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FDI in Real Estate and investment in

property – FEMA provisions

Naresh Ajwani

Chartered Accountant

In a growing economy, Real Estate sector invites a lot of attention

from all quarters including foreigners. India has a policy for non-residents
which invites them to invest in the Construction and Development sector.
For investment in independent premises, the policy is open only for NRIs.
In this article, the FEMA provisions have been discussed under 2 parts –
one relating to Real Estate business, and the other relating to Investment
in independent premises.

An important difference between Income-tax Act and FEMA may ne

noted. Income-tax Act is a revenue law with a fully developed appellate
process. One may interpret the law literally, and may do tax planning.
FEMA is a policy law. Appellate process is practically absent. Courts are
known to take usually a pro-RBI view. Hence it is better to comply with the
law in letter and spirit.

A. Real Estate Business:

1. Real Estate business:

Real Estate business can be broadly of three kinds. One is

“Development” where the developer builds new property and sells the
same. The second is developing or buying real estate and “leasing” the
same. The third is “trading” in property. Briefly, “Development” is
permitted. Investment for “Leasing” and “trading” is not permitted. For
leasing of property, see paragraph 10 below. Development and leasing is
slightly controversial. See paragraph 10.
 Related activities like building material, maintenance, real estate
agency are not a part of “Real Estate” policy. These are covered in the
general FDI policy. Most of the activities are permitted on automatic basis.

Key to understanding the difference between “Real estate

development business” and “related activities” is: “Whether the non-
resident investor (through the Indian company) will acquire ownership
rights over the immovable property or not.” If he acquires ownership
rights, it is real estate development business.

2. FDI policy:

The Foreign Direct Investment (FDI) Policy is laid down in the

Consolidated Policy of 1st October 2010. (The policy has been there for the
past few years. It is just that every 6 months, the Government comes out
with a Consolidated FDI Policy which replaces the earlier Consolidated
FDI Policy.) The FDI Policy has to be read with FEMA Regulations. The
original policy was laid down vide Press Note 2 dated 3rd March 2005. In
this policy, reference has been given to the Consolidated FDI policy or the
original press note or FEMA regulation as relevant.

Non-residents are permitted to invest in Real Estate Development

activity through Indian companies. Investment through LLPs, partnership
firms, branch, or any in any other manner is not permitted. Direct
business by non-residents is not permitted. The investment is subject to a
few conditions discussed in subsequent paragraphs.

Non-residents can invest upto 100% of the equity capital of the

Indian company. Investment is permitted on automatic basis.

Investment can be in equity shares, or Fully and Compulsorily

Convertible instruments (preference shares or debentures).
 For NRIs, there is a separate policy. This is discussed in paragraph
5.2 below.

Theme of the policy is that non-residents are not allowed to hoard

or speculate immovable property. They cannot create “Land Banks” and
hold them. At the same time, they are welcome to develop real estate.

Each project of Real Estate development should comply with the

specified conditions. Conditions relating to area are discussed in
paragraph 3 and conditions relating to investment are discussed in
paragraph 4 below.

3. Project conditions:

3.1 Minimum area to be developed:

Minimum area to be developed under each project should be as

under:

i. In case of development of serviced housing plots, minimum land area

should be 10 hectares.
ii. In case of construction-development projects, minimum built-up
area should be 50,000 sq.mts.
iii. In case of a combination project, any one of the above two conditions
should be satisfied.

3.2 The meaning of serviced plots has been explained in the Press
note. It means where roads, water supply, street lighting, drainage,
sewerage, and other conveniences, as applicable under prescribed
regulations, have been made available. This infrastructure should be
provided and a completion certificate from the concerned local
body/service agency should be obtained before selling the serviced
housing plots. Unserviced plots cannot be sold.

3.3 At least 50% of the project must be developed within a period of five
years from the date of obtaining all statutory clearances.
3.4 Other Conditions:

3.4.1 The project should conform to the norms and standards as laid
down in the applicable building control regulations, and all rules
regulations of the State Government/Municipal/Local Body concerned.

