Investment in Real Estate in India & Abroad

Natwar G. Thakrar

Saturday, 19th April, 2014

Intensive Study Course on FEMA

19.04.2014 1

AGENDA

• Regulatory framework

• Meaning of NRI/PIO

• Investment (other than FDI) by NRI/PIO and a Branch of a Foreign Company, Transfer & Repatriation of Sale Proceeds

• Investment abroad in Real Estate by Individuals/ Companies

• FDI in Real Estate (including by NRI/PIOs)

• Investment abroad in Real Estate Developments by a Person Resident in India

• Q&A 19.04.2014 2

Regulatory Framework

• Acquisition & Transfer of Immovable Properties in India by Non- Residents – S.6(3)(i) of FEMA Act

– Notification No. FEMA 21 - for purchase by NRIs/ POIs in India (except for a lease not exceeding 5 years )

– Press Notes / Consolidated FDI Policy by DIPP Circular / Notification No. FEMA-20 “TISPRO Regulations” for Construction - Development Projects

• Acquisition & Transfer of Immovable Properties abroad by Residents– – S. 6(3(h) of FEMA Act

– Notification No. 7 (except for a lease not exceeding 5 years)

– Notification No. 120 for construction / developments abroad by an Indian company

19.04.2014 3

Regulatory Framework

• Unlike FERA, the thrust is on residential status of a person determined under Section 2(v) of FEMA and not on citizenship of a person subject to – The person concerned would have to obtain the approvals and

fulfil the requirements, if any, prescribed by other authorities, such as, the State Government concerned, etc. The onus to prove his/her residential status is on the individual as per the extant FEMA provisions, if required by any authority.

– General restrictions on citizens of eight countries (viz. citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan) irrespective of their residential status and

– Restriction on buying agricultural land / plantation property / farm house.

19.04.2014 4

Meaning of NRI/ PIO/Person Resident in India

19.04.2014 5

Non Resident Indian (NRI)

• The term NRI has not been defined in FEMA, 1999. Section 2(w) defines a “person resident outside India” as a person who is not resident in India.

• The term “NRI” has different meanings under different Notifications, e.g.-

– Under Notification No. 13- Remittance of Assets-

An “NRI” is defined to mean a person residing outside India, who is a citizen of India.

– Under Notification No. 5 – Deposits -

“An “NRI” is defined as a person resident outside India who is a citizen of India or is a Person of Indian Origin (PIO)”

• Therefore, meaning of NRI could change due to different PIO definitions under

various Notifications issued by the RBI

• For the purpose of Immovable property, meaning given under Notification 13 shall be relevant as NRI does not include PIO.

• It is possible that a person may be an NRI under FEMA, yet may be a resident of India under Income tax laws.

19.04.2014 6

Person of Indian Origin (PIO)

• The term PIO is also not defined in FEMA, 1999 but it is defined differently under several Notifications and hence the meaning of PIO is contextual

• Under Notification 5, PIO means a citizen of any country other than Bangladesh or Pakistan, if

– he at any time held Indian passport; or

– he or either of his parents or any of his grand- parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or

– The person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b);

• The relevant definition of “PIO” for investment in Immovable Property is given in Regulation 2(c) of the Notification 21 to mean an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan) who -

– at anytime he has held an Indian passport; or

– he or either of his parents or grand parents was a citizen of India by virtue of Constitution of India or the Citizenship Act 1955; or

19.04.2014 7

Definition of PIO- Notification 5 Vs. 21

PIO

Who

held

Indian

Passport

at any

time

Whose

spouse

is a

citizen

of India

Whose father,

grand father,

mother or

grand mother

was citizen of

India

Whose spouse

held Indian

Passport or

whose

spouse’s

parents or

grand parents

were citizen

of India

Scope of PIO defined under Notification – 5 is wide. The scope of PIO is restricted under

