extent of the foreign investment in the corpus of the investment vehicle shall not be relevant in order to determine whether a downstream investment by the investment vehicle is a foreign investment or not.
  • When the sponsor and the investment manager are individuals, the downstream investment by such an investment vehicle shall be treated as domestic investments if both of them are resident Indian citizens only.
  • Now, Limited Liability Partnerships (LLPs) have been excluded from acting as a sponsor or an investment manager of an investment vehicle herein.
  • Any downstream investment by a foreign owned and controlled investment vehicle would need to be compliant with the sectoral caps and conditions which have been laid down within the policies of FDI.
  • Any downstream investment in an LLP by a foreign owned and controlled investment vehicle must be compliant with the relevant FEMA regulations and FDI policies which are in place.
  • Any portfolio investments by foreign owned and controlled Category III AIFs can be made only in those securities or instruments which are permitted for RFPIs.
  • Any investment vehicle receiving the foreign investment is obliged to submit the reports to the RBI/ SEBI as may have been prescribed.
All the liberalization measures which have been enumerated above, are expected to be of great benefit to the private equity and the venture capital industry in India. This would in turn help foreign investors to directly invest in the Indian pooling instruments instead of routing these investments via foreign pooling vehicles in turn. Accordingly, the LLP’s on the other hand are not authorised to act as a sponsor or an investment manager for an investment vehicle due to the ownership and control of an LLP being undeterminable under the policies of the FDI. However, after the release of a Notification by the Department of Industrial Policy and Promotion (DIPP) a definition which clearly states an LLP’s nature and characteristics has been provided for better understanding. The RBI is to take account of this recent amendment and thus consider allowing LLP’s to also act as sponsors or investment managers of investment vehicles hence.

The acquisition of real estate in India includes the below mentioned aspects:
  • Hiring a Real estate broker and drafting the Letter of intent: A real estate broker provides much needed expertise and thus it is essential to employ real estate broker for helping the company better identify the needed requirements. The primary framework between the parties is established by a Letter of intent and which is a non-binding agreement amongst the parties. No consideration is required to be paid for the same but parties may mutually agree to pay any amount if felt necessary.
  • Due diligence and execution of the sale agreement: A detailed due diligence is necessary for keeping a check over the usage, structure, outstanding litigation etc. Further, the company can either enter into a lease agreement (in case of any prior conditions) or a sale agreement before executing the main agreement. The documentation pertaining to all these agreements must be diligently analysed. Even though such prior agreements are not mandatory, in some states they could attract a certain stamp duty. Certain other states could also need it to be registered with the Registrar for more compliance. Hence the laws prevailing in the specific State wherein investment is sought, must be checked
  • Execution of deed and Registration: The final agreement is allowed to be executed by the parties once all the above mentioned conditions are fulfilled and the deed of lease or conveyance may therefore be executed respectively. After the deed of lease or conveyance is submitted with the Registrar of Assurances, a stamp duty, which varies from state to state is levied upon this document. This document only then, becomes a mandatorily registered document which can be taken to a court of law as proof for the rightful transfer of the immovable property rights.