3.4.2 The investor/investee company will be responsible for obtaining all

necessary approvals under applicable rules of the State Government/

Municipal/Local Body concerned.

3.4.3 The State Government/ Municipal/ Local Body concerned, which

approves the building / development plans, would be required to monitor
compliance of the above conditions by the developer.

3.5 Issues:

3.5.1 Built up area:

The built up area should be 50,000 square meters. How does one
calculate the area? There are different areas mentioned by the builders. It
is clear that saleable area is not to be considered.

Will the area be calculated as?

- the plinth area – length x breadth x floors.

- built-up area which includes the inner walls of the premises & upto outer wall
of the premises.
- Carpet area.

Will it include the following?

- Parking space.

- Open areas.

- Balconies.
 I understand that when the local authorities approve the plans,
some areas are not considered as a part of built up area – like balconies
and parking lots. If the areas for balconies and car park are considered, it
will be easier to satisfy the minimum area required to be built-up.

The guidelines state that bye laws and rules of the local authorities
should be complied with. Hence whatever area is permitted by them as
permissible built-up area can be considered as built-up. This would mean
that balconies and car park area cannot be considered as constructed area
for these guidelines.

DIPP takes a view that area considered as built-up by the local

authority will be considered.

4. Investor conditions:

4.1 Minimum Capitalisation:

The non-resident investor should invest a minimum of US$10

million in wholly owned subsidiaries, and US$ 5 million for joint ventures
with Indian partners. The funds have to be brought in within six months of
commencement of business of the Company.

If joint venture partners are all non-residents, the minimum

investment to be brought in US$ 10 mn. If there are Indian partners, then
the minimum capitalisation is US$ 5 mn.

The condition for capitalisation is only at the initial stage. For

example, one project is completed and the company has recovered its
investment. It wants to commence another project. In this situation, the
investor does not have to bring the funds again. Sale proceeds of the
earlier project can be utilised for the new project. However the new project
should have the minimum area as prescribed.

Issues:
 i) What is “joint venture” has not been explained. One has to give a
normal commercial meaning. If the Indian partner is investing say only
1%, will it be sufficient to say that he is a joint venture partner? It certainly
cannot be said that he is a joint venture partner. One has to look at the
whole joint venture – how much is the Indian partner investing, how
much is his contribution, what are his responsibilities as a partner. Then
one can take a decision whether the Indian partner is a bonafide partner or
not.

ii) Should the minimum investment comprise of face value of shares,

or can the investment include premium? The investment can include
premium. Here the minimum investment is the amount of funds which
should be invested in the Indian company.

4.2 Lock-in period:

4.2.1 Original investment cannot be repatriated before a period of

three years from completion of minimum capitalisation. Say the first
installment of investment of US$ 2 mn. is brought in on 30th September,
and the balance investment of US$ 3 mn. is brought in on 1st January.
Assume that the investment is in a joint venture with an Indian partner.
The lock in will apply for 3 years from 1st January.

Beyond the minimum investment, the lock-in period of three years

applies from the date of receipt of each installment of FDI. Thus later of
the two applies – date of achieving minimum capitalisation or the date of
investment of installment.

It also means that the lock-in applies to the entire investment,

and not just the minimum amount required to be brought in. The policy
clearly provides that the lock-in period applies to the “Original
investment”. Original investment means the entire amount brought in as
FDI.

4.2.2 The lock-in applies even if the non-resident investor wants to

transfer shares to another non-resident. In one such application, FIPB
rejected the proposal for transfer of shares from one non-resident to
another, although the DIPP was in favour of the transfer.

4.2.3 For some reasons if the investor wants to exit earlier, a prior
approval from FIPB is required. Generally the FIPB is not in favour of an
 approval unless there are compelling reasons like cancellation of a project.
In one such case, FIPB had approved the sale before the lock-in period as
the project was being abandoned. It was subject to compounding process.

