FDI REGULATIONS FOR NRI’S WITH EMPHASIS ON THE REAL ESTATE SECTOR Mr. Madhurendra Nath Jha, Senior Partner Paras Kuhad & Associates
Non Resident Indian (NRI) • The term NRI has not been defined in FEMA, 1999. However Regulation 2(vi) of the FEMA (Acquisition & Transfer of Immovable Property in India) Regulations 2000 defines the same as follows: • An NRI is a person resident outside India who is a citizen of India or is a Person of Indian Origin
Person of Indian Origin (PIO) A PIO has been broadly defined as a citizen of any country other than Bangladesh or Pakistan [certain Regulations also include Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan] if: • at anytime he has held an Indian passport; or • If he or either of his parents or grand parents was a citizen of India by virtue of Constitution of India of the Citizenship Act 1955; or • the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b) above.
Overseas Citizen of India (OCI) • An OCI is a foreign national, who was eligible to become a citizen of India on 26.01.1950 or was a citizen of India on or at any time after 26.01.1950 or belonged to a territory that became part of India after 15.08.1947 and his/her children and grand children, is eligible for registration as an Overseas Citizen of India (OCI). • However, if the applicant had ever been a citizen of Pakistan or Bangladesh he/she will not be eligible for OCI
Legal Counseling Issues • Opening of a Bank Account:Foreign nationals resident but not permanently resident in India are permitted to maintain and operate bank accounts in India only with authorised dealers. • Acquisition, Management & Transfer of Immovable Property:Section 6(5) of FEMA 1999, provides that a person resident outside India can hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was a resident in India or inherited from a person who was a resident in India.
Cont. • Direct Investment Opportunities:NRIs can open any business in India. Neither is there any specific bar under Company Law nor are they accorded any preferential treatment over other foreign and Indian Citizens. • Issues Relating to Borrowing & Lending:The Issues and Limitations relating to borrowings and Lending has been regulated by Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 issued by the RBI.
NRI’S INVESTMENT • Investment by Non Resident Indians is allowed in all categories. • Earlier, only the NRIs were permitted to invest in Housing and Real Estate sectors, RBI’s Circular known as Press Note 2 of 2005 dated March 3, 2005 and Press Note 4 of 2006 dated February 10, 2006 have vastly widened the field and opened the floodgates for FDI in “townships, housing, infrastructure and construction/ development projects.”
INVESTMENT BY NRIs IN REAL ESTATE SECTOR • The Indian Government has allowed 100% FDI by NRI’s vide Press Note 2 of 2005 in: • The development of serviced plots and construction of built-up residential premises. • Investment in real estate covering construction of residential and commercial premises including business centers and offices.
FDI IN REAL ESTATE SUBJECT TO THE FOLLOWING: A. Minimum area to be developed under each project would be as under: • In case of development of serviced housing plots, a minimum land area of 10 hectares; • In case of construction-development projects, a minimum built-up area of 50,000 sq. mts; • In case of a combination project, anyone of the above two conditions would suffice
CONT. B. The investment would further be subject to the following conditions: • Minimum capitalization of US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company. • Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPS.
Cont. C. At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor would not be permitted to sell undeveloped plots.
Effect of Press Note 4 of 2006 • Provisions regarding FDI in a number of sectors were further liberalized. • Provisions regarding automatic entry route, and 100 per cent FDI cap/equity in construction-development projects including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships, as also other guidelines given in Press Note 2 dated March 3, 2005 were reiterated. • The said Press Note dated 10.2.2006 also stated that for investment by NRIs, conditions mentioned in Press Note 2 dated March 3, 2005 were not applicable. Thus, NRIs have been given a special and preferential treatment in this regard. (All these stipulations have been re-affirmed vide items number 23 and 6 of Annexure 2 of Master Circular Number 2/2006-2007 dated July 1, 2006).
Opportunities lining up for NRIs.. • Direct FDI allowed in residential townships of more than 25 acres and in construction with approval for projects offering built-up area of more than 50 thousand square meters. • Direct and automatic approval for IT park and hotel investments. • Foreign and domestic venture capital investment in real estate allowed with prior approval. • Within special economic zones, akin to Foreign trade zones in the USA , developments, free capital and dividends allowed with many specific tax exemptions on profits (5 to 10 years), and local taxes.
Accruing Income Tax Benefits • Section 80-IB (10) of the Income Tax Act, 1961 exempting the entire income from specified housing projects from income tax invites FDI and NRIs to rush to India. • Section 80-IB (10) exempts an industrial undertaking's entire income from developing and building housing projects approved before the 31st day of March, 2007 by a local authority if such undertaking completes such construction within four years from the end of the financial year in which the housing project is approved by the local authority; and the project is on a plot of land admeasuring at least one acre. • Further, the conditions relating to the time limit for completion of the project and minimum size of plot are also waived in respect of the housing project carried out in accordance with the notified scheme framed by the Central or State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas
Why Invest in India? • Booming Indian economy - The GDP growth rate is around 8% and increasingly showing signs of northwards trend with the stated intention of 10% growth rate. • Booming IT sector -. Information Technology has changed the global definition of India. India has emerged as one of the global software leader. With the increase in spending power of Indians, the real estate market is just waiting to explode. • Booming economic policies - The progress of the nation by leaps and bounds is largely attributed to the ever improving, intelligent and forward-looking economic policies adopted by the successive governments during the past 15 years. The FDI regime is here to stay. FDI has the potential to change the face of India if pursued in the right earnest.
Cont.. 4. Booming middle class - The Indian middle class is estimated at more than 300 million – more than the entire population of US. Largely English-speaking Indian middle class represent the future of Indian service sector. All this augurs well for the overall improvement in the standard of living in India. Booming NRI investment - The millions of NRIs are channeling more and more money towards the growth of Indian infrastructure.