What structures do investors consider while investing in real estate in India?
The most popular structure is a joint development through the creation of a special purpose vehicle, joint venture or through a development management contract.
The joint venture may be equity based or purely contractual through creation of various rights and obligations. In an equity based joint venture, the investor invests directly by subscribing to, or acquiring, equity in the company holding the real estate, whereas a contractual joint venture is usually through the ‘development agreement’ model which is typically between the land owner(s) and the real estate developer, where the owner provides the land and the developer takes on the responsibility of developing the land and promoting the project, which results in cost and risk sharing.
An investor can also invest in units of a real estate investment trust (REIT), which is required to be registered with the Securities and Exchange Board of India (SEBI) and publicly traded on stock exchanges in India. A REIT, which owns and supervises a pool of income-generating real estate assets in India, is governed by the SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) and is similar to a mutual fund, giving the investor the opportunity to acquire beneficial interest in the assets managed by the REIT.
India appears to have several confusing land and development laws, can you provide some light on these?
Yes, India has several land related laws but this is the case with so many countries and here each has a separate function in protecting rights to land. We have the Transfer of Property Act, which deals with both movable and immovable property, and the Indian Easements Act, both effective from 1882; the Registration Act, again which is old from 1908; the Slum Areas (Improvement and Clearance) Act which was passed in 1956, and the not so old Environment (Protection) Act 1986 and the Forest (Conservation) Act of 1980; and then the very recent Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act of 2013, and last year’s Real Estate (Regulation and Development) Act and the Benami Transactions (Prohibition) Amendment Act, which came into effect on 1st November 2016; and the Indian Stamp Act 1899 which is also old but has been amended several times by various States; and the Special Economic Zones Act of 2005. And of course there are other municipal and local laws.
Can foreign entities acquire or transfer interest in immovable property in India? Also, how does the government regulate foreign investment in the real estate sector?
In India, ownership of real estate can be either freehold or leasehold. Most industrial zones are owned by State Governments and land is allotted on a leasehold basis (mostly through perpetual leases which are usually for 99 years). In the metropolitan cities there are residential complexes which are leasehold though options to convert to freehold have been provided by local governments if the required conversion charges and stamp duties are paid. Residential and commercial premises are also given on a leave and license basis, where the licensee only has the right to use and occupy the premises with no interest in the premises.
The Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 govern the purchase/sale of immovable property in India by foreign entities. A foreign corporate which has a branch office in India is permitted to acquire immovable property in India so long as this is essential for carrying out its business in India.
Under the Consolidated Foreign Direct Investment Policy (FDI Policy), foreign investment in the real estate sector in India is permitted under the Automatic route under which no Reserve Bank of India (RBI) or government approval is required for the investment, subject to compliance with the prescribed parameters and the FDI Policy or the Government route which requires a prior permission of the RBI or the government for the investment.
However, in order to promote foreign direct investment in India, the Foreign Investment Promotion Board (FIPB) is in the process of being abolished and a new framework is expected to be announced shortly.
No foreign direct investment is permitted in ‘Real Estate Business’ i.e. dealing in land and immovable property with a view to earning profit from such business. This does not include development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships and REITs as 100% foreign direct investment is permitted in construction development projects under the Automatic route, and the government has also eased the exit norms for foreign investors in this sector.
The FDI Policy stipulates that each phase of the construction development project would be considered as a separate project for the purposes of the FDI Policy and thus, an investor can exit before completion of the entire project subject to a lock in period of ‘three years’, calculated with reference to each phase of the project, having been completed. Also, the government has proposed to give infrastructure status, effective from the financial year 2017-2018 to affordable housing, which would be followed by government incentives and tax benefits for developers of such affordable housing projects.
What are the legal requirements in relatioN to payment of stamp duty and registration charges on an instrument of transfer of immoveable property?
An instrument of transfer of immoveable property is required to be stamped prior to execution and the rate of stamp duty varies from State to State, depending on the nature of the transfer. Typically, the stamp duty ranges between 4% to 7% of the market value of the property in case of a sale in the metropolitan cities like Delhi, Mumbai, Bangalore and Chennai.
Also, instruments of transfer of immoveable property are compulsorily registrable, unless the property is given on rent for a period of less than 1 year and in case of a sale, the registration fee is typically 1% of the total value of the sale deed.
What are some key features of REITS?