Notification – 21 and also excludes citizens of 8 neighboring countries

19.04.2014 8

Person Resident in India

Defined under Section 2(v) of FEMA : A person (being an individual) residing in India for more than 182 days during the

course of the preceding financial year but does not include:— (A) A person who has gone out of India or who stays outside India, in either

case— (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention

to stay outside India for an uncertain period; [RBI Clarification on Residential Status of Students Abroad- Refer AP 45 dated 8.12.2003]

(B) A person who has come to or stays in India, in either case, otherwise than— (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention

to stay in India for an uncertain period;

19.04.2014 9

Individual leaving India: Conditions for residence

• Mr. X leaves India on 1st January 2014 for taking up employment outside India for the first time. What will be his residential status? Can he acquire agricultural land in India before 30th June, 2014?

--------------------------

• Mr. X will be considered a non-resident, w.e.f. 1st January, 2014 irrespective of the fact that he was residing in India for more than 182 days in the preceding financial year 2012-2013 in view of Exception (A) (a) of the definition.

• Therefore, Mr. X will not be eligible to purchase agricultural land in India.

19.04.2014 10

Individual coming to India: Conditions for residence

• Mr. Y, staying in Dubai for past several years came to India on 1st May 2013 for medical treatment. He is planning to return to Dubai after medical treatment. Doctors have advised him to stay in India up to 31st October 2014. What will be his residential status under FEMA for the financial years 2013- 2014 & 2014-2015?

---------------------------------- • Notwithstanding his stay exceeding 182 days in India during the

current year, Mr. Y was not present in India for 183 days or more during the preceding financial year 2012-2013. Hence he continues to be a non-resident during the financial year 2013-2014. His situation is also covered by Exception B of the definition.

• His situation for financial year 2014-2015 will be covered by Exception

B(c) of the definition since Mr. Y’s stay in India will be for a specific purpose and not for uncertain period. Hence he will continue to be a non-resident during the financial year 2014-2015 as well.

19.04.2014 11

• Mr. Z, a foreign citizen of non-Indian origin comes to India for the

first time and sets up a proprietary concern in India on 1st August 2013 for carrying on business. What will be his residential status for the financial year 2013-2014?. Can he acquire Immovable property in India during Financial year 2014-2015?

----------------------- • Mr. Z will be non-resident during the Financial Year 2014-15 as he

had not stayed in India for a period preceding exceeding 182 days during the the financial year 2013-2014.

• Since Mr. Z is non-resident for the financial 2014-2015, he will not be entitled to acquire immovable property during the year.

Individual coming to India: Conditions for residence

19.04.2014 12

Investment in Real Estate in India (other than FDI) by NRIs/PIOs/ Branch Offices

19.04.2014 13

Acquisition through Purchase

• General permission to purchase immovable property in India by:

– Non-Resident Indian (NRI)

– Person of Indian Origin (PIO) as defined under Notification No. 21

• General permission covers only purchase of residential and commercial property

– Not available for purchase of agricultural land / plantation property / farm house in India.

19.04.2014 14

Acquisition through Gift

• NRIs and PIOs can freely acquire immovable property by way of gift either from – – a person resident in India; or – an NRI; or – a PIO.

• However, the property can only be commercial or residential in

nature.

• Agricultural land / plantation property / farm house in India cannot be acquired by way of gift.

• A foreign national of non-Indian origin resident outside India cannot acquire any immovable property in India by way of gift.

19.04.2014 15

Acquisition through Inheritance

• NRI / PIO / Foreign national of non-Indian origin can inherit and hold immovable property in India from a person who was resident in India.

• However, a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan should seek prior approval of the Reserve Bank for holding/ transfer of inherited immovable property in India.

• NRI /PIO /Foreign national of non-Indian origin can inherit immovable property from (a) a person resident in India (b) a person resident outside India However, the person from whom the property is inherited should have acquired the same in accordance with the foreign exchange law in force or FEMA regulations, applicable at the time of acquisition of the property.

19.04.2014 16

Transfer of immovable property by NRI/ PIO/ Foreign nationals

• NRI can sell property in India to – a person resident in India; or – an NRI; or – a PIO.

