fdi in real estate and investment in property – fema provisions

8/6/2019 FDI in Real Estate and investment in property FEMA provisions

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FDI in Real Estate and investment inproperty FEMA provisions

Naresh Ajwani

Chartered Accountant

In a growing economy, Real Estate sector invites a lot of attentionfrom all quarters including foreigners. India has a policy for non-residents which invites them to invest in the Construction and Development sector.For investment in independent premises, the policy is open only for NRIs.In this article, the FEMA provisions have been discussed under 2 parts one relating to Real Estate business, and the other relating to Investmentin independent premises.

An important difference between Income-tax Act and FEMA may nenoted. Income-tax Act is a revenue law with a fully developed appellateprocess. One may interpret the law literally, and may do tax planning.FEMA is a policy law. Appellate process is practically absent. Courts areknown to take usually a pro-RBI view. Hence it is better to comply with thelaw in letter and spirit.

A. Real Estate Business:

1. Real Estate business:

Real Estate business can be broadly of three kinds. One isDevelopment where the developer builds new property and sells thesame. The second is developing or buying real estate and leasing thesame. The third is trading in property. Briefly, Development ispermitted. Investment for Leasing and trading is not permitted. Forleasing of property, see paragraph 10 below. Development and leasing isslightly controversial. See paragraph 10.
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Related activities like building material, maintenance, real estateagency are not a part of Real Estate policy. These are covered in thegeneral FDI policy. Most of the activities are permitted on automatic basis.

Key to understanding the difference between Real estatedevelopment business and related activities is: Whether the non-resident investor (through the Indian company) will acquire ownershiprights over the immovable property or not. If he acquires ownershiprights, it is real estate development business.

2.FDI policy:

The Foreign Direct Investment (FDI) Policy is laid down in theConsolidated Policy of 1 st October 2010. (The policy has been there for thepast few years. It is just that every 6 months, the Government comes out with a Consolidated FDI Policy which replaces the earlier ConsolidatedFDI Policy.) The FDI Policy has to be read with FEMA Regulations. Theoriginal policy was laid down vide Press Note 2 dated 3 rd March 2005. Inthis policy, reference has been given to the Consolidated FDI policy or theoriginal press note or FEMA regulation as relevant.

Non-residents are permitted to invest in Real Estate Developmentactivity through Indian companies. Investment through LLPs, partnershipfirms, branch, or any in any other manner is not permitted. Direct business by non-residents is not permitted. The investment is subject to afew conditions discussed in subsequent paragraphs.

Non-residents can invest upto 100% of the equity capital of theIndian company. Investment is permitted on automatic basis.

Investment can be in equity shares, or Fully and Compulsorily Convertible instruments (preference shares or debentures).


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For NRIs, there is a separate policy. This is discussed in paragraph5.2 below.

Theme of the policy is that non-residents are not allowed to hoardor speculate immovable property. They cannot create Land Banks andhold them. At the same time, they are welcome to develop real estate.

Each project of Real Estate development should comply with thespecified conditions. Conditions relating to area are discussed inparagraph 3 and conditions relating to investment are discussed inparagraph 4 below.

3.Project conditions:

3.1 Minimum area to be developed:

Minimum area to be developed under each project should be asunder:

i. In case of development of serviced housing plots , minimum land areashould be 10 hectares.

ii. In case of construction-development projects , minimum built-uparea should be 50,000 sq.mts.

iii. In case of a combination project , any one of the above two conditionsshould be satisfied.

3.2 The meaning of serviced plots has been explained in the Pressnote. It means where roads, water supply, street lighting, drainage,sewerage, and other conveniences, as applicable under prescribed regulations, have been made available . This infrastructure should beprovided and a completion certificate from the concerned local body/service agency should be obtained before selling the servicedhousing plots. Unserviced plots cannot be sold.

3.3 At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances.


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3.4 Other Conditions:

3.4.1 The project should conform to the norms and standards as laiddown in the applicable building control regulations, and all rulesregulations of the State Government/Municipal/Local Body concerned.