REITs need to be set up as trusts and must be registered with SEBI. A REIT must have a trustee, sponsor(s) and a manager. The REIT Regulations specify that the trustee must be a SEBI registered debenture trustee and must not be an associate of the sponsor/manager. REITs are permitted to invest in commercial real estate assets, either directly or through special purpose vehicles and can raise capital through an initial public offering subject to the condition that the value of all commercial real estate assets owned by the REIT is not less than INR 5 billion.
It is mandatory for a REIT to list its units on a recognized stock exchange within 12 working days from the date of closure of the initial offer and mutual funds are permitted to invest in REITs, subject to the condition that a mutual fund scheme cannot invest more than 10% of its net asset value in the units of REITs.
What is the tax liability on ownership and operation of real estate?
An owner of real estate in India has to pay statutory taxes and levies under local State laws. However, in practice, if a commercial property is given on lease or license, the taxes are contractually passed on to the lessee or licensee.
Property tax in India varies from State to State and differs for freehold and leasehold property. It is generally calculated on the rateable value which is usually based on the rent that can be realized from the property or the capital value which is determined as per designated zones of the property e.g. in Mumbai, property tax is calculated on the basis of the capital value of the property whereas in Bangalore, property tax is calculated on the basis of rateable value of the property.
Income tax is payable on capital gains arising from the sale of immovable property. Long term capital assets (i.e. real estate held for more than 24 months) are taxed at concessionary rates compared to short term capital assets (i.e. real estate held for less than 24 months).
Service tax at the rate of 14% is also payable on rent or license fee, along with Swachh Bharat Cess at the rate of 0.5% and Krishi Kalyan Cess at the rate of 0.5%. All indirect taxes including service tax are proposed to be substituted by goods and services tax expected to be effective July 1, 2017.
How are real estate properties distinguished and demarcated by the government?
The authorities divide areas of land into different zones through “zoning”, based on land use i.e. residential zone, commercial zone, industrial zone etc. Additionally, certain areas are demarcated as Special Economic Zones (SEZs), which provide various incentives and concessions to the units operating from within these zones.
What is the most significant recent legal and regulatory development in regulation of real estate in India?
The Real Estate (Regulation and Development) Act, 2016 (RERA) has been recently enacted to regulate and promote the sale of real estate in India in an efficient and transparent manner and to protect the interest of purchasers.
Some of the key features of RERA are: (i) (a) every real estate project proposed to be developed which exceeds 500 sq. mtrs.; (b) or where the number of apartments proposed to be developed exceeds 8; (c) projects that have not received a completion certificate as on 1 May 2016; and/or (d) projects for redevelopment that would involve selling and marketing, have to be mandatorily registered with the Real Estate Regulatory Authority (Authority) established under RERA and failure to do so would attract a penalty of upto 10% of the estimated cost of the real estate project.
(ii) 70% of the amount received from a real estate project is required to be kept separately in an escrow account which is to be utilised for that project only. Therefore, a promoter or developer can no longer divert funds from one real estate project to another project. (iii) Also the promoter or developer, as the case may be, is responsible for all obligations, responsibilities and functions specified under RERA, till conveyance of all the apartments, plots or buildings to the purchasers has been completed. In case the promoter or developer fails to do so, then such promoter or developer has to return the amount invested by the purchaser and also compensate any loss suffered by the purchaser.
(iv) Per the RERA a promoter or developer cannot transfer majority rights and liabilities in a real estate project to a third party without obtaining the prior written consent from two-third of the purchasers and written approval from the Authority. (v) If a promoter or developer, as the case may be, does not comply with the orders of the Authority, a penalty can be levied on the promote or developer for every day during which such default continues, which may cumulatively extend up to 5% cent of the estimated cost of the real estate project. (vi) Failure to make timely payments would invite payment of interest from the buyer to the developer. (vii) The jurisdiction of courts has also been barred in relation to suits or proceedings for any matters which statutory authorities under the RERA have the power to adjudicate. Further, no injunctions may be granted by any court for any action taken or which may be taken by statutory authorities under the RERA.
So we can see that the Government has been taking several measures to protect the interests of purchasers as several violations of consumer rights in the real estate sector had been seen in the past.
How can one explain the concept of ‘land pooling’ in real estate development?
