Inbound and Outbound Investment

Seminar on Real Estate and
Construction Industry
FEMA & FDI Regulations – Inbound and

Outbound Investment Regulations
September 1, 2006
Rajesh Kapadia, FCA

Coverage
• Brief Background
• Inbound investment in real estate
• Outbound Investment in real estate
FEMA & FDI Regulations – Inbound and Outbound Investment Regulations - Rajesh Kapadia, FCA
Brief Background
Genesis of Exchange Control Regulations
Defence of India Act, 1939
Foreign Exchange Regulation Act, 1947
Foreign Exchange Regulation Act, 1973

• Substantially modified
• Draconian Provisions
• Relaxation of some stringent provisions -
1993
• Repealed – May 31, 2000 – Sunset clause
May 31, 2002
Foreign Exchange Management Act, 1999

• Effective June 1, 2000
Genesis of Exchange Control Regulations contd…
• Primary Purpose:
– Conserve foreign exchange
– Protect Indian industry and economy
• Relaxations:
– Fully convertible on current account
– Capital convertibility norms liberalised
• Way Forward:
– Complete deregulation
– Full capital account convertibility
– Removal of sectoral caps
Inbound Investment in Real Estate
Position under FERA
• No person resident outside India could own immovable property in

India, without the approval of the Reserve Bank of India (RBI)
• Certain relaxations permitted by issue of circulars and notifications
by RBI for NRIs owning residential houses for their personal use,
property inherited etc.
• First set of liberalization measures introduced to permit NRIs and
Overseas Corporate Bodies (OCBs) to invest in real estate
development projects, subject to certain conditions [Under FEMA
OCB derecognised as a category after September 2003]
• Repatriation of original investment by NRIs/ OCB permitted by RBI
only after lock in period of 3 years from date of issue
• OCBs permitted to repatriate net profits (upto 16%) arising from sale
of such investment after the lock-in period of 3 years
Position under FERA contd…
• Dividend/ interest on equity shares/ debentures allowed to be

remitted subject to necessary approvals without any lock –in period
• No other person resident outside India was eligible to invest in real
estate development projects
• Real estate development activity was limited to the following six
activities:
– Development of serviced plots and construction of built up residential
premises
– Construction of residential and commercial premises including business
centers and offices.
– Development of townships
– City and regional level urban infrastructure facilities, including roads and
bridges.
– Manufacture of building materials
– Financing of housing development
Position under FEMA
• Capital Account Transactions governed by Section 6 of FEMA

• Capital Account transactions defined in Section 2 (e) of FEMA
• RBI empowered to frame regulations and make rules etc. in
consultation with the Central Government
• Foreign Exchange Management (Permissible Capital Account
Transactions) Regulations, 2000 (Capital Account Regulations)
• Schedule II of Capital Account Regulations specifies classes of
permissible capital account transactions for non-residents
• Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident outside India) Regulations, 2000 prescribe
conditions for investments by persons residents outside India (TIS
Regulations)
Classification of Foreign Investment
• Foreign Direct investment by any Person Resident Outside India in

Real Estate development activity (regulation 5(1) read with
Schedule 1 of TIS Regulations)
• Investment by NRIs in Housing and Real estate sector (Schedule 1

of the TIS Regulations)
• Investment by Registered Foreign Venture Capital Investors in

Indian Venture Capital undertakings (VCUs) and Venture Capital
Funds (VCFs) in real Estate sector (regulation 5(5) read with
Schedule 6)
Foreign Direct investment by any Person Resident Outside
India in Real Estate Development Activity
• Annexure “A” of Schedule 1 of TIS Regulations prohibits FDI in

companies carrying on real estate business
• Real estate business defined under Explanation to Regulation 4(b)
of the Capital Account Regulations as under:
“real estate business shall not include development of townships,
construction of residential/ commercial premises, roads and
bridges”.
• Schedule 1 of TIS Regulations deals with FDI Scheme
TIS Regulations
• Foreign Investment in Indian companies carrying on:

