Disinvestment in the Real Estate Sector in India has opened up many possibilities for growth and development. Prioritizing and incentivizing foreign investment has uplifted the country’s Economy. However, the current Foreign Direct Investment (‘FDI’) policy has provisions that serve as obstacles in terms of ease of doing business for these foreign investors. In the longer run, this disincentivizes investment. The current policy framework needs revamping to sustain foreign investors’ interests in the longer run. This article aims to shed light on various issues faced by foreign investors in the Indian real estate sector and puts forth suggestions in the light of the same.

Introduction

The Real Estate Sector in India has flourished in the past decade. The construction industry is one of the most important sectors for generating employment and has a direct, induced and, indirect effect on all sectors of the economy. Its importance is evident in the data released by the Department for Promotion of Industry and Internal Trade Policy (‘DPIIT’), which reveals that construction was the third largest sector in terms of FDI inflow- which stood at around US Dollar 50.8 billion between April 2000 and March 2021.

Liberalizing the FDI norms in the real estate sector was an extremely strategic decision as prior to the same, the real estate market was fragmented, plagued with market uncertainties, and dominated by local actors. Prior to the 2005 Guidelines, only PIOs (Persons of Indian Origin) and NRIs (Non-Resident Indians) were authorized to invest in the real estate sector.

The 2005 Guidelines opened the gateway to investment in the real estate sector in India, this move arguably being one of the most significant policy decisions taken by the Union Government in that decade. The policy has revamped itself in multiple aspects according to the needs of specific sectors and the increasing awareness of predatory investments and safeguards to the same.

FDI Policy in the Real Estate Sector

As per the current FDI Policy, 100% FDI is allowed under the automatic route in ‘Construction Development: Townships, Housing, Built-up Infrastructure.’. However, the policy prohibits FDI in ‘Real Estate Business or Construction of Farm Houses’ and in ‘Trading in Transferable Development Rights (‘TDRs’)’. It has been clarified in the FDI Policy that ‘Real Estate Business’ shall not include development of townships, construction of residential/commercial premises, roads or bridges, and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014.

Prior to the 2005 guidelines, foreign investors could only invest with a joint venture with an Indian company or through a wholly-owned subsidiary, or a local partner and the same was limited to the development of townships and settlements.

It has been clarified that each phase of the construction development project would be considered a separate project for the purposes of FDI policy. “The Investment will then be subject to the conditions:

• The investor will be permitted to exit on completion of the project or after the development of trunk infrastructure i.e., roads, water supply, street lighting, drainage and, sewerage;
• Notwithstanding anything contained in (i) above, a foreign investor will be permitted to exit and repatriate foreign investment before the completion of a project under the automatic route, provided that a lock-in period of three years, is calculated with reference to each tranche of foreign investment, has been completed. Further, the transfer of stake from one non-resident to another non-resident, without repatriation of investment, will neither be subject to any lock-in period nor to any government approval;
• The project shall conform to the norms and standards, including land use requirements and provisions of community amenities and common facilities, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government/Municipal/Local Body concerned;
• The Indian investee company will be permitted to sell only developed plots. For the purposes of the FDI Policy “Developed Plots” will mean plots where trunk infrastructure i.e., roads, water supply, street lighting, drainage and sewerage, have been made available;

The Indian investee company shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal, peripheral areas, other infrastructure facilities, payment of development, external development and other charges, and complying with all other requirements as prescribed under applicable rules/bye-laws/regulations of the State Government/Municipal/Local body concerned.” [2.10.2 of the FDI Policy Circular 2020]
It has been further clarified that FDI is not permitted in an entity that is engaged or proposes to engage in Real Estate Business, construction of farmhouses and TDRs. “Real Estate Business” means dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/income on lease of the property, not amounting to transfer, will not amount to Real Estate Business. Further, it has also been stated that the completion of a project will be determined as per the local bye-laws/rules and other regulations of State Governments.