• PIO can sell property in India to

– a person resident in India; or – an NRI; or – a PIO – with the prior approval of the RBI

• Foreign national of non-Indian origin including a citizen of Pakistan or

Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan can sell property in India with prior approval of the Reserve Bank to – a person resident in India – an NRI – a PIO

19.04.2014 17

Transfer of immovable property by NRI/ PIO/ Foreign nationals through Gift

• NRI / PIO can gift residential / commercial property to – – person resident in India or – an NRI or – PIO.

A foreign national of non-Indian origin requires the prior approval

of the RBI for gifting the residential / commercial property.

• NRI / PIO can gift an agricultural land / a plantation property / a farm house in India only to a person resident in India who is a citizen of India.

A foreign national of non-Indian origin would require the prior

approval of the Reserve Bank to gift an agricultural land / a plantation property / a farm house in India.

19.04.2014 18

Mode of Payments

• Payment by NRI / PIO for Immovable Property: (a) funds remitted to India through normal banking channels or

(b) funds held in NRE / FCNR (B) / NRO account maintained in India No payment can be made either by traveller’s cheque or by foreign currency notes or by other mode except those specifically mentioned above.

• Repatriation of application money for booking of flat / payment made to the builder by NRI/ PIO when the flat or plot is not allotted or the booking / contract is cancelled

NRIs / PIOs are allowed to credit refund of application/ earnest money/

purchase consideration on account of non-allotment / cancellation of bookings for purchase of residential/commercial property, together with interest, if any, net of income tax payable thereon, to NRE/FCNR account if originally paid out of NRE/FCNR account / Remittance from outside India provided AD is satisfied about the genuineness of the transaction.

19.04.2014 19

Repatriation of Sale Proceeds

• Repatriation of Sale proceeds of immovable property other than agricultural land / farm house / plantation property in India by a NRI / PIO shall not exceed: – the amount paid for acquisition of the immovable property in foreign

exchange received through normal banking channels, or – the amount paid out of funds held in Foreign Currency Non-Resident Account,

or – the foreign currency equivalent (as on the date of payment) of the amount

paid where such payment was made from the funds held in Non-Resident External account for acquisition of the property; and

• In the case of residential property, the repatriation of sale proceeds is

restricted to not more than two such properties.

• Repatriation outside India shall include crediting the proceeds to an account denominated in foreign currency or to an account in Indian currency maintained with an AD from which it can be converted in foreign currency.

19.04.2014 20

Repatriation Example

21

NRI has invested Rs. 9.0 CR USD 2.00 million

Issues:- Two Properties in a year ?, in a lifetime of the investor or at a time ?

Sold For - Rs. 24.0 CR

Gain - Rs. 15.0 CR (Less) Tax - Rs. 4.5 CR

Balance - Rs. 10.5 CR

Sale Proceed - Rs. 24.0 CR

12 CR ( USD 2 M) Direct Remittance

7.5 CR

NRO a/c 1 million 6.0 CR

Not Repatriable 1.5 CR

USD 4.00 million

Repatriation of Sale Proceeds

• Sale proceeds of the property acquired out of Rupee resources – the amount can be credited to the NRO account of the

NRI/PIO. The amount of capital gains, if any, arising out of sale of the property can also be credited to the NRO account.

– ADs can allow to repatriate an amount up to USD 1 million per financial year out of the balance in the NRO account subject to production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and a tax clearance / no objection certificate from the Income Tax Authority for the remittance.

– Remittances exceeding US $ 1,000,000 (US Dollar One million only) in any financial year requires prior permission of the Reserve Bank.

19.04.2014 22

Other Aspects

• Renting of residential / commercial property purchased out of foreign exchange / rupee funds

NRI/PIO can rent out the property without the approval of the RBI. The rent

received can be credited to NRO account / NRE account or remitted abroad based on an appropriate certification by a Chartered Accountant subject to payment/ provision of applicable taxes.