In the midst of agitation by farmers against land acquisition by governments in various States in India, land pooling is emerging as a way forward towards peaceful and smooth acquisition of land for development of infrastructure projects. Instead of monetary compensation, the government provides compensation to the landowners in the form of a reconstituted plot or land, which reduces the financial burden on the government.
Typically, in land pooling schemes land owned by individuals or a group is legally consolidated by transfer of ownership rights to the designated land pooling agency, which later transfers the ownership of the part of the land back to the land owners for undertaking development of such areas. It is an effective way of integrating farmers as partners in land development projects.
Amaravati, in the State of Andhra Pradesh is an example where a land pooling scheme has been successfully implemented. We have seen news reports which indicate that over 20,000 farmers have given up land under a land pooling scheme notified under the provisions of the Andhra Pradesh Capital Region Development Authority Act, 2014 for the development of the new capital city for the State of Andhra Pradesh. The Finance Bill, 2017, proposes to amend the Income Tax Act, 1961 in order to provide exemption to capital gains tax arising from the transfer of land under a land pooling scheme.
How is rent payable?
Rent is payable in Rupees per sq. ft. per month (generally in advance, on or before the 10th day of the relevant English calendar month) and is typically exclusive of 14% service tax plus Swachh Bharat Cess at the rate of 0.5% and Krishi Kalyan Cess at the rate of 0.5% (all indirect taxes including service tax are proposed to be substituted by goods and services tax expected to be effective July 1, 2017).
What are the typical periods of a lease, security deposit payable, lock-in period and percentage of rent increase?
Typically the lease term for commercial leases varies between 5 to 9 years (it is either a 5+4 year term or a 3+3+3 year term) and for residential leases between 2 to 3 years. The tenure is usually determined keeping in mind stamp law charges as there are States which charge stamp duty up to a 5 year lease term and then the stamp charges are enhanced or stamp duty is paid on a 3 year tenure before being enhanced and so on. The security deposit is interest free and refundable and varies across cities, and the general practice in Tier I cities is to take 3 to 6 months of the monthly rent as a security deposit while in Tier II cities, it is 6 to 12 months of the monthly rent. There is usually a ‘lock-in’ period based on the commercial agreement of the parties. Most lease agreements have a fixed increment in the monthly rent which typically varies between 5% to 8% every year.
What is the general practice in relation to payment of service charges, operating cost, repairs and insurance in relation to lease agreements in Tier I and Tier II cities?
In both Tier I and Tier II cities, service/maintenance charges usually form part of the monthly rent and all utilities such as electricity and water are metered separately and payable by the lessee at actuals. The lessee is responsible to undertake minor internal repairs while major structural repairs and repairs to the common facilities such as elevators, stairs etc., along with insurance, is undertaken by the lessor.
What are the lessee’s rights in relation to subleasing and assignment, early termination and reinstatement responsibilities in relation to the premises at the lease end?
A lessee is generally not permitted to sub-lease or assign rights in the property, without the prior approval of the lessor. A lessee can terminate a lease prior to its expiry in the event of a breach by the lessor of the lease terms. On expiry or early termination of the lease, the lessee is required to reinstate the property back to its original condition subject to normal wear and tear and hand over possession of the property to the lessor, subject to receipt of the security deposit.
about the authors
Kanika Premnarayen is a dual qualified lawyer (registered as a non-practicing solicitor in England & Wales and as a Solicitor and Advocate in India). Kanika completed her B.A. LL.B from Government Law College, Mumbai in 2006 and is enrolled as an advocate with the Bar Council of Maharashtra and Goa since 2006. Kanika has also been admitted as a solicitor with the Bombay Incorporated Law Society in 2008 and as a solicitor of England and Wales in 2011, and is also a member of the International Bar Association.
Kanika has significant experience in corporate and commercial laws focusing on mergers, acquisitions, joint ventures and private equity investments and exits across various sectors in India. Kanika also has experience in numerous real estate transactions and has assisted and appeared in commercial litigation proceedings before the Hon’ble High Court (Mumbai), the Debt Recovery Tribunal (Mumbai), the Securities Appellate Tribunal (Mumbai) and in various arbitration proceedings.
