ISSUE I : Real-estate – On a rocketing high!


India is growing fast and everyone seems to want a piece of the action.1

This statement is a testament to the unprecedented growth of the Indian economy, which cannot be ignored. Real-estate encompasses projects relating to housing, commercial premises, resorts, hotels, educational institutions, shopping malls, hospitals, recreational facilities, city and regional level infrastructure, special economic zones and townships and it is witnessing extraordinary development pursuant to the relaxation of FDI norms2 vide Press Note of March 3, 2005.

Currently, one of the fastest growing industries in India, real-estate is roughly worth US$ 14-15 billion3. The favorable demographics and economic development provide the required impetus in making India an attractive destination for property investors. The changed regulatory environment for real-estate where 100% foreign direct investment is now permitted has caused series of multinational developers4 to invest either by means of equity stakes in companies that are engaged in townships projects across India or create joint ventures5 focused on property development. In addition, increasing urbanization and rising income levels are also motivating the companies looking at opportunities emerging from increasing affluence and spending capability of an emerging middle class. The Indian real-estate sector is expected to grow to US$ 45 billion by 20156. Besides introducing policy reforms and schemes, the government has also decided to allow introduction of Real-Estate Mutual Funds in June 2006. This bulletin focuses on various legal aspects of Indian real-estate and the opportunities therein.

1. FDI in realty

The Government, vide its Press Note of March 3, 2005, permitted 100% FDI in this sector, which till then was limited to non-resident Indians and persons of Indian origin. However, it clarified in its Press Note of February 10, 20067 that FDI in real-estate is permitted only in construction development projects, including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships. Briefly, the 100% FDI is subject to the following guidelines:

  • Minimum area to be developed under each project should be:
  • In case of development of serviced housing plots, a land area of at least 10 hectares.
  • In case of construction-development projects, a minimum built-up area of 50,000 square meters.
  • In case of a combination project, any one of the above two conditions would suffice.

1.2 Other Conditions

  • There is a minimum capitalization requirement of US$ 10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds should be in India within six months of commencement of business of the company.
  • There is a lock-in period of three years. Repatriation of the original investment before the expiration of three years requires prior approval of the FIPB. However, investments made by NRIs are outside the purview of the lock-in clause. The Ministry of Commerce and Industry allows NRIs to convert their equity from non-repatriable to repatriable.8
  • 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 allowed to sell “undeveloped plots” which means areas where roads, water supply, street lighting, drainage, sewage and other facilities have not been made available.
  • The developer has to ensure that the project conforms to all the bye-laws, rules and other regulations of the concerned State Government/Municipal/Local bodies.
  • The investor is responsible for obtaining all essential approvals and costs thereof.

2. Entry options

A foreign entity has a choice in terms of its entry strategy in the Indian realty sector; either a Wholly- Owned Subsidiary (WOS) or a Joint Venture (JV). There are certain inherent problems in realty sector such as unclear land titles, inadequate infrastructure, poor records of land ownership, protracted bureaucratic processes in gaining clearances and use of black market money in realizing property transactions. A JV is generally preferred because although the aforesaid problems persist, an Indian partner, who is well acquainted with ground realities and functionality of the system is better equipped to address the issues.

3. Other investment options

Besides the aforesaid two structures, the investors can evaluate and consider the following options also.

3.1 Portfolio investment

Subject to the applicable laws, a foreign investor, through portfolio investment, can invest in a listed company engaged in the real-estate business. The investor has an option to invest in such companies either independently or through mutual funds. If an investor chooses to invest via mutual funds and, thereby, build his portfolio then Real-Estate Mutual Funds is an excellent option. The advantage of portfolio investment is qualified investment professionals manage investor funds in order to maximize returns and minimize risks.

It is their task to find the best securities for the fund, keep track of investments and changes in market conditions, and adjust the mix of the portfolio, as and when required. Mutual Funds offer various kinds of schemes for investors depending on the level of risk they are willing to take.

3.2 Real-Estate Mutual Funds (REMF)

Real-Estate Mutual Fund (REMF) is essentially similar to Real-Estate Investment Trusts, a popular concept in USA. REMF works on the same principle as mutual funds i.e. maximizing returns for the investor.