4.2.4 After the lock-in period for the investment is over, the investor can
sell the investment to another non-resident. Is the lock-in period
applicable to the non-resident who purchases the shares? The guidelines
are silent on this. Prima facie, the lock-in applies to all non-resident
investors whether they are the first investors or subsequent investors.

Further, investment is permitted for development projects. Hence if

the Investee company is planning to commence a new project, the
purchaser non-resident can acquire the shares. However if the investee
company does not any project, or has semi-finished projects, the
purchaser non-resident cannot acquire the property. See paragraphs 5 and
6 also.

Thus in essence, if the conditions or press note 2 of 2005 are

satisfied, then the non-resident can acquire the shares.

5. Some issues:

5.1 Hotels, etc.:

Do the guidelines apply to hotels? The guidelines apply only if the

project involves construction of real estate, and selling the premises. Hotel
project does not involve selling the developed units. Hotel industry is a
service industry. These norms do not apply to a hotel. Thus the hotel can
be of an area less than 50,000 square meters. The policy clearly specifies
that the conditions for real estate development do not apply to Hotels &
Tourism & Hospitals.

The guidelines do not apply to infrastructure like roads, ports,

bridges, etc. These are not real estate projects as such.

The guidelines also do not apply to development of SEZs. Provisions

of the SEZ Policy will apply.
 However, other conditions stated in paragraph 3.4 above do apply to
all projects.

5.2 NRIs:

The guidelines do not apply to investment by NRIs individually. If

however NRIs wish to invest through their foreign companies (or any non-
individual entity), then the FDI guidelines will apply.

NRIs are also permitted to invest on non-repatriable basis.

Investment can be made in a company (schedule 4 of FEMA notification
20), or a firm or a proprietory concern (FEMA notification 24).
Investment in an LLP, AOP, or any other entity is not permitted. Real
estate business means only construction and development activity. Thus
leasing or trading is not permitted. Investment in agricultural property,
plantation, and farm houses is not permitted.

5.3 Projects of different sizes:

The company could have projects of different sizes. Some projects

could be FDI compliant (minimum 50,000 sq. meters), and some may not
be FDI compliant. Can the non-resident invest in such a company? Can he
invest with a condition that his investment should be utilised only for FDI
compliant project?

Such an investment would not be permitted. All projects should be

FDI compliant. This is because while the investment can be directed in the
FDI compliant project, it cannot be ensured that the profits and returns of
only FDI compliant projects go to the non-resident. Therefore wherever
there is a Foreign investment (other than NRI individual), only FDI
compliant projects should be undertaken.

5.4 Real estate and non-real estate business:

A company may have real estate and non-real estate business. Can a
non-resident investor invest in such a company?

The non-resident investor can certainly invest in such a company.

However it is necessary that each project of the company is FDI compliant.
If any project is not FDI compliant, the investment cannot be made.
 There may be some practical difficulties. For example, the non-
resident will not be able to sell the shares before the lock-in period (even
though for non-real estate business there is no lock-in). To take another
example, the lock-in period may be over, but conditions of the real estate
project-are not fulfilled. Then also, the non-resident will not be able to sell
the shares.

For practical purposes, it is advisable to keep FDI compliant

projects in one company, and the remaining business in another company.

5.5 Semi finished projects:

An Indian resident has a semi finished project. He requires funds

for the balance project. Can he invite a non-resident investor to invest in
his project? (The resident investor can transfer the project to his Indian
company before inviting the non-resident.) Let us see different views:

(i) FDI is prima facie permitted in a new project. i.e. The Indian
company should construct the premises. If the project is semi finished,
then in my view the non-resident cannot invest in the company. The
guideline suggests that investment should be brought in within 6 months
of commencement of business of the company. It suggests that investment
is welcome in new business.

(ii) If one takes a view that investment in semi-finished project is

allowed, then it leads to the next question as to how much of the project
may be unfinished. For example, can the project be 99% finished, and then
the non-resident invests? This will almost amount to trading in Real
estate.