The FDI Policy clearly provides that 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/shopping complexes, and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.

Further, the FDI Policy has also clearly provided that “Transfer”, in relation to FDI policy on the sector, includes:

(a) the sale, exchange or relinquishment of the asset; or

(b) the extinguishment of any rights therein; or

(c) the compulsory acquisition thereof under any law; or

(d) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882; or

(e) any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of any immovable property. [Para 5.2.10.2 (C) of FDI Policy]

The DPIIT has, time and again, clarified that Companies incorporated in India (whether owned and controlled by resident Indians or not), having FDI up to 100% can purchase land, including agricultural land, for the purpose of its business activities pertaining to real estate construction and development.

However, the following restrictions have been imposed upon any and all FDI compliant companies pertaining to the sale of such land that has been acquired by it:

• Company with FDI is permitted to sell only developed plots, viz., developed plots where trunk infrastructure has been made available.
• Company with FDI is restricted from engaging in real estate business, viz., dealing with land and immovable property with a view of earning profit.

Over the course of time, the FDI Policy has evolved for other sectors of the industry and the provisions and norms of FDI have been modified, revised, and relaxed in such sectors. Moreover, various waivers and concessions have been granted to the other sectors of the industry. FDI norms have been relaxed in single-brand retail trading, contract manufacturing, Defence, automobile industry, capital goods, construction of hospitals, digital media, food processing, healthcare, civil aviation, renewable energy, telecom, insurance, etc.

Issues Faced by Real Estate Investors:

Real Estate Investor firms are quite diversified. Real Estate Private Equity (‘REPEs’) firms like Blackstone, essentially raise capital to build, acquire, operate, transfer property to generate returns for investors.

Real Estate Development Firms like Trammel Crow fundamentally focuses on building properties and developing them from scratches whereas in REPEs and Real Estate Investment Management firms usually acquire existing properties.

Characteristically, Real Estate Development Firms specialize in building properties, they usually focus on few properties for a longer span of time, as construction or development takes a much longer time than simply acquiring properties. It is important that these Development firms don’t face barriers that– either increase/extend the time duration for completion of their projects as it would lead to increased costs, or create significant obstructions in terms of the process of development like requisite permissions and state support to continue investing.

Real Estate Investor companies usually purchase parcels of land in various States and Union Territories within the territory of India on the premise that the regulatory framework and the regulatory norms for undertaking real estate construction and development thereon shall be made available to them over a period of time. They act upon such understanding based on the various representations, assurances and promises made by the Government and Government agencies over a period of time at various levels and at various forums.

However, over the period of time, no concrete measures were undertaken and/or provided by the Government of India, State Governments, or other Government agencies for extending the requisite support. Thereby the regulatory framework enabling foreign investment in the Real Estate Construction and Development was a hindrance to investors effectively carrying out their business operations and activities in India.

The issue exists due to multiple delays in getting licenses, clearances, and permissions and because of the regulatory red tape. The efficiency and cost-effectiveness suffer as most projects get delayed and extended.

In a nutshell, there are:

Land Parcels outside the purview of Development Plans – Land parcels on which development cannot be undertaken due to such land parcels falling outside the purview, extent, and presence of the Development Plans as notified from time to time. There is no further possibility of such land parcels being included in the Development Plans;

Restrictions on the development of land parcels under the Regulatory Framework – Land parcels on which development cannot be undertaken due to the regulatory framework and on account of their location and vicinity to the no construction/no-development/eco-sensitive/ natural conservation/ coastal regulations, etc.;

Restrictions on the Development of land parcels due to Licensing Framework – Land parcels on which development cannot be undertaken due to licensing norms and restrictions under the same;

Scattered Land Parcels – Land parcels on which development cannot be undertaken due to their location, area, dimensions, and development norms.
In the light of the same, the restrictions on the development of land parcels, unless they are clearly hazardous to the environment, or pose a high risk of the same, should be assessed.