– Activities falling in Annexure “A” – Part A - FDI permitted with prior approval of
the Government of India
– Activities falling in Annexure “A” –Part B – No FDI is permitted
– Activities specified in Annexure “B” – FDI permitted upto the sectoral caps under
automatic route of RBI.
• Provided that:
– activity of the company does not require industrial license
– shares are not issued with a view to acquiring existing shares of an Indian
company
• Issue of preference shares not having conversion option not covered under
sectoral caps
• Indian company also permitted to issue shares against royalty/ lumpsum
payment due and against outstanding External commercial Borrowings
• Issue of shares subject to pricing guidelines
Press Note 4 (2001 series) & Press Note 3 (2002 Series)
• 100% FDI for development of integrated townships with prior govt approval
• Foreign company to invest in Indian Company
• Core business of the company seeking to make investment should be
integrated township development with a record of successful execution of
such projects elsewhere
• Minimum area to be developed by such a company should be 100 acres
OR minimum of two thousand dwelling units for about ten thousand
population
• Minimum capitalisation norm (funds required to be brought in upfront)
– US$ 10 million for a wholly owned subsidiary
– US$ 5 million for joint ventures with Indian partner/s.
• Minimum lock-in period of 3 years from completion of minimum
capitalisation shall apply before repatriation of original investment
• Dividend may be repatriated
Press Note 4 (2001 series) & Press Note 3 (2002 Series)
contd…
• Minimum of 50% of the integrated project development must be completed
within a period of five years from the date of possession of the first piece of
land
• Conditions regarding the use of land for commercial purposes, development
charges, external development charges and other charges as laid down in
Master Plan will have to be met as per planning norms and standards on
similar lines as those applicable to local investors
• Land with assembled area for peripheral services such as police stations,
milk booths as well as playgrounds and parks will be handed over free of
cost to the Government / local authority / agency as the case may be
• Developer will retain the lands for community services such as schools;
shopping complex; community centres; ration shop; hospital/ dispensary.
These services will be developed by developer himself and made
operational before the houses are occupied.
• The developer will ensure the norms and standards as applicable under
local laws / rules
Press Note 2 – 2005 series
• 100% investment under the automatic route in townships, housing,

built-up infrastructure and construction development projects,
including:
– Housing
– Commercial premises
– Hotels and resorts
– Hospitals
– Educational institutions
– Recreational facilities
– City and regional level infrastructure
Press Note 2 – 2005 series – conditions stipulated
Minimum area requirements: Capitalization norms and

– for development of serviced restrictions:
housing plots – a minimum – for wholly owned subsidiaries
land area of 10 hectares minimum capitalisation of USD
– for construction-development 10 mn
projects – a minimum built-up – for joint ventures with Indian
area of 50,000 sq. mts. partners minimum
– for combination projects – capitalisation of USD 5 mn.
either a minimum land area of – funds to be brought in within 6
10 hectares or a minimum months of commencement of
built-up area of 50,000 sq. business
mts. – Lock-in period of 3 years for
original investment (earlier exit
would require FIPB approval)
Press Note 2 – 2005 series – conditions stipulated
Time frame for completion: Conformity with state and

– 50% of the project must be local laws
developed within 5 years from – The project shall conform to
the date of obtaining all the norms and standards as
statutory clearances laid down by the applicable
– Investor would not be rules, building control
permitted to sell undeveloped regulations etc.
plots (i.e. where roads, water – All necessary approvals to be
supply, street lighting, obtained and to comply with
drainage, sewerage and other requirements under applicable
conveniences have not been state and local laws
made available)
Press Note 2 – 2005 series – Update
As per a report in the Economic Times, Mumbai edition dated August

24, 2006 – Government plans to ease the aforesaid conditions to
reduce the minimum area criteria to 10,000 sq meters for commercial
developments and 10 acres for residential projects.
Investment by NRIs in Housing and Real estate sector
• In addition to Press Note 2 (2005) investment permissible only in 7

specified categories
– Development of serviced plots and construction of built up residential
premises
– Investment in real estate covering construction of residential and
commercial premises including business centres and offices
– Development of townships
– City and regional level urban infrastructure facilities, including both
roads and bridges
– Investment in manufacture of building materials, which is also open to
FDI
– Investment in participatory ventures in categories listed above
– Investment in housing finance institutions, which is also open to FDI as
an NBFC
Investment by Foreign Venture Capital Investors
• FVCI registered with SEBI permitted to invest in VCFs and VCUs

under automatic route
• VCF and VCU defined under TIS Regulations
• FVCI permitted to purchase equity/ equity linked instruments, debt/
debt instruments, units of scheme set up by VCF, subject to
stipulated limitations
• Investment in VCU and VCF by FVCI not subject to pricing
restrictions, lock-in or valuation guidelines. FVCI can purchase and
sell shares of VCFs and VCUs at mutually agreed price
• April 2004 - amendment to the SEBI (Venture Capital Funds)
Regulations, 1996 (“the VCF Regulations”) - “real estate” removed
from the Negative List - paved way for Real Estate Venture Funds
• As per clause 11(1) of the VCF Regulations, VCF may raise monies
from any investor whether Indian, foreign or non-resident Indian by
way of issue of units
Investment by Foreign Venture Capital Investors
• FVCI – controversy regarding applicability of FDI Policy

• Several FVCI applications are held up on this account.
Summary
FDI – Other than NRIs/ PIOs FDI – NRIs/ PIOs

– Press Note 2 compliant – Press Note 2 compliant
projects projects
– Investment in units issued by a – Investment in units issued by a
VCF requires prior approval VCF requires prior approval
from FIPB from FIPB
– Shares of an Indian company
carrying on the any of the
seven specified activities
FII FVCI
– Shares of Listed Companies – Approval of RBI required
and pre-IPO offerings of Real- through SEBI
Estate Companies – Shares/ units of VCF
– Press Note 2 – not applicable – Shares of VCU
– Press Note 2 – not applicable
Other Real Estate and Construction Related Areas
• Roads and highways, ports and harbour 100%