• Holding of immovable property bought immovable when a resident after becoming an NRI/PIO

A person who had bought the residential / commercial property / agricultural

land/ plantation property / farm house in India when he was a resident, can continue to hold the immovable property without RBI approval even after becoming an NRI/PIO.

19.04.2014 23

Acquisition by a Foreign Company

• General permission to purchase immovable property in India by Branch or Office or other Place of Business (excluding a liaison Office) approved by RBI under Notification No. 22 which is necessary or incidental to carrying on the approved activity provided-

– All applicable laws, rules, regulations or directions for the time being in force are duly complied with; and

– It files a declaration in the form IPI within ninety days from the date of such acquisition with RBI.

19.04.2014 24

Investment in Real Estate by NRIs/PIOs (Other than FDI under Notification No. 21)

Reg NRIs Reg PIOs Reg Others

Acquire 5 Branch

• In accordance with

applicable law

• Remittances from

abroad

• Form IPI has to be

filed with RBI within 90

days

Diplomatic offices of

Foreign Government

• Remittances from

abroad

• Approval from

Ministry of External

Affairs

Repatriation

• Allowed

Agricultural Land,

Plantation, Farm

House

3(a) No except Inheritance

from PROI/PRII.

Restriction on use/

repatriation possible

4(c) No except Inheritance from

PROI/PRII

Restriction on use/

repatriation possible

Other Property 3(a)

Yes 4(a)

4(c)

4(b)

Purchase

Inheritance of property acquired

in accordance with FEMA*

Gift from NRIs, PIOs & PRII

5(a)

Transfer

Agricultural Land 3(b) Sale or Gift to PRII only 4(e) Sale & gift to PRII who is Citizen

of India

Other Property Gift, Sale or inheritance

to NRIs, PIOs & PRII

4(d)

4(f)

Sale to PRII

Gift to NRIs, PIOs & PRII

Sale to PIO - with prior RBI

approval

Repatriation 6(a)

&(b)

Up to Original

Investment in FC and

for Residential

Property- maximum for

2 houses

Balance under US $ 1

Million Scheme

Up to Original Investment in FC

and for Residential Property-

maximum for 2 houses

Balance under US $ 1 Million

Scheme

Including foreign nationals excluding citizens of 8 neighboring countries – RBI FAQ-10 25

Investment abroad in Immovable Property by Individuals & Companies

19.04.2014 26

Immovable Property abroad by Individuals

• An Indian citizen resident in India cannot acquire or transfer immovable property outside India without RBI approval except - – by purchase out of RFC account funds, or out foreign funds acquired as a NR. – as gift or inheritance from Returning Indian. He can not acquire by way of gift from other

persons.

• Foreign citizens who are Indian residents, are free from any restrictions regarding immovable property transactions outside India.

• Acquiring property on lease up to 5 years is freely permitted.

• An Indian resident can transfer the above property as gift to his relative who is also an Indian resident.

Relative means - Spouse, brother or sister, lineal ascendant or descendant.

19.04.2014 27

Immovable Property abroad by Companies

• Within the limits of remittance for overseas branches, an Indian company can acquire:

- immovable property for its business. - residence of its staff.

19.04.2014 28

FDI in Real Estate Development

19.04.2014 29

Entry Routes & Compliances

Automatic Route Prior Permission

FDI in India

General rule

• Inform RBI within 30 days of inflow

in Annex (Advance Reporting & KYC)

• Issue shares within 180 days of inward

remittance and file FC-GPR within one

month thereafter

• Pricing: FEMA Regulations •Unlisted – DCF Valuation except initial

investment through Subscription of A&MA)

•Listed – As per SEBI Guidelines

• File Annual Return of Foreign Liabilities

& Assets by 31st July every year

By exception

•Approval of Foreign

Investment Promotion

Board (FIPB) needed.

•Subsequent procedures

are same as under Automatic

route

19.04.2014 30

Relevant Statutory Regulations

• Consolidated FDI Policy: – Latest FDI Policy - DIPP Circular No. 1 dated

April 5, 2013.