3.4.2 The investor/investee company will be responsible for obtaining all

necessary approvals under applicable rules of the State Government/Municipal/Local Body concerned.

3.4.3 The State Government/ Municipal/ Local Body concerned, which

approves the building / development plans, would be required to monitorcompliance of the above conditions by the developer.

3.5 Issues:

3.5.1 Built up area:

The built up area should be 50,000 square meters. How does onecalculate the area? There are different areas mentioned by the builders. Itis clear that saleable area is not to be considered.

Will the area be calculated as?

- the plinth area length x breadth x floors.

- built-up area which includes the inner walls of the premises & upto outer wallof the premises.

- Carpet area.

Will it include the following?

- Parking space.

- Open areas.

- Balconies.


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I understand that when the local authorities approve the plans,some areas are not considered as a part of built up area like balconiesand parking lots. If the areas for balconies and car park are considered, it will be easier to satisfy the minimum area required to be built-up.

The guidelines state that bye laws and rules of the local authorities

should be complied with. Hence whatever area is permitted by them aspermissible built-up area can be considered as built-up. This would meanthat balconies and car park area cannot be considered as constructed areafor these guidelines.

DIPP takes a view that area considered as built-up by the localauthority will be considered.

4. Investor conditions:

4.1 Minimum Capitalisation:

The non-resident investor should invest a minimum of US$10million in wholly owned subsidiaries, and US$ 5 million for joint ventures with Indian partners. The funds have to be brought in within six months of commencement of business of the Company.

If joint venture partners are all non-residents, the minimuminvestment to be brought in US$ 10 mn. If there are Indian partners, thenthe minimum capitalisation is US$ 5 mn.

The condition for capitalisation is only at the initial stage. Forexample, one project is completed and the company has recovered itsinvestment. It wants to commence another project. In this situation, theinvestor does not have to bring the funds again. Sale proceeds of theearlier project can be utilised for the new project. However the new projectshould have the minimum area as prescribed.

Issues:


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i) What is joint venture has not been explained. One has to give anormal commercial meaning. If the Indian partner is investing say only 1%, will it be sufficient to say that he is a joint venture partner? It certainly cannot be said that he is a joint venture partner. One has to look at the whole joint venture how much is the Indian partner investing, how

much is his contribution, what are his responsibilities as a partner. Thenone can take a decision whether the Indian partner is a bonafide partner ornot.

ii) Should the minimum investment comprise of face value of shares,or can the investment include premium? The investment can includepremium. Here the minimum investment is the amount of funds whichshould be invested in the Indian company.

4.2 Lock-in period:

4.2.1 Original investment cannot be repatriated before a period of three years from completion of minimum capitalisation. Say the firstinstallment of investment of US$ 2 mn. is brought in on 30 th September,and the balance investment of US$ 3 mn. is brought in on 1 st January. Assume that the investment is in a joint venture with an Indian partner.The lock in will apply for 3 years from 1st January.

Beyond the minimum investment, the lock-in period of three yearsapplies from the date of receipt of each installment of FDI. Thus later of the two applies date of achieving minimum capitalisation or the date of investment of installment.

It also means that the lock-in applies to the entire investment ,and not just the minimum amount required to be brought in. The policy clearly provides that the lock-in period applies to the Originalinvestment. Original investment means the entire amount brought in asFDI.

4.2.2 The lock-in applies even if the non-resident investor wants totransfer shares to another non-resident. In one such application, FIPBrejected the proposal for transfer of shares from one non-resident toanother, although the DIPP was in favour of the transfer.

4.2.3 For some reasons if the investor wants to exit earlier, a priorapproval from FIPB is required. Generally the FIPB is not in favour of an


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approval unless there are compelling reasons like cancellation of a project.In one such case, FIPB had approved the sale before the lock-in period asthe project was being abandoned. It was subject to compounding process.