Applying a blanket regulation essentially takes away multiple developmental and investment opportunities from foreign firms. Thereby leaving these lands undeveloped and disadvantageous for the local populations as well.

Suggestions and Way Forward:

On account of the various restrictions and regulations in dealing with land parcels which have not been developed and there being a differentiation in the approach of dealing with such land parcels by an Indian entity (without any FDI investment/ participation) and an Indian entity (with FDI investment/ participation), the FDI Compliant Real Estate Investors cannot deal with such undeveloped land. In light of the challenges mentioned above, the following suggestions are made.

Sale of Undeveloped Lands

According to the FDI policy, the Indian Investee company can only sell developed lands. [ Para 5.2.10.2- C]. Such land parcels become both a liability and a burden, financially and otherwise, on the investor on account of not being capable of any development and/or there being various regulatory controls on development thereof being undertaken by an FDI compliant company. An FDI-compliant entity stands on a totally different footing and in fact, is not being treated at par with a non-FDI entity in undertaking development under the applicable norms and requirements of the FDI Policy and Guidelines.

Essentially, a mechanism for sustainably developing the land should be given to the investors and most of the time these lands remain underutilized. The inability to sell these land parcels leads to haphazard development, disincentivizing investors and an overall stagnation of the land parcels.

Opt-Out and Exit Mechanism:

The current regulatory framework suggests that the government wants to ensure accountability and commitment on part of these foreign firms. To ensure that they don’t leave midway-leaving multiple people unemployed and lands that are blocked, which has been observed in other countries. The opt-out in the FDI policy is almost non-existent.

There is a lock-in period for a minimum of three years for minimum capitalization, wherein if a company wants to leave earlier other than in case of cancellation of a project, it requires approval of the FIPB (Foreign Investment Promotion Board). This measure, however, in the long run, might disincentives FDI as the opt-out has been very strictly and narrowly defined. To ensure accountability an option for opt-out for a heavy consideration to the state should be introduced.

Fast Track Approvals:

State Government and Municipal authorities ensure the compliance of these projects. However, the process is time-consuming to the extent of being inefficient in meeting its purpose. This primarily occurs because of the lack of timelines given within regulations for the authorities as well. A timeline is essential as it would also ensure accountability on both sides and ensure that there are no unnecessary delays. In terms of having a “fair hearing”, an appeal to a board of experts on matters of real estate and law should exist. Especially against decisions of authorities as otherwise, lengthy dispute resolution mechanisms don’t offer the expertise required in construction and infrastructure sector. In light of principles of equity and fair hearing, such a board of experts should be set up or should be included within the Foreign Investment Promotion Board (FIPB).

Conclusion:

In an increasingly globalized world, cross-border engagement between private entities and states is regularized. This offers a plethora of possibilities for both the parties. The essentials of power to leverage lies on the economic capacity of each actor. India is at a stage where foreign investment is extremely necessary- as it offers a non-debt financial resource but is also a driver of economic growth, increased employment opportunities, etc.

Thereby the FDI guidelines cater to ensuring that investment is– incentivized with accountability and necessary safeguards to avoid exploitation.

FDI in real estate in India has specifically suffered from acute liquidity crunches, developer delays etc. partly due to obstacles like regulations around the restricted lands. The responsibility of obtaining approvals lies in the Indian investee company and even the developed land can only be sold by the Indian investee company, provided the minimum built up- infrastructure and other requirements- are met.

Accordingly, it is proposed that to encourage ease of doing business and to ensure that such FDI investors are not compelled to withdraw from India due to one reason or the other. It is the need of the hour that they should be granted an opportunity to be heard along with relaxation of norms. Ensuring that all such FDI compliant entities in the real estate sector can sell, transfer and/or part away with such undevelopable land parcels which are, in fact, a burden and/or liability on these real estate investors so as to enable them in contributing to the State Exchequer in the form of revenues and also to avoid any haphazard or unplanned development.