• RBI Notifications / Circulars: – Notification No. 20 - Schedule 1- Annexure B –

Updated from time to time in accordance with the FDI Policy of the Government of India

– AP. Dir Circulars issued from time to time

– Master Circular issued in July every year.

19.04.2014 31

General Restrictions

• Investors who require prior FIPB approval: – Citizen of Pakistan/Entities incorporated in Pakistan can

invest (excluding defence, space & atomic energy and other sectors/ activities prohibited for foreign investment) only upon prior FIPB approval subject to sectoral caps.

– Citizen of Bangladesh/Entities incorporated in Bangladesh

can invest in all the sectors where FDI is permitted upon prior FIPB approval subject to sectoral caps.

• Activities Prohibited in Real Estate Sector: – Real Estate Business (RBI Master Circular 2013)

• “real estate business” means dealing in land and immovable property with a view to earning profit or earning income 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.

– Construction of Farm Houses

– Trading in Transfer Development Rights (TDRs)

19.04.2014 32

Entities in which FDI can be made

• FDI in an Indian Company: – General FDI Guidelines - discussed separately

– Certain Relaxations in FDI policy (including Investments by NRIs/PIOs) – discussed separately

• FDI in Partnership Firm / Proprietary Concern: – NRIs/ PIOs can invest under automatic route. Others will require prior RBI approval

– The firm or proprietary concern with FDI cannot engage in agricultural/plantation activities or real estate business or print media sector

– Original investment on repatriation basis is possible only with the prior RBI approval

– Current Income freely repatriable after payment of taxes

• FDI in Limited Liability Partnerships (LLPs): – Permissible with prior FIPB approval in sectors where 100% FDI is permitted and no

performance related conditions are attached

– Therefore, FDI in LLP for investment in Real Estate Sector is not permissible (Except by NRIs/ PIOs as they are not affected by performance related conditions).

19.04.2014 33

Entities in which FDI can be made (Contd..)

• FDI in Venture Capital Fund (VCF):

– Investments subject to General FDI policy.

– If the domestic VCF is set up as a trust, investment requires prior FIPB approval

– A SEBI registered Foreign Venture Capital Investor (FVCI) can make 100% investment in - • Indian Venture Capital Undertaking (IVCU) and also set up a domestic AMC to manage the

fund.

• Domestic Venture Capital Fund (VCF) registered under the SEBI (Venture Capital Fund) Regulations, 1996

– SEBI registered FVCIs can invest under the FDI Scheme, as non-resident entities, subject to FDI Policy and FEMA regulations.

• FDI in Trusts: – FDI in Trusts other than VCF is not permitted

19.04.2014 34

Types of Projects Included

• Township, Housing & Built-Up Infrastructure and Construction Development Projects

• To include projects such as Housing, Commercial Premises, Hotels, Resorts, Hospitals, Educational Institutions, Recreation Facilities & City and Regional Level Infrastructure.

• Issues

– Townships ? • In Maharashtra- Area specified under Bombay Tenancy and Agricultural Land Act, 1948

• In Other States – Area Notified under regional town planning acts of the respective states

– Construction-Development projects • Can company give land to a builder under development agreement where consideration is

received in terms of certain constructed area?

19.04.2014 35

Mandatory Guidelines

• Minimum Area:

– In case of Development of Serviced Housing Plots- Minimum of 10 Hectares of Land ( Approx 25 acres)

– In case of Construction-Development Projects- Minimum built-up Area of 50,000 sq. mts

– In case of a combination project, compliance with any one of these two condition would suffice

• Issues:

– What comprises built-up area? – FSI, Carpet or Salable area?

– Does the minimum area need to be contiguous?

– Any requirement to have the master plan approved?

19.04.2014 36

Mandatory Guidelines

• Minimum Capitalization: – For WOS US $ 10 million

– For JV with a resident in India US $ 5 million

– Funds (USD 10/5 Million as the case may be) should be brought in within 6 Months of the commencement of the business

• Issues

– JV at what level?