Kanika’s experience includes assisting and advising KIA Motor Corporation on setting up its proposed greenfield automotive cluster in India; Nippon Paper (Japan) with regard to its acquisition of India’s largest maker of paper beverage cups Plus Paper Foodpac; BlueScope Steel Limited (Australia) with regard to matters relating to its joint venture with Tata Steel Limited; Mitsui (Japan) with regard to its proposed investment in steel manufacturing in India; Partners Group (Mauritius), a private equity investor, with regard to its investment in Eurokids International Limited; STADA Arzneimittel AG (Germany) with regard to its investment in an Indian pharmaceutical company; U-SHIN Ltd (Japan) in relation to its joint venture in India; Oxford Instruments Plc (UK) and Oxford Instruments India Private Limited, in relation to their business operations in India; Developers Group Pte Ltd (Singapore) with regard to real estate investments in India; Diligent Corporation (USA) in relation to its operations in India; Soktas (Turkey) in relation to its business operations in India; and Kuwait Petroleum in its proposed investments in Indian companies engaged in the petrochemical sector.
T: +91 22 26466061/ 65381887
Vineet Gupta is a qualified lawyer admitted to the Bar Council of Rajasthan and company secretary from the Institute of Company Secretaries of India, and is also a member of the International Bar Association. Vineet completed his B.Com LL.B (Hons) from Gujarat National Law University in 2010.
Vineet was seconded to Ashurst’s London office in 2014 and to Mori Hamada & Matsumoto’s Tokyo office in 2016.
Vineet has significant experience advising on diverse corporate and regulatory issues and in Indian corporate and commercial laws, including joint ventures, business alliances, cross border transactions, establishing and servicing wholly owned subsidiaries for foreign clients, private equity investments and exits, mergers and acquisitions, and employment law.
Vineet’s experience includes assisting and advising Japan Bank for International Cooperation (JBIC) in its equity investment in the Delhi Mumbai Industrial Corridor Development Corporation (DMIC); JBIC in its ongoing and proposed investments in India; KIA Motor Corporation on setting up its proposed greenfield automotive cluster in India; BlueScope Steel in its joint venture with Tata Steel Limited; Mitsui, Japan in its proposed investment in steel manufacturing in India; Toshiba in its investment in a water treatment company in India; Nippon Paper Industries, Japan in its acquisition of Plus Paper Foodpac, India’s largest paper beverage cup manufacturing company; Blueair Sweden in acquisition of its Indian subsidiary by Unilever; U-Shin Ltd, Japan in its joint venture in India; New Silk Route in its investment in and exit from Café Coffee Day; Kuwait Petroleum in its proposed investments in Indian companies engaged in the petrochemical sector; Haitong Bank; and L’Occitane.
T: +91 11 24154000/ 24154022
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Indian Law Partners (ILP) is a boutique corporate commercial law firm in India with offices in New Delhi and Mumbai and focuses on Corporate and Regulatory Advisory, M&As, Private Equity, Banking and Finance, JVs, Technology, Energy and Renewables, Infrastructure and Transport, IP, Media, Entertainment, Competition Law, Sports Law and Real Estate. ILP was established by Gopika Pant in 1999 and has in 2011 established a non-exclusive best friends relationship with Ashurst LLP, a leading London headquartered international law firm with over 1,600 partners and lawyers with 25 offices in 15 countries and a number of referral relationships covering 10 time zones. As the relationship with Ashurst is non-exclusive, ILP works with other international law firms from various jurisdictions.
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With its experienced dual qualified lawyers with a proven track record of successfully concluded deals in India, ILP’s Partners have worked on various transactions and matters including India’s first private banking merger between HDFC and Times Bank; equity investment by Japan Bank for International Cooperation (JBIC) in the Delhi Mumbai Industrial Corridor Development Corporation (DMIC) (the world’s largest infrastructure project worth more than USD 100 billion); Serco UK’s acquisition of Infovision group; New Silk Route’s investment in and exit from Café Coffee Day; AIF Capital’s investment in Bharti Infratel; Xchanging PLC’s cross border restructuring across several jurisdictions; Bosch’s divestment of its foundation brakes manufacturing business in India; BUPA UK’s acquisition of 26% in a health insurance joint venture in India with the Max Group; BlueScope Steel’s joint venture with Tata Steel Limited; Toshiba’s investment in a water treatment company in India; investment by various PE funds; Haitong Bank’s India business; Merlin Entertainments setting up its India operations, with the first being a Madame Tussauds in New Delhi; KIA Motors and Kuwait Petroleum’s interests in India; Microsoft’s India operations, and so on.
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