4.2.4 After the lock-in period for the investment is over, the investor cansell the investment to another non-resident. Is the lock-in periodapplicable to the non-resident who purchases the shares? The guidelinesare silent on this. Prima facie, the lock-in applies to all non-residentinvestors whether they are the first investors or subsequent investors.

Further, investment is permitted for development projects. Hence if the Investee company is planning to commence a new project, thepurchaser non-resident can acquire the shares. However if the investeecompany does not any project, or has semi-finished projects, thepurchaser non-resident cannot acquire the property. See paragraphs 5 and6 also.

Thus in essence, if the conditions or press note 2 of 2005 aresatisfied, then the non-resident can acquire the shares.

5. Some issues:

5.1 Hotels, etc.:

Do the guidelines apply to hotels? The guidelines apply only if theproject involves construction of real estate, and selling the premises. Hotelproject does not involve selling the developed units. Hotel industry is aservice industry. These norms do not apply to a hotel. Thus the hotel can be of an area less than 50,000 square meters. The policy clearly specifiesthat the conditions for real estate development do not apply to Hotels &Tourism & Hospitals.

The guidelines do not apply to infrastructure like roads, ports, bridges, etc. These are not real estate projects as such.

The guidelines also do not apply to development of SEZs. Provisionsof the SEZ Policy will apply.


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However, other conditions stated in paragraph 3.4 above do apply toall projects.

5.2 NRIs:

The guidelines do not apply to investment by NRIs individually. If however NRIs wish to invest through their foreign companies (or any non-individual entity), then the FDI guidelines will apply.

NRIs are also permitted to invest on non-repatriable basis .Investment can be made in a company (schedule 4 of FEMA notification20), or a firm or a proprietory concern (FEMA notification 24).Investment in an LLP, AOP, or any other entity is not permitted. Realestate business means only construction and development activity. Thusleasing or trading is not permitted. Investment in agricultural property,plantation, and farm houses is not permitted.

5.3 Projects of different sizes:

The company could have projects of different sizes. Some projectscould be FDI compliant (minimum 50,000 sq. meters), and some may not be FDI compliant. Can the non-resident invest in such a company? Can heinvest with a condition that his investment should be utilised only for FDIcompliant project?

Such an investment would not be permitted. All projects should beFDI compliant. This is because while the investment can be directed in theFDI compliant project, it cannot be ensured that the profits and returns of only FDI compliant projects go to the non-resident. Therefore whereverthere is a Foreign investment (other than NRI individual), only FDIcompliant projects should be undertaken.

5.4 Real estate and non-real estate business:

A company may have real estate and non-real estate business. Can anon-resident investor invest in such a company?

The non-resident investor can certainly invest in such a company.However it is necessary that each project of the company is FDI compliant.If any project is not FDI compliant, the investment cannot be made.


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There may be some practical difficulties. For example, the non-resident will not be able to sell the shares before the lock-in period (eventhough for non-real estate business there is no lock-in). To take another

example, the lock-in period may be over, but conditions of the real estateproject-are not fulfilled. Then also, the non-resident will not be able to sellthe shares.

For practical purposes, it is advisable to keep FDI compliantprojects in one company, and the remaining business in another company.

5.5 Semi finished projects:

An Indian resident has a semi finished project. He requires fundsfor the balance project. Can he invite a non-resident investor to invest inhis project? (The resident investor can transfer the project to his Indiancompany before inviting the non-resident.) Let us see different views:

(i) FDI is prima facie permitted in a new project. i.e. The Indiancompany should construct the premises. If the project is semi finished,then in my view the non-resident cannot invest in the company. Theguideline suggests that investment should be brought in within 6 monthsof commencement of business of the company. It suggests that investmentis welcome in new business.

(ii) If one takes a view that investment in semi-finished project isallowed, then it leads to the next question as to how much of the projectmay be unfinished. For example, can the project be 99% finished, and thenthe non-resident invests? This will almost amount to trading in Realestate.