(iii) There could be a contrary view. If one takes a view that no

investment can come in semi finished project, then a large company will
always have a number of running projects. There will always be in some
stages of development. Non-residents will never be able to invest in such a
company.
(iv) A balanced view may be as under: The Indian company may have a
project under construction. Some work is already finished. However, the
pending work is so large that the whole of non-resident investment will be
utilised in construction costs.

In such a case the conditions would be satisfied in spirit.

(v) In case of serious doubt, it may be better to take a approval from

FIPB before investing in semi-finished projects.

6. Purchase of shares:

The non-resident investor can purchase shares from Indian resident

investors. It is clear that if the company has FDI compliant projects, shares
can be purchased.

The funds will go to the Indian shareholders and not the company.
In this situation, will minimum capitalisation norms apply?

The guidelines are silent. As per the policy, that non-resident

investors should bring the minimum funds as required as per
capitalisation norms. In case of doubts, it will be better to apply to FIPB.

It is safer to take a view that the entire guideline for Real Estate
development, lock-in, etc. will apply.

7. Joint Venture at project level / or Company level:

The joint venture has to be at the company level and not the project
level.

Consider an example. A non-resident invests in an Indian developer

company. The Indian developer company enters into a contract with a
land owner to develop the property. On completion of the property, the
land owner will be entitled to a certain percentage of flats. The Indian
developer company will be entitled to the remaining flats which it will sell.
The above structure is resorted to as the non-resident and the Indian
partner may be interested in the partnership only for one project.
 This kind of proposal is permitted provided that the Indian
developer company obtains approvals for development, markets the flats
and other aspects of FDI policy are complied with. However should the
non-resident investor invest US$ 5 mn. in the Indian company or US$ 10
mn.?

If the investment in the Indian developer company is owned to the

extent of 100% by the non-resident, investment of US$ 10 mn. is required.
If the land owner had invested in the Indian developer company, the
minimum investment required would have been US$ 5 mn.

8. Multiple projects with different partners:

The non-resident and Indian resident investors may want to have

partnership for specific projects and not all the projects. What are the
different options available?

8.1 A simplest option is to have one company for each project. The non-
resident and the resident investors can invest in the company, specific for
that project. This will of course mean that in every company, the minimum
amount of capitalisation will apply. Lock-in period will apply.

Alternatively, there can be two companies - (i) FDI compliant

projects where the non-resident wants to invest, and (ii) Other projects.

8.2 It is however possible that the non-resident may want to form a

holding company. Under the holding company, there can be different
subsidiaries for different projects. In different subsidiaries, different
Indian partners can invest.

To invest in the Indian holding company, an FIPB approval is

required.
 If however the non-resident holds shares in an operating company
(with active business), then investing in the subsidiaries can be done on
automatic basis.

In this situation, the real estate guidelines apply to the subsidiaries.

9. Agricultural land:

Can the Indian company acquire agricultural land with a view to

convert into non-agricultural land for real estate development?

Under FEMA, non-residents are not permitted to invest in

agricultural land. However for the purpose of real estate development, if
agricultural land has to be acquired, an application should be made to
FIPB and a prior clearance should be obtained.

10. Construct and lease:

Foreign investor cannot acquire property for the purpose of leasing.

It is not a permitted activity. However if the property is constructed and
then leased, it is permitted. The policy does not make this explicitly clear.
However this is the view of the Central Government.

It appears that RBI has not agreed with this view. Hence the
investor can write to FIPB and obtain a specific confirmation in this
regard.

11. Exit from the project:

The main conditions to be complied with before the non-resident

can sell the shares are:

- the lock-in period of 3 years should be completed from the date of

investment or minimum capitalization norms, whichever is later.

- at least 50% of the project should have been developed within a

period of 5 years from obtaining statutory clearances.
11.1 Assume that the project is of 100 residential units. The building is
complete and more than 95 units are sold. Can the non-resident sell his
shares? The clear answer is that the non-resident can sell the shares if the
3 year lock-in period is over.