– What are the instruments for capitalization?

– Minimum Capitalization - Is premium on shares counted ? • Minimum capitalization includes share premium received alongwith the face value of

the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement.

– What is meant by ‘commencement of business’?

19.04.2014 37

Project Development

• Project Development: – At least 50% of each of the project must be developed within a period of 5 years from the

date of obtaining statutory clearances

– Investor is not allowed to sell undeveloped plots • “Undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage,

and other conveniences, as applicable under the prescribed regulations, have not been made available.

• Investor is required to provide stipulated infrastructure and obtain completion certificate from the concerned local body/service agency before he is allowed to dispose of these serviced housing plots.

• Issues: – Meaning of 50% Project Development

– All Statutory approvals? Completion certificate/ Occupation Certificate/ Part- occupation certificate?

– Can part of the project be sold prior to completion certificate?

– Is it necessary to obtain ‘completion certificate’ before a serviced housing plot can be sold?

– Is it necessary to complete the entire project before sale / lease of a part of the project?

19.04.2014 38

Repatriation / Exit Policy

• Repatriation / Exit Policy:

– Original Investment [entire amount brought in as FDI] can not be repatriated before a period of 3 years from the date of completion of minimum capitalization. Earlier exit permitted only with Prior FIPB approval

• Issues

– Lock-in tenure • Will apply from the date of receipt of each installment / tranche of FDI or from the date of

completion of minimum capitalization, whichever is later

– Up to what stage in a project can an FDI investor participate?

– NR to NR transfer- Does this amount to repatriation?

• Two main conditions to be fulfilled for exit:

– Lock-in period of 3 years.

– 50% project completion within 5 years of obtaining statutory clearances.

19.04.2014 39

Other Conditions

• The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the local building control regulations, bye-laws, rules and regulations .

• It will be the responsibility of the investor & investee company to-

– Obtain all the approvals (including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities)

– Pay development, external development and other charges

– Comply with all other requirements prescribed under rules/bye-laws/regulations of the State Government/ Municipal/Local Body concerned.

• The State Government/ Municipal/ Local Body concerned, which approves the building / development plans also required to monitor compliance of these conditions by the developer.

19.04.2014 40

• Can a Company receive FDI in when - – It has both FDI compliant and FDI non-compliant projects?

– It has FDI compliant real estate project along with other FDI permitted business?

• Is it necessary to sale premises before exit? – The condition is “development” and not “sale”.

• Purchase of Agricultural Land for Real Estate Development? • Depends upon State Policy

• In Maharashtra- Possible if approved under S. 63(1)(a) of Bombay Tenancy and Agricultural Land Act, 1948

• Construct and lease – is it permitted?

• Can builder offer a minimum return to the non-resident investor?

• Call and Put options?

19.04.2014

Other Issues

41

Relaxations in FDI Conditions

• Types of FDI Projects/ Investors entitled for relaxations – FDI in Hotels & Tourism – Hospitals – Special Economic Zones (SEZs)/ Industrial Parks – Education Sector – Old age Homes – Investment by NRIs/ PIOs

• Relaxation in respect of 4 conditions relating to -

– Minimum Area – Minimum capitalization & 6 Months Capitalization Period – 50% Project development within 5 years, and – Lock in period on repatriation of initial investment

19.04.2014 42

FDI in Industrial Parks

• Industrial Park

– a project in which quality infrastructure in the form of plots of developed land or built up space or a combination with common facilities, is developed and made available to all the allottee units for the purposes of industrial activity.

• Infrastructure

– facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads),water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.

• Common Facilities

– facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.

19.04.2014 43

FDI in Industrial Parks

• Built- Up Area - Meaning

– In the case of plots of developed land-

• the net site area available for allocation to the units, excluding the area for common facilities.