(iii) There could be a contrary view. If one takes a view that noinvestment can come in semi finished project, then a large company willalways have a number of running projects. There will always be in somestages of development. Non-residents will never be able to invest in such acompany.


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(iv) A balanced view may be as under: The Indian company may have aproject under construction. Some work is already finished. However, thepending work is so large that the whole of non-resident investment will beutilised in construction costs.

In such a case the conditions would be satisfied in spirit.(v) In case of serious doubt, it may be better to take a approval fromFIPB before investing in semi-finished projects.

6. Purchase of shares:

The non-resident investor can purchase shares from Indian residentinvestors. It is clear that if the company has FDI compliant projects, sharescan be purchased.

The funds will go to the Indian shareholders and not the company.

In this situation, will minimum capitalisation norms apply?

The guidelines are silent. As per the policy, that non-residentinvestors should bring the minimum funds as required as percapitalisation norms. In case of doubts, it will be better to apply to FIPB.

It is safer to take a view that the entire guideline for Real Estatedevelopment, lock-in, etc. will apply.

7. Joint Venture at project level / or Company level:

The joint venture has to be at the company level and not the projectlevel.

Consider an example. A non-resident invests in an Indian developercompany. The Indian developer company enters into a contract with aland owner to develop the property. On completion of the property, theland owner will be entitled to a certain percentage of flats. The Indiandeveloper company will be entitled to the remaining flats which it will sell.The above structure is resorted to as the non-resident and the Indianpartner may be interested in the partnership only for one project.


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This kind of proposal is permitted provided that the Indiandeveloper company obtains approvals for development, markets the flatsand other aspects of FDI policy are complied with. However should the

non-resident investor invest US$ 5 mn. in the Indian company or US$ 10mn.?

If the investment in the Indian developer company is owned to theextent of 100% by the non-resident, investment of US$ 10 mn. is required.If the land owner had invested in the Indian developer company, theminimum investment required would have been US$ 5 mn.

8. Multiple projects with different partners:

The non-resident and Indian resident investors may want to havepartnership for specific projects and not all the projects. What are thedifferent options available?

8.1 A simplest option is to have one company for each project. The non-resident and the resident investors can invest in the company, specific forthat project. This will of course mean that in every company, the minimumamount of capitalisation will apply. Lock-in period will apply.

Alternatively, there can be two companies - (i) FDI compliantprojects where the non-resident wants to invest, and (ii) Other projects.

8.2 It is however possible that the non-resident may want to form aholding company. Under the holding company, there can be differentsubsidiaries for different projects. In different subsidiaries, differentIndian partners can invest.

To invest in the Indian holding company, an FIPB approval isrequired.


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If however the non-resident holds shares in an operating company (with active business), then investing in the subsidiaries can be done onautomatic basis.

In this situation, the real estate guidelines apply to the subsidiaries.

9. Agricultural land:

Can the Indian company acquire agricultural land with a view toconvert into non-agricultural land for real estate development?

Under FEMA, non-residents are not permitted to invest in

agricultural land. However for the purpose of real estate development, if agricultural land has to be acquired, an application should be made toFIPB and a prior clearance should be obtained.

10. Construct and lease:

Foreign investor cannot acquire property for the purpose of leasing.It is not a permitted activity. However if the property is constructed andthen leased, it is permitted. The policy does not make this explicitly clear.However this is the view of the Central Government.

It appears that RBI has not agreed with this view. Hence theinvestor can write to FIPB and obtain a specific confirmation in thisregard.

11. Exit from the project:

The main conditions to be complied with before the non-residentcan sell the shares are:

- the lock-in period of 3 years should be completed from the date of investment or minimum capitalization norms, whichever is later.

- at least 50% of the project should have been developed within aperiod of 5 years from obtaining statutory clearances.


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11.1 Assume that the project is of 100 residential units. The building iscomplete and more than 95 units are sold. Can the non-resident sell hisshares? The clear answer is that the non-resident can sell the shares if the3 year lock-in period is over.