Thus if three years of lock-in period are completed; more than 50%
of the project is completed – the non-resident can sell the shares.

11.2 However if the 5 year time for development is not complete,

development is complete to the extent of less than 50%, but the 3 year
lock-in period is complete, can the non-resident sell the shares? In this
situation, the non-resident cannot sell the shares. Even if the Indian
investee company / non-resident investor is confident of completing 50%
development within 5 years, the non-resident cannot sell the shares. The
development has to be actually completed. In case the non-resident wants
to sell the shares, one may take an approval from FIPB.

11.3 Development:

Assume that the project is 95% complete. However no unit is fully

ready to be handed over to the buyers. Can the non-resident sell the shares
in the company?

Take another example. The project comprises of five buildings of

500 flats. Three buildings are ready. For two buildings, construction has
yet to commence. Out of the 300 flats in the three completed buildings,
only 100 flats have been sold. Can the non-resident sell the shares?

There could be several permutations.

The condition is that development should have been completed to

the extent of 50%. The meaning of development has not been explained.
One may take guidance from para 1c) of the press note 2 of 2005. In case
of serviced plots, it is necessary that all infrastructure like roads,
electricity, etc. should be completed before selling. Thus development
cannot be considered in terms of the extent of the completion of the
 project, or the value. In my personal view, “developed” means ready for
sale. The premises should be livable and completion certificate should be
obtained.

Thus in the above examples, if 95% of the project is complete but no

unit is livable, it will not be considered as developed. In the second
example, where 300 flats are ready for sale, the project will be considered
as developed to the extent of more than 50%.

The guidelines state that 50% of the project should be “developed”.

There is no condition of sale / lease. Hence if at least 50% of the project is
fully complete, the non-resident can sell the shares. The objective is that
new property should have come into existence. If that is so, the non-
resident can sell the shares, although independent premises may not have
been sold.

11.4 If the project cannot be completed within a period of 5 years to the

extent of 50%, what can be the consequences? In my personal view, it will
be considered that the conditions have not been fulfilled. One should
approach FIPB and take approval for an extension. If an approval is not
taken, it will be a violation of FEMA.

12. Minimum returns:

Typically a non-resident requires minimum returns from the

project. The non-resident proposes that he is willing to invest a certain
amount with the builder. He expects a minimum return. The minimum
return can be by way of interest; or buy-back of shares gives the minimum
return. Is this possible?

Under FEMA, an Indian resident cannot give any guarantee

to a non-resident. Hence to offer any minimum return is not possible.
Under the FDI policy, the non-resident invests in equity shares. As equity
shareholder, he is the owner. The owner cannot get any minimum
guarantee.
 Loan cannot be taken from a non-resident. Till 31st Dec. 2010, ECB
was possible for large projects exceeding 100 acres. That facility has been
discontinued. Hence to offer any interest on loan to the non-resident
investor is also not possible.

There can be however a cap on the return which the non-resident

can be given. The FDI policy provides that the non-resident can sell the
shares to an Indian resident at a price which does not exceed the fair value
of the shares. Thus for example, there can be an agreement between the
non-resident investor and the builder that in case of a buy-back, the price
will be lower of – i) price as per FEMA rules, or ii) Rs. ______ (based on
agreed formula). The buy back can be at a price less than the fair value of
the shares.

13. Expenses in relation to real estate:

Normally the real estate projects in India will have expenses to be

incurred in India. However there could be some services procured from
abroad for which remittances may have to be made. Normally, expenses
are in the nature of current account. These can be incurred without any
approval from RBI. There are however a few expenses where there are
restrictions.

13.1 Agency commission:

Real estate agents can be appointed abroad for selling the flats to
NRIs. Commission can be paid to them within the specified limits.

Commission can be paid upto US$ 25,000 or 5% of inward

remittance, whichever is more. The limit is per transaction. The
commission can be paid to the agent, or the agent can deduct the same
from the sale proceeds of the flats.

In case the NRI who purchases the flat out of NRO funds, the
commission will be restricted to US$ 25,000. (This is because there will be
no inward remittance. Hence the commission as percent (5%) cannot
apply.)

