Can a Foreigner Sell/Gift Immovable Property Without RBI's Permission?

Introduction: Transitioning from FERA to FEMA

Under the Foreign Exchange Regulation Act, 1973 (‘FERA’)- the acquisition and disposal of immovable property situated in India by persons who are not citizens of India was restricted. Section 31(1) of FERA clearly laid down the legal position in the following manner:

(1) No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise an immovable property situate in India: Provided that nothing in this sub-section shall apply to the acquisition or transfer of any such immovable property by way of lease for a period not exceeding five years[1].
 
RBI approval was mandatory for the acquisition and sale of any immovable property by non-citizens. In the landmark judgement of the Supreme Court in Asha John Divianathan v. Vikram Malhotra (2021) it was held that the requirement for permission from the RBI under Section 31 is mandatory within the FERA, 1973 framework, and any transfer of immovable property situated in India made by a non-citizen was void in the event the condition under Section 31 was not duly met[2]. Although this case made its appearance well after the repeal of FERA, it demonstrates the legislative intent of Section 31(1) which was to curtail the unmonitored clearing of foreign exchange through repatriation of income received as sale proceeds from disposal of immovable property by a non-citizen[3].
 
It was clarified through a press release issued by the Reserve Bank of India that notwithstanding the contents of the judgement, at the present time, the provisions of FEMA, 1999 govern the acquisition and transfer of immovable property in India and NRIs/OCIs do not require prior approval of RBI for acquisition and transfer other than in the case of agricultural land, farm house, and plantation property[4].

As is evident from this progression, India's foreign exchange laws have undergone a noticeable transformation since the FERA regime. FERA was replaced with the Foreign Exchange Management Act, 1999 (‘FEMA’), coming into effect since June 1, 2000. In relation to the acquisition and transfer of immovable property by non-citizens of India, the key positional change under FEMA was the shift from the emphasis on citizenship to residential status. This broadened the categorization of overseas entities and the degree of restriction/permissions applicable to them.

This article aims to provide an overview of the current legal framework governing immovable property transactions for non-residents under the Foreign Exchange Management Act and adjoining regulations.
 

Regulatory Framework

The Foreign Exchange Management Act, 1999 sets the overarching law governing foreign exchange considerations in India. Section 6 and Section 41 of FEMA empower the RBI in conjunction with the Central Government to establish limits, conditions or classifications for foreign exchange admissibility vis-à-vis different categories of transactions[5].

Chapter IX of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 addresses specifically, the acquisition and transfer of immovable of immovable property situated in India. Chapter IX prescribes the legal position regarding acquisitions by different categories of non-residents, permitted methods of payment, joint acquisitions, transfer, repatriation of sale proceeds and prohibitions.
 

Categories of non-residents

Based on their categorisation, different non-resident entities are subject to varying regulations under FEMA law. In order to be compliant with the appropriate legal framework, it is crucial to be aware of which category is applicable to the entity.

Non-Resident Indian (NRI): 

Non-Resident Indians are citizens of India or a Person of Indian Origin (PIO). PIO being citizens of any country aside from Pakistan or Bangladesh, who at some point held an Indian Passport, or had an Indian spouse, or they had immediate family who were Indian citizens. The defining characteristics to meet this classification would be residence outside India for a duration exceeding 182 days of the financial year, and/or expression of intent to remain resident and employed overseas for extended/indefinite periods.

Overseas Citizens of India (OCI):

OCI refers to those persons who are registered as overseas citizens of India under the Citizenship Act, 1955[6]. OCI card holders enjoy rights similar to NRIs and their legal position is unique in that generally, they are exempt from the restrictions imposed on foreign nationals of non-Indian origin. For example, persons and legal entities from the countries of Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, Hong Kong, Macau or Democratic People’s Republic of Korea require prior permission from the RBI to acquire or transfer immovable property in India[7]. However, the above requirement is not applicable to OCI card holders or the foreign spouse of OCI card-holders being citizens of any of the above mentioned countries.

Non-Residents of Foreign/Overseas Origin:

Non-Residents of Non-Indian Origin refers to citizens of countries other than India that do not ordinarily reside in India. This includes foreign companies and legal entities. The Rules address the situations of joint acquisition of immovable property by spouses of NRIs and OCIs, alongside those foreign entities who are engaging in the acquisition and transfer of immovable property in India for permitted activities.
 