3.2 SEBI guidelines for REMF

Securities and Exchange Board of India (SEBI) on June 26, 2006 approved the guidelines for REMF. The provisions of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 govern this scheme. Under REMF scheme, fund managers have investment objective to invest, directly or indirectly, in real-estate property. SEBI has specified that at least 35% of REMFs should be invested in property. It further provides that 40% of a REMF can be invested in shares or securities of realty companies. As per the guidelines, the structure of the REMF, initially, will be close ended. The units of REMF have to be compulsorily listed on the stock exchanges and NAV9 of the scheme must be declared daily. The REMF shall appoint a custodian who will be granted a certificate of registration to carry on the business of custodian of securities by SEBI. The custodian will keep safely the title of real-estate properties held by the REMF. These REMF schemes can invest-

  • Directly in real-estate properties within India;
  • Mortgage (housing lease) backed securities;
  • Equity shares/bonds/debentures of listed/unlisted companies, which deal in properties and also undertake property development; and
  • In other securities

3.2.2 Benefits of REMF

Under   REMF   scheme,   group   of   real-estate   professionals/experts   join   hands   and   “manage” property/real-estate  for  the  investor.  Investment  in  a  REMF  enables  any  investor,  who  may  not  have resources to invest in properties, to reap benefits from the escalating values of the properties, both in sale and rent.

The bigger advantage of making such an investment is that not all the money is invested in one property alone, which could be risky. Instead, the fund invests in several properties in various locations, which reduces both risk and volatility. The experts managing the fund take care of the legal issues and, therefore, investors are not involved in mundane paper work attached with real-estate.

3.2.2 Risk factors

Of course, there are risks involved. A REMF has risks similar with the equity/debt mutual funds ranging from (a) wrong choice while selecting a real-estate fund; (b) gestation period in real-estate is long as buying developing and renting/selling a property takes some time; (c) possible legislative changes to tax laws spurred by political compulsions which may raise the costs of owning property. Real-estate is a cyclical market; and a downswing is inevitable as has been the case in other global markets. This means returns will not always be predictable evenly.

REMF schemes are yet to gain popularity, which would be possible only when investor awareness enhances. Presently, REMF is open only to high net worth individuals, institutional investors and global investors.

4. Applicable laws

There  are  series  of  Central/State  laws,  which  govern  real-estate  sector,  which  a  developer  of  a greenfield project must observe. The principles for sale, exchange, mortgage, lease, lien etc. are enshrined in Transfer of Property Act, 1882. Additionally, a developer must abide by the conditions/laws stipulated by local municipality or development authority with respect to design and construction of buildings. Some of the other laws critical for a greenfield project are briefly explained below.

4.1 The Environment (Protection) Act (EPA), 1986

EPA is the main legislation on environment protection in India. The Ministry of Environment and Forests (MoEF), Government of India vide its notification10 states that an expansion or modernization projects11 cannot be undertaken in any part of India unless environmental clearance has been obtained from the Central Government. The application for environment clearance covers several aspects of environment protection such as details about climate and air quality, water balance, solid wastes, noise etc. of the proposed site. A detailed project report along with annexure12 must be attached with the application form. MoEF must issue clearance certificate within four months from the date of filing of documents by the applicant (provided all documents are in order). The clearance is valid for five years for commencement of construction.

4.2 The Land Acquisition Act (the Act), 1894

The Land Acquisition Act is a legislation to facilitate acquisition of certain notified piece of land from an individual or group of people. However, there should be a public purpose for acquiring the land and a person whose land is going to be acquired must be adequately compensated. Therefore, the Act provides for four distinct issues – a) acquisition of land b) taking possession of land c) assessment of compensation and d) payment of compensation. Part VII of the Act provides for acquisition by Indian

companies also. A company can acquire land only if it has a prior consent and agreement with the state government after it satisfies the state government that the affected party has been duly compensated.

4.3 The Indian Stamp Act, 1899

Stamp duty is a tax, which is paid for the transaction performed by way of document or instrument. The duty is calculated based on the amount of consideration mentioned in a document. State governments can decide on the rates of stamp duty for documents connected with sale and transfer of an immovable property. The rates of stamp duty essentially vary from 5% to 14.7% depending on the state where the property is located. It is important that a transactional document is properly stamped because in case of any dispute, an insufficiently stamped document is inadmissible in evidence.