Consider a situation – The foreign agent sets up an Indian company

for conducting real estate brokerage. This company is an Indian company.
 Real estate brokerage is under automatic route. Hence no approval is
required for investing in the company. The Indian company acts as a
broker for NRIs. It charges brokerage exceeding 5% of the inward
remittance. After payment of income-tax, the profits can be repatriated out
of India. Is this workable?

In my view, legally there is no restriction on such a arrangement. It

would not amount to circumventing the rules. In this situation, the non-
resident sets up an Indian company, invests capital in India, will pay taxes
in India. Thus one cannot consider this to circumvent the rules.

13.2 Consultancy services:

The Indian company may procure consultancy services from foreign

consultants. Under current account rules, upto US$ 1,000,000 (one
million) can be paid per project.

The provision does not elaborate the meaning of “consultancy

service”. There could be several services which the Indian company may
incur for services of – architect, landscaping consultant, lawyers, etc. In a
large project, there could be several consultants for various purposes. In
my personal view, consultancy services should be confined to the overall
consultancy for the project. If there is any specific service like payment to
structural engineers, that will not “consultancy”. However this area is not
free from doubt. It will be advisable to obtain approval from RBI before
making any payment exceeding US$ 1 mn.

14. Indirect Foreign Investment:

Press Notes 2, 3 & 4 of 2009 lay down the policy for direct & indirect
investment. “Direct” investment refers to non-resident investment
directly into the Indian company. “Indirect” foreign investment refers to
investment by the non-resident through an intermediate Indian company.

The policy states that the intermediate Indian company will be

considered as “Indian investor” if more than 50% of the ownership &
control is with persons who are Indian residents and citizens. If either the
ownership or the control to the extent of 50% or more is with the non-
resident, then the intermediate Indian company will be considered as
“non-resident” investor. FDI policy will apply to such Indian intermediate
company. Consider the chart below:
 As per the criteria discussed above, the Indian Company-I will be
considered as “Indian investor” or “non-resident investor” depending
upon facts.

Assume that 51% of the shares of Indian Company-I are held by

Indian citizens & residents. The company is also controlled by Indian
citizens & residents. This company can invest in Indian Company-II
without any restrictions of FDI policy. Thus the non-resident investor can
participate in the Real Estate Sector upto 49% without the need of
minimum capitalization, lock-in, etc. In fact, Indian Company-II can
undertake real estate trading also. Is that the intention?

The plain reading of the press notes permit such an investment. RBI
has still not amended FEMA notification No. 20. The Consolidated FDI
policy states that wherever there is an issue of interpretation, FEMA will
prevail. Therefore, in my view, investing as stated above amounts to
violating the spirit of the FDI policy. The Press Notes of the year 2009 are
badly drafted. RBI has not amended FEMA notification No. 20 giving
effect to these Press Notes. A conservative investor may avoid such
schemes. Hence it may be advisable to get a clearance from FIPB before
entering into such a structure.

In sensitive sectors, it is better to be safe than regret later.

 15. Foreign Venture Capital Investment (FVCI):

Foreign Venture Capital funds are permitted to invest in India.

Under SEBI rules, FVCI is permitted in Real Estate sector also. However,
RBI has taken a view that if FVCIs are allowed to invest in Real Estate
sector, then they may be able to by-pass the FDI guideline for Real Estate.
Hence RBI does not permit investment through FVCI route, unless there is
an undertaking given that investment will not to be done in real estate
sector.

B. Investment in independent premises:

1. Background:

India does not permit non-residents to acquire any premises in

India. However NRIs have been permitted to invest in premises (houses
and commercial establishments) for now almost 15 years. FEMA
notification 21 regulates investment in immovable property.

If however a property has to be acquired on lease for a period of less

than 5 years, then the same can be acquired without any approval. This is
typically required by foreign companies opening liaison offices in India.

