Chapter 10

INDIA

Cyril Shroff, Reeba Chacko, Nagavalli G and Vandana Sekhri 1

I OVERVIEW OF THE MARKET

As India heads for the general election in May 2019, 2017–2018 marked a major push for
reforms and policies by the government headed by the Bharatiya Janata Party. The Goods
and Services Tax (GST), the long-pending reform that sought to unify indirect taxation in
India was launched on 1 July 2017. The government also rolled out the Indian Bankruptcy
Code to provide a resolution framework that will help corporates clean up stressed assets and
reduce debt.
This year also witnessed the Indian economy recover from the radical decision of
the government to demonetise certain currency notes in the past year and the economic
indicators showed robust signs of revival. India’s position in the World Bank’s Ease of Doing
Business rankings moved up by 30 positions.2 The GDP growth of India in 2018–2019 is
projected to be in the range of 7.6 per cent by the International Monetary Fund.3
Foreign direct investment (FDI) equity inflow continues to grow and in the financial
year 2017–2018 surged to US$61.96 billion. The total FDI inflow improved by a margin of
3 per cent from financial year 2016–2017.4
So far, 2018 has been a highly eventful year for real estate, as the sector witnesses the
impact of the rollout of the Real Estate (Regulation and Development) Act 2016. On the
back of the policy changes that have made the real estate sector more transparent, the private
equity (PE) and debt investments in the sector improved by 12 per cent to US$4.18 billion
across 79 transactions in 2017. US$3.26 billion worth of M&A deals were also made in
India’s real estate sector in 2017.5

II RECENT MARKET ACTIVITY

The Indian real estate sector has witnessed high growth in recent times with a rise in demand
for office as well as residential spaces. FDI equity inflows in the construction development
sector was reported to be US$24.67 billion in the period April 2000–December 2017.6

1 Cyril Shroff is managing partner and Reeba Chacko, Nagavalli G and Vandana Sekhri are partners at
Cyril Amarchand Mangaldas.
2 http://mofapp.nic.in:8080/economicsurvey/.
3 https://www.imf.org/external/pubs/ft/weo/2017/update/01/.
4 https://health.economictimes.indiatimes.com/news/industry/fdi-in-india-rises-to-61-96-billion-in-2017-
18-government/64509907.
5 https://www.ibef.org/industry/real-estate-india.aspx.
6 https://www.ibef.org/industry/real-estate-india.aspx.

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Some reported activity (along with certain reported details) include the following:
a DLF bought 11.76 acres of land for 15 billion rupees for its expansion in Gurugram,
Haryana.7
b Japanese behemoth Sumitomo Corporation announced its US$2 billion partnership
with Krishna Group to develop real estate projects in India;8 and
c KKR India Asset Finance Pvt Ltd has invested over US$500 million in residential real
estate projects in India in 2017, taking its total investments in real estate projects in
India to US$1 billion.9

III REAL ESTATE ENTITIES AND PLATFORMS

Asset classes in the Indian real estate sector include standalone commercial (comprising
business parks, special economic zones, hotels, hospitality, shopping centres, etc.), residential
assets or a combination of both in a mixed-use project. Developers have also in the recent past
focused on the development of full-fledged townships that cater to a wide variety of investors
and customers.
Assets in the Indian real estate market are mostly aggregated at the local level. Development
entities either buy from these aggregators or enter into development arrangements with land
owners. Large project requirements are also met through government-assisted acquisitions.
Land is usually held through multiple special purpose vehicles (SPVs) holding real estate
assets.
Multilevel holding structures are typically used for reasons of consolidation,
corporatisation, ease of unbundling, ring-fencing project-specific risks, itemised scalability
and future potential to list holding companies for fundraising.
Typically, investments are held though corporate entities and SPVs, and in businesses
without a foreign investment element, through partnership firms and limited liability
partnerships driven primarily by tax benefits, low compliance, and ease of setting up and
winding up.

IV RAISING FINANCE
Avenues for fundraising in the real estate sector are fairly skewed as a result of regulatory
hurdles and lack of confidence in developers given the manner in which the sector has been
operated over the years.

i Issues under various modes of financing

Bank debt
Under the domestic banking laws,10 scheduled commercial banks are restricted from lending
for acquisitions of land. Further, a promoter’s contribution towards the equity capital of
a company needs to be brought in from the promoter’s own resources, and the banks are

7 https://www.business-standard.com/article/companies/dlf-buys-11-76-acre-of-land-for-rs-15-billion-in-
gurugram-plans-expansion-118022701253_1.html.
8 https://www.moneycontrol.com/news/business/real-estate/sumitomo-announces-2-bn-real-estate-project-
with-krishna-group-2513609.html.
9 https://www.ibef.org/industry/real-estate-india.aspx.
10 Master Circular – Housing Finance issued by the Reserve Bank of India.