4.4 The Registration Act, 1908

The purpose of Registration Act is to ensure that proper records are maintained with the municipal authorities  for  all  transactions  related  to  land/property.  It  is  mandatory  to  register  documents  relating  to land/property.  A  document,  which requires  compulsory  registration,  should  be  submitted  for  registration within four months from date of execution13. An un-registered document shall not affect any rights of the parties in immovable property comprised therein, but in the event of a dispute, its evidentiary value is lowered and it cannot be relied upon.

Proposed reforms

The government realizes the importance of the realty sector. It is an industry with immense potential and is the second largest employer next only to agriculture. Nearly 250 ancillary industries such as cement, steel, timber, building materials etc. are dependent on it14. Therefore, every effort should be made to streamline this industry in order to attract more FDI. Described below are certain key changes which, we feel, will encourage further growth.

5.1 Legislative reforms:
The government needs to rationalize the tax rate and various duties imposed on this sector. By far, this sector is already overburdened with taxes15. Stamp duty rates should be uniform across India and, ideally, should vary between 4-6%. This may bring forth transparency in land deals as a buyer tries to conceal the actual price paid fearing high rates of taxes and duties. Although Government has abolished Urban Land (Ceiling & Regulation) Act, 1976 some of the states have not repealed this act. Consequently, nearly 2.2 million hectares of urban land is not available for development.

5.2 Land reforms:
Land Acquisition Act, 1894 should be amended to hasten the process of acquisition, which is too cumbersome in nature and normally leads to unnecessary delays in project completion. The government is planning to ease the existing ‘building code regulations’. Until now, builders had to get complete floor plans approved by the government, which is a cumbersome process16.

5.3 Financial reforms:
Besides REMF, government should allow funds from pension, provident fund and insurance sector to invest in real-estate.

5.4 Other reforms:
A grading system should be developed for real-estate developers, which would ensure that defaulters and fly-by-night operators stay away from duping the end user of the property. Such grading system would allow the buyer to be aware of developer’s performance and ability to deliver as per specified terms and quality parameters and transfer on time. Further, government should encourage public- private partnership in the housing sector.


There is absolutely no doubt that Indian real-estate market is in an upbeat mood. There is growth in every segment along with ancillary industries attached with it. However, real-estate investors and developers need to focus on making sound investment decisions by choosing the right partner who is knowledgeable about the complexities and maze of local laws and can navigate through them with ease, deal with the local bureaucracy and issues emanating from lack of transparency in land titles.

1 Graham, Martin; Director of Market Services, London Stock Exchange.

2 Department of Industrial Policy and Promotion (DIPP) vide its Press Note 2 of 2005 has allowed 100% FDI, with certain conditions, in realty sector.

3 “India Next: Accelerating Growth” prepared by Ernst & Young, September 13, 2006.

4 Examples include Lee Kim Tah Holdings and Keppel land of Singapore, High Point Rendel of the UK and Edaw Limited of USA.

5 Westport Malaysia, Emmar Group, Dubai, Ireland based Cathedral Financial Consultants Ltd.

6 “India Next: Accelerating Growth” prepared by Ernst & Young, September 13, 2006.

7 Serial number 11, section IV of annexure of Press Note 4 of 2006 by DIPP.

8 Press Note No. 4 dated 31.8.2005.

9 Net Asset Value.

10 S.O. 60 (E) (Notification) dated January 27, 1994.

11 This includes new construction projects like townships, commercial premises, industrial townships etc.

12 1.Environment Management Plan 2. Environmental Impact Assessment (EIA) Report and 3. Details of public hearing as specified in the schedule IV of the Notification. However, if the project is located in export processing zone or special economic zone then public hearing is not required.

13 Section 23 of the Registration Act.

14 Tenth five-year plan 2002-07: A Report by Planning Commission.

15 “FICCI suggestions on Real Estate Sector”: prepared by FICCI dated November 2005.

16 “Building plans to get nod sans floor details”: The Economic Times August 15, 2006.


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