2. Meaning of NRI:

Indian citizen who is a non-resident of India, is considered as a

Non-Resident Indian (NRI). Further foreign citizen who is a non-resident
is also considered as an NRI if:

- he held an Indian passport at any time, or

- His either of the parents or grandparents was an Indian citizen by

virtue of the Indian constitution or the Citizenship Act 1955.

However citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan,

China, Iran, Nepal, and Bhutan are excluded from the definition of NRI.
Citizens of these countries are not permitted to acquire immovable
property in India.
 3. Acquisition of immovable property:

3.1 NRIs are permitted to acquire immovable property. Acquisition can

be in the following manner:

- Purchase.

- Gift from another non-resident or an Indian resident.

- Inheritance.

The NRI can even construct the property.

There is no need of any approval from RBI. No declaration has to be

filed with any one.

It is however advisable to keep proper evidence of acquisition and

source of funds (whether NRO, NRE or remittance from abroad). This can
be useful at the time of sale and remittance of funds.

Normally an Indian resident can give a gift to a non-resident under

Liberalised remittance scheme upto US$ 2,00,000 per year. However in
case of property, the gift can be without any limit.

3.2 Payment for purchase:

For purchase, the funds have to be paid from FCNR, NRE or NRO
account, or remitted from abroad.
 Payment cannot be made by travellers’ cheques, or currency notes
or any other mode.

Thus in case one NRI purchases property from another NRI, the
payment cannot be made outside India. It has to be made in India.

3.3 Kind of property:

The property can be residential or commercial property. Thus an

NRI can acquire a flat, bungalow, office, shop or even a warehouse. Land
can also be acquired.

The property can be acquired jointly with any other NRI or with an
Indian resident.

While commercial premises can be acquired, no business can be

done in the premises by the NRI. Thus an NRI may buy a warehouse.
However he cannot undertake warehousing business. If he undertakes any
business, it will become a place of business (like a branch). A non-resident
cannot set up a branch without a prior approval from RBI. The conditions
for a branch are strict. An individual NRI is not given an approval for a
branch.

The NRI can however invest in his proprietory concern on non-

repatriable basis (Schedule 4 of FEMA notification 20). Legally, the
proprietory concern being an Indian resident, can acquire property.
However practically there may be difficulties as a proprietory concern is
not an entity under general law. A better way may be that the NRI
purchases the property in his own name, invests in his proprietory concern
in India, and permits the proprietory concern to us the property for
business.

3.4 Number of properties:

 There is no limit to the number of properties he can purchase.
However it should not amount to doing business. See paragraph 4 for
more details.

3.5 Agricultural property:

Agricultural land, plantations, farm houses (agricultural property)

cannot be acquired by the NRI (whether by purchase of gift). If of course
the NRI inherits an agricultural property, he can hold the same. However
he cannot undertake any commercial agricultural activities.

3.6 Income from property:

The NRI can lease the property and earn lease rent. The income can
be repatriated abroad after payment of taxes without any limit.

4. Business in property:

While an NRI can acquire immovable property and also sell the
same, he cannot do business in the properties. For example, if the NRI
acquires 10 shops in a row and leases them out, this can be considered as
doing business. Similarly if the NRI purchases and sells property 2-3
times, it will amount to trading. What exactly amounts to business has not
been explained. One has to consider the facts and determine the issue.

5. Disposal of property:

5.1 The NRI can dispose of the property as under:

- Sale to an Indian resident, or to another NRI.

- Gift to an Indian resident or another NRI.

However if he owns an agricultural property, it can be sold or gifted

only to a person who is an Indian resident and Indian citizen.
 The NRI can also bequeath the property to any one including a non-
NRI. Bequeathing the property (of any kind) to any one is permitted.

5.2 On sale, the funds can be remitted abroad to the extent the same
have been remitted from abroad or paid from NRE / FCNR account. In other
words, profits cannot be repatriated. The cost in foreign currency can be
repatriated.

The remittance is restricted to 2 residential properties. There is no

restriction in case of commercial properties. There is no clarity as to how
this limit of 2 properties should apply? Is it a lifetime limit?