Permitted Transactions under FEMA, 1999

Non-resident Indians (NRI) and Overseas Citizens of India (OCI)

a) Purchase:

• Permissions is required from the RBI in case of purchase of agricultural land, farm houses and plantation property. NRIs and OCIs face no restrictions on the acquisition of immovable property of residential or commercial nature.
• The provision of Rule 24(a) further states that the consideration for the transfer is to be made out of funds received as inward remittance from a country outside India, through banking channels in India, or as funds held in any category of non-resident account[8].
• It is not permitted to make the payment by traveller’s cheques or foreign currency notes or any other method that is not the abovementioned.

b) Transfer:

Irrespective of whether agricultural, farm house or plantation property, to the extent that such transfer is being made to a person resident in India, is permitted without the requirement of permission. Immovable property. Transfer of any immovable property situated in India may be made to an NRI or OCI to the extent it is not agricultural, a farm house, or plantation property[9].

c) Gift:

In accordance with Rule 24(b), immovable property, with the exception of agricultural, farm house or plantation property may be accepted as a gift from persons residing in India or their relatives, who are NRIs or OCIs, without permission from the RBI[10]. A relative in this context is understood in the manner prescribed in Section 2(77) of the Companies Act, 2013. This includes members of a Hindu Undivided Family (‘HUF’), spouse, parent (biological or step-parent), siblings (biological or step-siblings), or the children’s spouse[11].

d) Inheritance:

NRIs and OCIs may inherit immovable property from a person residing in India[12]. Any immovable property being inherited by person who is not a resident of Indian may be done provided the property was acquired in accordance with the provisions of the foreign exchange laws applicable at the time of the acquisition[13]. With respect to property acquired by way of inheritance under Section 6(5) of FEMA, 1999, the sales proceeds cannot be repatriated outside India with the general or specific permission of the RBI[14].

Foreign Nationals of overseas origin and foreign companies

Those foreign nationals/persons residing outside India who are the spouse of an NRI or OCI are allowed the acquisition of one immovable property, to be jointly acquired with their spouse. The conditions laid within the rules require the marriage to be registered and subsisting to the completion of a minimum of 2 years prior to the acquisition of the immovable property[15].

Foreign Nationals of overseas origin to the extent that they are companies or bodies corporate with a place of business or branch office established in the manner prescribed under FEMA regulations[16], are allowed to acquire any immovable property in India as may be necessary for the purpose of carrying out their permitted activities[17].

However, permission is required from the RBI in the case of persons or entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Hong Kong, Macau, Nepal, Bhutan or the Democratic People’s Republic of Korea to acquire immovable property unless by way of lease for a period of 5 years at most[18].
 

Application to the RBI

In order to obtain permission from the RBI, applications are ordinarily made for permission related to foreign exchange transactions, sent to the RBI through AD banks (Authorized Dealer). AD banks act as intermediaries between the applicant and the RBI, facilitating the application. Alongside the application letter explaining the circumstances of the transfer and providing relevant details in relation to the parties involved, other documentation may be required to be submitted. This may include documents related to the title of the property, and the sale agreement, any other documents specified by the AD bank or the RBI.
 

Repatriation of sale proceeds

In the case of an NRI or OCI, sale proceeds may be remitted from transfer of immovable property (again, excluding agricultural land, farmhouses, or plantation property) if the property was bought following the foreign exchange laws that were in place at the time of acquisition or the amount for acquisition of the immovable property was paid in foreign exchange received[19].

If ECB (also know an foreign loan) was not repaid by a person resident in India in accordance with the provisions of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000- the bank may permit the overseas lender to sell the immovable property on which the said loan has been secured to repatriate sale proceeds in favour of fulfilling outstanding dues[20].
 

Risk associated with non-compliance

Should a non-resident fail to obtain the necessary RBI permission, penalties for contravention of provisions of FEMA 1999 and its adjoining rules shall become applicable. Non-compliance with obtaining permission of the RBI is not a compoundable offence, and shall result in unenforceability of the transaction or attracting legal proceedings depending on the circumstances of the relevant case.

 

Conclusion

FEMA 1999 and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 together provide a comprehensive framework for regulating the acquisition and transfer of immovable property in India by foreign entities and individuals. The regulations envision balancing liberalised outlook with necessary controls to prevent misuse of foreign exchange, maintaining the stability of the foreign exchange market. The RBI plays a crucial role in implementing and enforcing these regulations, working in consonance with the Central Government’s policy objectives.

[1] Foreign Exchange Regulation Act, 1973, Section 31(1).

[2] Asha John Divianathan v. Vikram Malhotra

[4] Clarification on Acquisition/Transfer of Immovable Property in India by Overseas Citizen of India (OCIs) Press Release: 2021-2022/1439

[5] FEMA Section so and so

[6] OIFC EY Report

[7] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 31.

[8] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 24(a)(i) and 24a)(ii)

[9] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 24(e)

[10] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 24(b)

[11] The Companies Act, 2013. Section 2(77)

[12] Foreign Exchange Management Act, 1999, Section 6(5)

[13] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 24(c)

[14] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 29(1)

[15] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 25

[16] Foreign Exchange Management (Establishment in India of a Branch office or a liaison office or a project office or any other place of business) Regulations, 2016

[17] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 26

[18] Ibid

[19] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 29(1)

[20] Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Rule 29(3)