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

FEMA & FDI Regulations – Inbound and Outbound Investment Regulations - Rajesh Kapadia, FCA

Coverage

• Brief Background

• Inbound investment in real estate

• Outbound Investment in real estate


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1993• Repealed – May 31, 2000 – Sunset clause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 inIndia, 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/ lumpsumpayment 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:– for development of serviced

housing plots – a minimum land area of 10 hectares

– for construction-development projects – a minimum built-up area of 50,000 sq. mts.

– for combination projects –either a minimum land area of 10 hectares or a minimum built-up area of 50,000 sq. mts.

Capitalization norms and restrictions:

– for wholly owned subsidiaries minimum capitalisation of USD 10 mn

– for joint ventures with Indian partners minimum capitalisation of USD 5 mn.

– funds to be brought in within 6 months of commencement of business

– 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:– 50% of the project must be

developed within 5 years from the date of obtaining all statutory clearances

– Investor would not be permitted to sell undeveloped plots (i.e. where roads, water supply, street lighting, drainage, sewerage and other conveniences have not been made available)

Conformity with state and local laws

– The project shall conform to the norms and standards as laid down by the applicable rules, building control regulations etc.

– All necessary approvals to be obtained and to comply with requirements under applicable state and local laws


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 VCUsunder 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 moniesfrom 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 – NRIs/ PIOs– Press Note 2 compliant

projects– Investment in units issued by a

VCF requires prior approval from FIPB

– Shares of an Indian company carrying on the any of the seven specified activities

FVCI– Approval of RBI required

through SEBI– Shares/ units of VCF– Shares of VCU– Press Note 2 – not applicable

FDI – Other than NRIs/ PIOs– Press Note 2 compliant

projects– Investment in units issued by a

VCF requires prior approval from FIPB

FII– Shares of Listed Companies

and pre-IPO offerings of Real-Estate Companies

– 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

Documents

Transcript of Inbound and Outbound Investment