Thus if three years of lock-in period are completed; more than 50%

of the project is completed the non-resident can sell the shares.

11.2 However if the 5 year time for development is not complete,development is complete to the extent of less than 50%, but the 3 yearlock-in period is complete, can the non-resident sell the shares? In thissituation, the non-resident cannot sell the shares. Even if the Indianinvestee company / non-resident investor is confident of completing 50%development within 5 years, the non-resident cannot sell the shares. Thedevelopment has to be actually completed. In case the non-resident wantsto sell the shares, one may take an approval from FIPB.

11.3 Development:

Assume that the project is 95% complete. However no unit is fully ready to be handed over to the buyers. Can the non-resident sell the sharesin the company?

Take another example. The project comprises of five buildings of 500 flats. Three buildings are ready. For two buildings, construction has yet to commence. Out of the 300 flats in the three completed buildings,only 100 flats have been sold. Can the non-resident sell the shares?

There could be several permutations.

The condition is that development should have been completed tothe extent of 50%. The meaning of development has not been explained.One may take guidance from para 1c) of the press note 2 of 2005. In caseof serviced plots, it is necessary that all infrastructure like roads,electricity, etc. should be completed before selling. Thus developmentcannot be considered in terms of the extent of the completion of the


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project, or the value. In my personal view, developed means ready forsale. The premises should be livable and completion certificate should beobtained.

Thus in the above examples, if 95% of the project is complete but nounit is livable, it will not be considered as developed. In the secondexample, where 300 flats are ready for sale, the project will be consideredas developed to the extent of more than 50%.

The guidelines state that 50% of the project should be developed.There is no condition of sale / lease. Hence if at least 50% of the project isfully complete, the non-resident can sell the shares. The objective is thatnew property should have come into existence. If that is so, the non-resident can sell the shares, although independent premises may not have been sold.

11.4 If the project cannot be completed within a period of 5 years to theextent of 50%, what can be the consequences? In my personal view, it will be considered that the conditions have not been fulfilled. One shouldapproach FIPB and take approval for an extension. If an approval is nottaken, it will be a violation of FEMA.

12. Minimum returns:

Typically a non-resident requires minimum returns from theproject. The non-resident proposes that he is willing to invest a certainamount with the builder. He expects a minimum return. The minimumreturn can be by way of interest; or buy-back of shares gives the minimumreturn. Is this possible?

Under FEMA, an Indian resident cannot give any guaranteeto a non-resident . Hence to offer any minimum return is not possible.Under the FDI policy, the non-resident invests in equity shares. As equity shareholder, he is the owner. The owner cannot get any minimumguarantee.


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Loan cannot be taken from a non-resident. Till 31 st Dec. 2010, ECB was possible for large projects exceeding 100 acres. That facility has beendiscontinued. Hence to offer any interest on loan to the non-residentinvestor is also not possible.

There can be however a cap on the return which the non-resident

can be given. The FDI policy provides that the non-resident can sell theshares to an Indian resident at a price which does not exceed the fair valueof the shares. Thus for example, there can be an agreement between thenon-resident investor and the builder that in case of a buy-back, the price will be lower of i) price as per FEMA rules, or ii) Rs. ______ (based onagreed formula). The buy back can be at a price less than the fair value of the shares.

13. Expenses in relation to real estate:

Normally the real estate projects in India will have expenses to beincurred in India. However there could be some services procured fromabroad for which remittances may have to be made. Normally, expensesare in the nature of current account. These can be incurred without any approval from RBI. There are however a few expenses where there arerestrictions.

13.1 Agency commission:

Real estate agents can be appointed abroad for selling the flats toNRIs. Commission can be paid to them within the specified limits.

Commission can be paid upto US$ 25,000 or 5% of inwardremittance, whichever is more. The limit is per transaction. Thecommission can be paid to the agent, or the agent can deduct the samefrom the sale proceeds of the flats.