Under US$ 1 mn. scheme, funds can repatriated upto US$ 1 mn. per
person per annum. Hence profits on sale of property can be repatriated
under this scheme.

6. Acquisition of property by non-NRIs:

6.1 Non-NRIs cannot acquire any property in India. There is however a

major change between FERA and FEMA. Under FERA, “citizenship”
was the criteria for acquiring the property. If a person was an Indian
citizen, he could acquire a property in India. If a person was a foreign
citizen, he could not acquire any property in India (except as permitted to
NRIs).

Under FEMA, “residence” is the criteria. A non-resident cannot

acquire any property. An Indian resident can acquire property.

6.2 Say for example, a foreign citizen of non-Indian origin is employed

in India for 2 years. On coming to India for employment, he becomes an
Indian resident. As an Indian resident, such a person can acquire property
in India. FEMA actually does not apply to such a person as far as
acquisition of property in Indian is concerned.
 Master circular (para 8(ii)) states that his type of visa should clearly
indicate that his stay in India is “uncertain”. The language of the master
circular can be misleading.

Under section 2(v)(i)(b), a person becomes an Indian resident if he

satisfies any of the three conditions stated below:

- he stays in India on taking up employment in India.

- he stays in India for carrying on a business in India.

- any purpose which indicates his intention to stay in India for an

uncertain period.

Normally a foreigner is never given a visa for an uncertain period. It

is always a fixed period visa. It will usually be “certain” that the person will
“go back” after the visa expires. Typically the visa types would be
employment visas, dependent visas, etc.

The criteria given in master circular is only a guideline. What it

means is that the visa will indicate the purpose of coming to India and that
the non-resident will stay for sufficiently long period to make him an
Indian resident. Thus a foreigner who comes on a tourist visa or short trip
visa will not able to buy property in India. However if he comes for an
employment of say 3 years, he will be considered as an Indian resident.
Such a person who comes for employment, can purchase a property in
India.

6.3 For sale of property, resident foreigners do not need any approval if
they are Indian residents. However if they propose to sell the property
after becoming non-residents, they will require approval from RBI.

6.4 There are several foreign citizens who have acquired property in
Goa. They have come on tourist visa and have acquired the property. The
 Central Government has advised the State Governments to be careful at
the time of registration of the property in case of foreign nationals.

6.5 Citizens of Pakistan, etc.:

There are some citizens of Pakistan, Nepal, etc. who are staying in
India. Can such people acquire immovable property in India?

As explained, FEMA applies to property in India based on

residential status. If Pakistani citizens staying in India have become
Indian residents, they can acquire property in India. The regulations and
master circular state that Pakistani citizens cannot acquire property in
India (even if they are Indian residents). This in in my view goes beyond
FEMA. It is an established principle that the sub-ordinate regulations
cannot go beyond the principal act. To that extent the regulation
prohibiting Indian residents who are citizens of Pakistan, etc. to acquire
immovable property, are ultra vires.

This issue is applicable to citizens of eight countries – Pakistan,

Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.

6.6 Inheritance:

Foreign citizens who are non-residents can acquire property by way

of inheritance. They can also continue to hold the same. However if they
wish to sell property, they require approval from RBI.

7. Foreign companies:

Foreign companies are not permitted to acquire properties in India.

However if the foreign company opens a branch office or a project
office, then it can acquire the property for its own activity.
 A liaison office cannot acquire any property except by way of
lease for a period of upto 5 years.

For sale, an approval of RBI is required.

8. Acquisition of immovable Property by Foreign Embassies/

Diplomats/ Consulate Generals:

For acquisition or disposal of properties foreign embassy, diplomat

and consul generals, am approval is required from the Ministry of External
Affairs.

Summary:

Foreign investment is welcome in India but only within the specified

conditions. FEMA law is a policy law. Hence the language creates
controversies.

For NRIs, the regime has worked well for the past several years. By
and large, they have not faced any difficulties.

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