• Hotel and tourism 100%
• Industrial Parks 100%
• Special Economic Zones 100%
• Airports 74%
Transfer of Shares
• Transfer by a foreign company to another foreign company – No

approval
• Transfer by one NRI to another NRI – No approval
• Transfer by a resident to any person resident outside India – No
approval, subject to compliance of Circular no 16 dated 4th October,
2004 and valuation guidelines.
• Transfer from a person resident in India to a person resident outside
India by way of gift requires RBI approval and is subject to certain
conditions.
Outbound Investment in Real Estate
Direct Investment abroad by an Indian Party
• Investment in Joint Venture/ Wholly owned subsidiary abroad:

– Indian Party defined and includes a registered Firm
– Under automatic route provided certain conditions are satisfied
– Indian Party is not engaged in real estate business or banking business.
The term real estate business defined
– Overseas JV/WOS should also not be engaged in real estate business
– Remittance upto 200% of net-worth of the Indian Party
– No limit if remittance from an Exchange Earner’s Foreign Currency
Account (EEFC).
– Indian party also permitted to extend loan or a guarantee within the
permissible limit. Indian party can make overseas acquisition i.e.
acquire existing shares of the overseas company subject to valuation of
shares certified by the appropriate certifying authority
• Other modes of Direct Investment:

– Investment in listed overseas company: An Indian Listed Company
permitted to make investment in overseas listed company (The
condition of the overseas company to have reciprocal investment in
India listed company of at least 10% dispensed with vide. A.P. (DIR
Series) Circular No. 3 dated 26th July, 2006 in respect of Mutual funds)
– Investment in Step down Subsidiary through a holding company:
Automatic route if conditions specified are satisfied. Indian party
required to report to RBI of decision with regard to making investment in
step down subsidiary taken by the JV/WOS within 30 days of the
approval of the said decision by the competent authority in the host
country.
– Investment in foreign security by a resident person:
• Out of Resident Foreign Currency (RFC) Account
• Out of funds held abroad which were acquired at the time when the said
person was a non-resident.
– Investment by a person resident in India being an individual in foreign

securities without RBI approval:
• by way of gift from a person resident outside India
• issue of cashless ESOPs by company incorporated outside India provided
no remittance is made from India
• by way of inheritance from person resident outside India
• if he is an employee or a director of India office or branch office or a
subsdiary of the foreign company, the foreign company holding at least 51%
of the capital in the subsidiary
• as qualification shares for holding post of director subject to certain
conditions
• as right shares
• Upto US$ 25,000 per calendar year without approval from RBI under
Circular No 64 dated 4th February, 2004 subject to certain prohibitions.
Remittance to Bhutan, Nepal, Mauritius or Pakistan under this circular is
prohibited
Direct Investment abroad by an Indian Party - Exit Option
• Sale to another Indian party or to a person resident outside India

• Automatic route provided certain conditions are satisfied
• Sale not to take place at a price less than the amount invested.
(However, RBI vide Circular No. 29 dated 27th March, 2006
permitted disinvestment by sale of shares at a price less than the
amount invested in certain cases)
THANK YOU

Inbound and Outbound Investment

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Inbound and Outbound Investment

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Seminar on Real Estate and

FEMA & FDI Regulations – Inbound and

Rajesh Kapadia, FCA

• Inbound investment in real estate

• Outbound Investment in real estate

Defence of India Act, 1939

Foreign Exchange Regulation Act, 1947

Foreign Exchange Regulation Act, 1973

Foreign Exchange Management Act, 1999

• No person resident outside India could own immovable property in

• Dividend/ interest on equity shares/ debentures allowed to be

• Capital Account Transactions governed by Section 6 of FEMA

• Foreign Direct investment by any Person Resident Outside India in

• Investment by NRIs in Housing and Real estate sector (Schedule 1

• Investment by Registered Foreign Venture Capital Investors in

• Annexure “A” of Schedule 1 of TIS Regulations prohibits FDI in

• Foreign Investment in Indian companies carrying on:

• 100% investment under the automatic route in townships, housing,

Minimum area requirements: Capitalization norms and

Time frame for completion: Conformity with state and

As per a report in the Economic Times, Mumbai edition dated August

• In addition to Press Note 2 (2005) investment permissible only in 7

• FVCI registered with SEBI permitted to invest in VCFs and VCUs

• FVCI – controversy regarding applicability of FDI Policy

FDI – Other than NRIs/ PIOs FDI – NRIs/ PIOs

• Roads and highways, ports and harbour 100%

• Transfer by a foreign company to another foreign company – No

• Investment in Joint Venture/ Wholly owned subsidiary abroad:

• Other modes of Direct Investment:

– Investment by a person resident in India being an individual in foreign

• Sale to another Indian party or to a person resident outside India

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