In case the NRI who purchases the flat out of NRO funds, thecommission will be restricted to US$ 25,000. (This is because there will beno inward remittance. Hence the commission as percent (5%) cannotapply.)

Consider a situation The foreign agent sets up an Indian company for conducting real estate brokerage. This company is an Indian company.


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Real estate brokerage is under automatic route. Hence no approval isrequired for investing in the company. The Indian company acts as a broker for NRIs. It charges brokerage exceeding 5% of the inwardremittance. After payment of income-tax, the profits can be repatriated outof India. Is this workable?

In my view, legally there is no restriction on such a arrangement. It would not amount to circumventing the rules. In this situation, the non-resident sets up an Indian company, invests capital in India, will pay taxesin India. Thus one cannot consider this to circumvent the rules.

13.2 Consultancy services:

The Indian company may procure consultancy services from foreignconsultants. Under current account rules, upto US$ 1,000,000 (onemillion) can be paid per project.

The provision does not elaborate the meaning of consultancy service. There could be several services which the Indian company may incur for services of architect, landscaping consultant, lawyers, etc. In alarge project, there could be several consultants for various purposes. Inmy personal view, consultancy services should be confined to the overallconsultancy for the project. If there is any specific service like payment tostructural engineers, that will not consultancy. However this area is notfree from doubt. It will be advisable to obtain approval from RBI beforemaking any payment exceeding US$ 1 mn.

14. Indirect Foreign Investment:

Press Notes 2, 3 & 4 of 2009 lay down the policy for direct & indirectinvestment. Direct investment refers to non-resident investmentdirectly into the Indian company. Indirect foreign investment refers toinvestment by the non-resident through an intermediate Indian company.

The policy states that the intermediate Indian company will beconsidered as Indian investor if more than 50% of the ownership &control is with persons who are Indian residents and citizens. If either theownership or the control to the extent of 50% or more is with the non-resident, then the intermediate Indian company will be considered asnon-resident investor. FDI policy will apply to such Indian intermediatecompany. Consider the chart below:


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As per the criteria discussed above, the Indian Company-I will beconsidered as Indian investor or non-resident investor dependingupon facts.

Assume that 51% of the shares of Indian Company-I are held by Indian citizens & residents. The company is also controlled by Indiancitizens & residents. This company can invest in Indian Company-II without any restrictions of FDI policy. Thus the non-resident investor canparticipate in the Real Estate Sector upto 49% without the need of minimum capitalization, lock-in, etc. In fact, Indian Company-II can

undertake real estate trading also. Is that the intention?

The plain reading of the press notes permit such an investment. RBIhas still not amended FEMA notification No. 20. The Consolidated FDIpolicy states that wherever there is an issue of interpretation, FEMA willprevail. Therefore, in my view, investing as stated above amounts to violating the spirit of the FDI policy. The Press Notes of the year 2009 are badly drafted. RBI has not amended FEMA notification No. 20 givingeffect to these Press Notes. A conservative investor may avoid such

schemes. Hence it may be advisable to get a clearance from FIPB beforeentering into such a structure.

In sensitive sectors, it is better to be safe than regret later.


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15. Foreign Venture Capital Investment (FVCI):

Foreign Venture Capital funds are permitted to invest in India.Under SEBI rules, FVCI is permitted in Real Estate sector also. However,RBI has taken a view that if FVCIs are allowed to invest in Real Estate

sector, then they may be able to by-pass the FDI guideline for Real Estate.Hence RBI does not permit investment through FVCI route, unless there isan undertaking given that investment will not to be done in real estatesector.

B. Investment in independent premises:

1. Background:

India does not permit non-residents to acquire any premises inIndia. However NRIs have been permitted to invest in premises (houses

and commercial establishments) for now almost 15 years. FEMA notification 21 regulates investment in immovable property.

If however a property has to be acquired on lease for a period of lessthan 5 years, then the same can be acquired without any approval. This istypically required by foreign companies opening liaison offices in India.