– In the case of built up space-

• the floor area and built up space utilized for providing common facilities

– In the case of a combination of developed land and built-up space-

• the net site and floor area available for allocation to the units excluding the site area and built

up space utilized for providing common facilities.

• Minimum Area

– Minimum of 10 Units and no Single Unit shall occupy more than 50% of the allocable area

– Minimum percentage of the area to be allocated for industrial activity shall not be less than 66% of the total allocable area.

19.04.2014 44

• FIIs and QFIs are permitted to invest in “listed” or “to-be-listed” (the issue should be listed

within 15 days) NCDs issued by an Indian company

• The NCD investment by FIIs are treated as rupee borrowing and distinct from the general

external commercial borrowing. Hence, they are not subjected to ECB restrictions

• Aggregate debt investment limit for all FIIs / QFIs: USD 51 billion (no individual limit)

• No lock in or residual period – No approval till aggregate debt limit reaches 90% of the

total limit

• For an exit, NCDs may be sold on the floor of the stock exchange, but most commonly are

redeemed

• Listed NCDs can be secured (by way of pledge, mortgage of property, hypothecation of

receivables etc.) in favor of the debenture trustee

19.04.2014

FII/ QFI Route - NCDs

45

CCD vs. NCD – Comparative Analysis

Particulars CCD – FDI NCD - FII / QFI

Equity Ownership

Equity under FEMA IT/ Company Law- Initially debt, but equity on conversion

Mere lending rights; however, veto rights can ensure certain degree of control.

ECB Qualification

Assured returns on FDI compliant instruments, or put option granted to an investor, may be construed as ECB.

Shall not qualify as ECB.

Coupon Payment

Interest pay out may be limited to SBI PLR + ALP Markup (Max 450 basis points). Interest can accrue and be paid only out of free cash flows, if agreement so provided.

Arm's length interest pay out should be permissible resulting in better tax efficiency. Interest can accrue only out of free cash flows. Redemption premium may also be treated as business expense.

Pricing DCF Valuation applicable DCF Valuation not applicable

Sectoral conditionalities

Only permissible for FDI compliant activities Sectoral restrictions not applicable.

Equity Upside Investor entitled to equity upside upon conversion. NCDs are favorable for the borrower to reduce book profits or tax burden. Redemption premium can be structured as capital gains which may not be taxed if the investment are from Singapore or Cyprus.

19.04.2014

46

Investment in Real Estate Development Projects abroad

19.04.2014 47

Outbound Investment in Real Estate Development Projects

• Investment in foreign entities involved in real estate business is prohibited – Notification No. 120- Regulation 5(2). – "Real estate business" means buying and selling of real estate or trading in

Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges - Regulation 2(p)

• Investment in foreign entities doing development of townships, construction of residential/commercial premises, roads or bridges – – Others can invest up to 100% of their Net worth – Mode of Funding -

• Under Regulation 4 of the Notification No. 120 - from RFC Account or out of funds held outside India by persons not permanently resident in India

• Drawal of Foreign Exchange permissible under Regulation 6 -Notification No. 120

19.04.2014 48

Outbound Investment in Real Estate Development Projects

• Drawal of Foreign Exchange – Total permissible Financial Commitment - Up to 100% the Net Worth of the

Indian Party. – To include remittances from India, ECB, Capitalization of Exports and 100% of

Guarantees

• Other Conditions

– Foreign entity to carry on bonafide business activities only – Investor is not on RBI’s Caution List/ investigation by ED. – Investor submits request in Form ODI to the AD and remits the fund only after

obtaining UIN – Investor to route all remittances though a designated branch of an AD. – Investor to file Annual Performance Report (APR) – Investor to submit Annual Return of Foreign Liabilities and Assets by 31st July

every year

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Thank You

N. G. Thakrar & Co

Chartered Accountants 4, Big Three Building, 1st Floor,

88, Anandilal Poddar Marg, Mumbai- 400 002

Tel: 2201 8184/ 2207 9094 Mobile: 98210-21841

Email: natwarthakrar@gmail.com

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