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not permitted to grant advances for the acquisition of shares of other companies. With bank
funding for land and the acquisition of SPVs ruled out, construction development finance
is essentially the only area for which bank funding is available, which is more often than
not the second step in a real estate transaction. Such restrictions, however, do not apply to
non-banking financial companies, which have in the recent past emerged as strong pillars for
this segment.

External commercial borrowing

Raising debt by way of external commercial borrowings is not permitted for real estate
activities (other than for specific special economic zone-related activities), the acquisition of
land and the acquisition of shares. Thus, this funding mechanism is completely unviable for
the real estate sector.

Public fundraising
From a public markets point of view, the track record of publicly traded real estate companies
is less than good. While market hopes are now pinned on the REIT platform as the saviour
of the real estate public market space, it is currently still a little too nascent to be a force to
reckoned with. An encouraging trend can be seen, however, in the regulator’s supportive
stance on interpreting the regulatory framework with a view to making REITs happen. With
time and new players, more changes in the law in this regard is expected.

Setting up REITs
The extant foreign exchange regulations, have been amended to permit non-residents to
invest in REITs, including by way of a swap of capital instruments held in an SPV (which
holds the assets) for REIT units, thereby clearing a significant hurdle in setting up a REIT
with non-resident PE investors. However, the swap of non-convertible debt instruments for
REIT units still requires approval of the RBI and could therefore continue to be a hurdle in
case of investments made through debt instruments.

Investment conditions
Under the current regulatory framework, at least 80 per cent of the value of a REIT’s
assets must be invested in completed rent-generating assets. The remaining 20 per cent is
permitted to be invested in properties that are under construction or completed, but not
for rent-generating purposes. While the general 80:20 break-up is in line with the intent
of providing more liquidity and ensuring minimal risk in the hands of a unitholder, REITs
are also intended to be a means of revitalising the cash-strapped market for real estate assets,
especially under-construction properties. Practically as well, in the case of large office parks
that are not substantially complete, or in the case of SPVs operating multiple office parks
with some being under development, the under-construction component may need to be
carved out to comply with the existing norms. The process might involve regulatory hurdles
and significant transaction restructuring costs.
Further, in instances where the manager or sponsor of a REIT is foreign-owned or
controlled, the REIT would be deemed to be a foreign-owned and controlled entity, and
all downstream investments by the REIT would be required to comply with extant foreign
exchange regulations. Given that real estate is a significantly regulated sector, this could
restrict the funding and investment options available to the REIT.

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Multiple SPV structures

The REITs regulations permit up to two-layer SPV structures to be held by the REIT.
Therefore, the requirement of complying with this requirement in cases where assets are held
through multilevel structures involves significant restructuring of existing holdings.

FDI
While specific types of development-related activities are permitted, generally speaking, FDI
is not permitted in real estate business (dealing in immovable property with the intent of
earning profits), the construction of farmhouses and trading in transferable development
rights. Exceptions to this are investments in construction development projects and the
earning of rent or income from projects through the leasing of property (without transfer of
the same).
The equity investment regime has come a long way since the sector’s liberalisation in
2005. Under the 2005 regime, stringent entry conditions such as a minimum capitalisation
(US$10 million for wholly owned subsidiaries and US$5 million for joint ventures) and
minimum area requirements (10 hectares for development of serviced housing plots and
50,000 square metres for construction development projects) had made projects below
a certain size inaccessible to investors. Exits were available only after the expiry of a lock-in of
three years or upon completion of the project, which meant that if a project did not take off
for reasons of litigation or lack of consumer interest, the non-resident investor would have
to sit out for three years. There was also regulatory ambiguity with FDI being meant only
for greenfield projects and not for brownfield or existing under-construction projects. Exits
from projects prior to a period of three years (even through a stake sale between non-residents
without repatriation) required the approval of the Foreign Investment Promotion Board
(FIPB), which was not very forthcoming given the sensitivities around the sector.
In a significant overhaul in 2014, the present government eased the minimum area
requirements, and minimum capitalisation conditions were made applicable from the
commencement of the project; however, subsequent tranches of investment could only
be brought in until the expiry of 10 years from the commencement of the project. The
three-year lock in was done away with, and exits were made possible on completion of trunk
infrastructure (roads, water supply, street lighting, drainage and sewage). While the easing of
entry conditions did help, the greenfield–brownfield ambiguity continued and exits remained
an issue, specifically for stalled or litigation-affected projects. The only way out for projects
with no trunk infrastructure was by approval of the FIPB. Transfers between non-residents
during the lock-in period were specifically brought into the approval route. As a positive
measure, for the first time, investments in the operation and maintenance of completed
projects such as shopping centres and business centres were permitted. Thus, the FDI regime
in construction development until November 2015 was marred by exit issues.
In November 2015, the government did away with most of the entry conditions for
investment into a project. Investment can now be brought in for each phase separately,
a dispensation that has significantly aided developers in obtaining phase-wise funding from
different investors. Although investments by non-residents continue to be locked in for
a period of three years, exits are permitted if trunk infrastructure in a project is completed.
Exits are no longer linked to absolute transfer restrictions, but are linked to repatriation
of funds outside, which means that non-resident investors are permitted to divest stakes
to other non-residents without a repatriation of funds, even during the lock-in period,
without the requirement of obtaining any approvals from authorities in India. In addition,