2. Meaning of NRI:

Indian citizen who is a non-resident of India, is considered as aNon-Resident Indian (NRI). Further foreign citizen who is a non-residentis also considered as an NRI if:

- he held an Indian passport at any time, or

- His either of the parents or grandparents was an Indian citizen by virtue of the Indian constitution or the Citizenship Act 1955.

However citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan,China, Iran, Nepal, and Bhutan are excluded from the definition of NRI.Citizens of these countries are not permitted to acquire immovableproperty in India.


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3. Acquisition of immovable property:

3.1 NRIs are permitted to acquire immovable property. Acquisition can be in the following manner:

- Purchase.

- Gift from another non-resident or an Indian resident.

- Inheritance.

The NRI can even construct the property.

There is no need of any approval from RBI. No declaration has to befiled with any one.

It is however advisable to keep proper evidence of acquisition andsource of funds (whether NRO, NRE or remittance from abroad). This can be useful at the time of sale and remittance of funds.

Normally an Indian resident can give a gift to a non-resident underLiberalised remittance scheme upto US$ 2,00,000 per year. However incase of property, the gift can be without any limit.

3.2 Payment for purchase:

For purchase, the funds have to be paid from FCNR, NRE or NROaccount, or remitted from abroad.


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Payment cannot be made by travellers cheques, or currency notesor any other mode.

Thus in case one NRI purchases property from another NRI, thepayment cannot be made outside India. It has to be made in India.

3.3 Kind of property:

The property can be residential or commercial property. Thus anNRI can acquire a flat, bungalow, office, shop or even a warehouse. Land

can also be acquired.

The property can be acquired jointly with any other NRI or with anIndian resident.

While commercial premises can be acquired, no business can bedone in the premises by the NRI. Thus an NRI may buy a warehouse.However he cannot undertake warehousing business. If he undertakes any business, it will become a place of business (like a branch). A non-residentcannot set up a branch without a prior approval from RBI. The conditionsfor a branch are strict. An individual NRI is not given an approval for a branch.

The NRI can however invest in his proprietory concern on non-repatriable basis (Schedule 4 of FEMA notification 20). Legally, theproprietory concern being an Indian resident, can acquire property.However practically there may be difficulties as a proprietory concern isnot an entity under general law. A better way may be that the NRIpurchases the property in his own name, invests in his proprietory concernin India, and permits the proprietory concern to us the property for business.

3.4 Number of properties:


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There is no limit to the number of properties he can purchase.However it should not amount to doing business. See paragraph 4 formore details.

3.5 Agricultural property:

Agricultural land, plantations, farm houses (agricultural property)cannot be acquired by the NRI (whether by purchase of gift). If of coursethe NRI inherits an agricultural property, he can hold the same. Howeverhe cannot undertake any commercial agricultural activities.

3.6 Income from property:

The NRI can lease the property and earn lease rent. The income can be repatriated abroad after payment of taxes without any limit.

4. Business in property:

While an NRI can acquire immovable property and also sell thesame, he cannot do business in the properties. For example, if the NRIacquires 10 shops in a row and leases them out, this can be considered asdoing business. Similarly if the NRI purchases and sells property 2-3times, it will amount to trading. What exactly amounts to business has not been explained. One has to consider the facts and determine the issue.

5. Disposal of property:

5.1 The NRI can dispose of the property as under:

- Sale to an Indian resident, or to another NRI.

- Gift to an Indian resident or another NRI.

However if he owns an agricultural property, it can be sold or giftedonly to a person who is an Indian resident and Indian citizen.


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The NRI can also bequeath the property to any one including a non-NRI. Bequeathing the property (of any kind) to any one is permitted.

5.2 On sale, the funds can be remitted abroad to the extent the samehave been remitted from abroad or paid from NRE / FCNR account. In other words, profits cannot be repatriated. The cost in foreign currency can berepatriated.

The remittance is restricted to 2 residential properties. There is norestriction in case of commercial properties. There is no clarity as to how this limit of 2 properties should apply? Is it a lifetime limit?

