India-Real-Estate.org

As you would notice from the posts on this website, there are different kinds of rules for different kinds of real estate investing in India.

If all you want to do is buy an apartment for yourself, its straight forward. But its different if you want to build an apartment complex or township or SEZ (special economic zone) with FDI (foreign direct investment) or ECB (external commercial borrowing).

Please refer this post: RBI Guidelines for FDI and ECB in Indian Real Estate

Investing in real estate in India requires compliance with various laws, some 100 years old and some new. In addition to Central Govt laws, there are state laws governing real estate transactions and investment.

The Central laws governing real estate include:

Indian Transfer of Property Act

The Transfer of Property Act governs the transfer of property by various means. Sales, mortgages (other than by way of deposit of title deeds) and exchanges of immovable property are required to be registered by virtue of the Transfer of Property Act. Therefore, all the above documents must be in writing and registered.

Indian Registration Act, 1908

The purpose of this Act is the conservation of evidence, assurances, title, publication of documents and prevention of fraud. It details the formalities for registering an instrument. Instruments which require mandatory registration include:

• (a) Instruments of gift of immovable property;
• (b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, to or in immovable property;
• (c) non-testamentary instruments which acknowledge the receipt or payment of any consideration on account of instruments in (2) above.
• (d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent

Sales, mortgages (other than by way of deposit of title deeds) and exchanges of immovable property are required to be registered by virtue of the Transfer of Property Act. So all the above documents have to be in writing.

Section 17 of the Act provides for optional registration. An unregistered document will not affect the property comprised in it, nor be received as evidence of any transaction affecting such property (except as evidence of a contract in a suit for specific performance or as evidence of part-performance under the Transfer of Property Act or as collateral), unless it has been registered.

Thus the doctrine of part performance dealt with under Section 53 A of the Transfer of Property Act and the provision of Section 49 of the Registration Act (which provide that an unregistered document cannot be admissible as evidence in a court of law except as secondary evidence under the Indian Evidence Act) together protect the buyer in possession of an unregistered sale deed and cannot be dispossessed. The net effect has been that a large number of property transactions have been accomplished without proper registration.

Instruments such as Agreement to Sell, General Power of Attorney and Will have been indiscriminately used to effect change of ownership. Therefore, investors in real estate have to be careful in their due diligence.

Therfore, establishing “Clear Title” on your desired Indian Real Estate is more complex and time-consuming than it is in America or Europe. Please factor this in your due-diligence.

Reference: http://www.madaan.com/realestate.html

Question by Mr. Narendran: We are Bangalore based real estate company and we are inviting foreign individual investors/institutes to invest in our residential projects across India. We are basically a marketing company and we have now stepped into our own property development in India. Can NRI’s invest through ETFs or ADRs? Kindly comment.

Answer: Thanks for asking your question. Please see the following posts for relevant inputs:

RBI Guidelines for FDI and ECB in Indian Real Estate

How can USA residents invest in India Real Estate through ETFs/ADRs?

So, can NRI’s invest through ETFs or ADRs? The simple answer is Yes in most cases. You should double check that your specific “residential projects” don’t have any regulation constraint from either Central Govt (RBI) or State Govt (I believe some state govts have added clauses to Central govt rules). Since you are already operating in India, you would have a good understanding on these aspects.

One more point from our experience is that if you are looking to attract FDI from NRIs for Real Estate Projects in the form of ETFs/ADRs, then you should tie-up with a company that has existing relationships with NRI investors, so that your offering gains more credibility.

You can contact us if you want help in connect with such companies. Feel free to ask any other question.

Thanks,
Shankar on behalf of India-Real-Estate.org

Question by Mr Prasad: Could you be kind enough to tell me if we can bring FDI in debt form in India in real estate sector under current RBI Guidelines under automatic route and if you can suggest few names to whom we can contact for this for detailed procedures and documentation etc?

Answer: I think when you say FDI in debt form, you meant to say: External Commercial Borrowing (ECB), because FDI (foreign direct investment) stands for investments rather than debt.

The finance ministry allowed External Commercial Borrowing (ECB) in Indian real estate projects (in 2005) involving integrated townships of 25 acres or 50,000 square metres of more. However, the RBI’s position has to be checked on a project by project basis. Its not right to give a general answer on this website – so that other readers don’t take wrong conclusions.

As per our understanding, the RBI allows ECB in real estate projects involving integrated townships of 100 acres or more.

As you maybe aware, in real estate projects, significant capital is required upfront for land acquisition, which is classified as working capital. But end-use restrictions like not allowing ECB money to be used for working capital mean that Foreign funds (as debt) can’t be applied everywhere in Indian Real Estate.

RBI guidelines are often related to type and scale of the project. So if you are planning a large infusion of debt capital then please check RBI guidelines at a micro level.  Our team of legal real-estate experts could offer detailed help on specific cases. Feel free to contact us or ask any other questions.

BSE reports indicate that Foreign institutional investors (FIIs) have reduced their investment in real estate companies, particularly Parsvnath Developers and Unitech by 0.8 and 2 percent respectively, year-on-year.

According to shareholding data available on BSE, the domestic financial institutions and banks have increased their inevstment in Unitech Ltd by over 1.5 percentage, while Foreign institutional investors (FIIs) have reduced their stake.

In the case of Parsvnath, there were marginal changes in the institutional shareholding (mutual funds/UTI and financial institutions and banks) within the non-promoter category, even as the ‘individual’ holding rose by just less than a percentage point.

“The FII stake in Parsvnath had almost doubled between June 2007 and December 2007, but came down subsequently, in line with market trend,” a market observer said.

In the case of Unitech, the stake held by various mutual funds and UTI stood at 0.51 per cent on June 30, 2008 — a bit higher than 0.25 per cent in 2007.

According to market sources, while FIIs have trimmed their holding in Unitech, the shares sold by them may have been picked up by private Indian insurance firms.

So there is capital in the market that is willing to pick-up whatver real estate equity becomes available. Whether the current Indian Real Estate Stock P/E is good for buying now, is the big question.

Obviously, different people are seeing things differently!