Under US$ 1 mn. scheme, funds can repatriated upto US$ 1 mn. perperson per annum. Hence profits on sale of property can be repatriatedunder this scheme.

6. Acquisition of property by non-NRIs:

6.1 Non-NRIs cannot acquire any property in India. There is however amajor change between FERA and FEMA. Under FERA, citizenship was the criteria for acquiring the property. If a person was an Indiancitizen, he could acquire a property in India. If a person was a foreigncitizen, he could not acquire any property in India (except as permitted toNRIs).

Under FEMA, residence is the criteria. A non-resident cannotacquire any property. An Indian resident can acquire property.

6.2 Say for example, a foreign citizen of non-Indian origin is employedin India for 2 years. On coming to India for employment, he becomes anIndian resident. As an Indian resident, such a person can acquire property in India. FEMA actually does not apply to such a person as far asacquisition of property in Indian is concerned.


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Master circular (para 8(ii)) states that his type of visa should clearly indicate that his stay in India is uncertain. The language of the mastercircular can be misleading.

Under section 2(v)(i)(b), a person becomes an Indian resident if hesatisfies any of the three conditions stated below:

- he stays in India on taking up employment in India.

- he stays in India for carrying on a business in India.

- any purpose which indicates his intention to stay in India for an

uncertain period.

Normally a foreigner is never given a visa for an uncertain period. Itis always a fixed period visa. It will usually be certain that the person willgo back after the visa expires. Typically the visa types would beemployment visas, dependent visas, etc.

The criteria given in master circular is only a guideline. What itmeans is that the visa will indicate the purpose of coming to India and thatthe non-resident will stay for sufficiently long period to make him anIndian resident. Thus a foreigner who comes on a tourist visa or short trip visa will not able to buy property in India. However if he comes for anemployment of say 3 years, he will be considered as an Indian resident.Such a person who comes for employment, can purchase a property inIndia.

6.3 For sale of property, resident foreigners do not need any approval if they are Indian residents. However if they propose to sell the property after becoming non-residents, they will require approval from RBI.

6.4 There are several foreign citizens who have acquired property inGoa. They have come on tourist visa and have acquired the property. The


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Central Government has advised the State Governments to be careful atthe time of registration of the property in case of foreign nationals.

6.5 Citizens of Pakistan, etc.:

There are some citizens of Pakistan, Nepal, etc. who are staying inIndia. Can such people acquire immovable property in India?

As explained, FEMA applies to property in India based onresidential status . If Pakistani citizens staying in India have become

Indian residents, they can acquire property in India. The regulations andmaster circular state that Pakistani citizens cannot acquire property inIndia (even if they are Indian residents). This in in my view goes beyondFEMA. It is an established principle that the sub-ordinate regulationscannot go beyond the principal act. To that extent the regulationprohibiting Indian residents who are citizens of Pakistan, etc. to acquireimmovable property, are ultra vires.

This issue is applicable to citizens of eight countries Pakistan,Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.

6.6 Inheritance:

Foreign citizens who are non-residents can acquire property by way of inheritance. They can also continue to hold the same. However if they wish to sell property, they require approval from RBI.

7. Foreign companies:

Foreign companies are not permitted to acquire properties in India.However if the foreign company opens a branch office or a projectoffice , then it can acquire the property for its own activity.


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A liaison office cannot acquire any property except by way of lease for a period of upto 5 years.

For sale, an approval of RBI is required.8. Acquisition of immovable Property by Foreign Embassies/

Diplomats/ Consulate Generals:

For acquisition or disposal of properties foreign embassy, diplomatand consul generals, am approval is required from the Ministry of External Affairs.

Summary:

Foreign investment is welcome in India but only within the specifiedconditions. FEMA law is a policy law. Hence the language createscontroversies.

For NRIs, the regime has worked well for the past several years. By and large, they have not faced any difficulties.

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fdi in real estate and investment in property – fema provisions

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