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special economic zones and hospitals, where these sectoral conditions relating to FDI do
not apply, and industrial parks (where there is a different regime of commercial projects),
investments are now permitted in completed projects for the operation and maintenance
of townships, shopping centres and complexes and business centres, subject to a lock in of
three years. Investments under the FDI route have to comply with pricing guidelines, which
prescribe a fair market value cap (determined based an on internationally accepted pricing
methodology) for exits and restrict non-resident investors from agreeing on assured returns
on their investments. With significant liberalisation in the FDI regime, it is expected that
deal activity in this sector will continue to increase.
In the case of industrial parks, while investments are permitted under the automatic
route, 66 per cent of the allocable area in the project is required to be dedicated to industrial
activity (a specified set of activities), with the park required to have a minimum of 10 units
and no single unit occupying more than 50 per cent of the allocable area. Industrial park
investments have to continually undertake compliance analysis and keep only a defined
tenant base, which on a practical level is sometimes arduous.

Investment through listed non-convertible debentures

The market is seeing a rise in the prominence of investments through listed non-convertible
debentures (NCDs) subscribed by foreign portfolio investors (FPIs) and non-banking
financial companies. From 2017 to 2018, the corporate bond market has raised about 5,990
billion rupees across 2,706 issues through private placement of NCDs.11 Under the Indian
foreign exchange regulations, FPIs registered with SEBI are permitted to invest in listed or
unlisted NCDs (subject to minimum residual maturity of one year, end-use restrictions on
investment in real estate business, the capital market and the purchase of land, and conditions
imposed by under the regulatory laws for such security). This, as an investment route, is
separate from the FDI regime, and consequently, sectoral caps and conditions, pricing and
restrictions on assured returns as applicable to FDI are not applicable to such investments.
Till April 2018, NCDs held by FPIs were required to have a residual maturity of
three years, which essentially means that the issuer cannot redeem the NCDs (even through
optionality clauses) prior to the expiry of three years. The three-year lock-in, however, is not
applicable to the sale of NCDs by FPIs in favour of domestic investors. In April 2018, RBI
reviewed the policy to revise the minimum residual maturity period of NCDs held by FPIs,
to one year. The issuance of listed privately placed NCDs is governed by the Companies Act
2013, with listing and disclosure requirements being regulated by the SEBI (Issue and Listing
of Debt Securities) Regulations 2008 and the SEBI (Listing, Obligations and Disclosure
Requirements) 2015. NCDs with less than a one-year maturity are required to comply with
the Reserve Bank of India (Issuance of Non-Convertible Debentures) Directions 2010,
which prescribe higher compliance requirements regarding credit ratings or the eligibility of
the borrower, and a restriction on a redemption or put option for a period of 90 days from
the date of issuance.
In summary, with traditional debt funding through scheduled commercial banks and
external commercial borrowings being in short supply, sentiment for publicly traded real
estate companies being weak and REITs still in their infancy, investments (both equity and
debt) in the real estate sector continue to be dominated by PE investors.

11 www.sebi.gov.in/statistics/corporate-bonds/privateplacementdata.html.

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ii Impact of the Real Estate (Regulation and Development) Act 2016 (RERDA)
A revolutionary change in recent times was the introduction of the RERDA, which seeks
to protect consumer interests, ensure efficiency in property transactions, improve the
accountability of developers and boost transparency in the sector, all of which have been
lacking for a long time. The RERDA has brought about significant changes to the way real
estate transactions will now be undertaken in India. Key changes include:
a the establishment of a real estate regulatory authority in various states in India to
regulate real estate transactions;
b the registration of real estate projects and real estate agents;
c the mandatory disclosure of all registered projects, including details of the promoter,
project, layout plan, land status, approvals and agreements, along with details of real
estate agents, contractors, architects, structural engineers, etc.;
d promoters and developers being restricted from amending plans and designs without
the prior consent of consumers;
e developers being required to deposit at least 70 per cent of the funds collected from
allottees of the units in an infrastructure project to meet the cost of construction
(including land cost); and
f the establishment of fast-track dispute resolution mechanisms and the provision of
jurisdiction to consumer courts to hear real estate disputes.

The RERDA also provides for the insurance of titles of property, which will benefit both
consumers and developers if land titles are later found to be defective.
While the RERDA is intended to provide investors with much-required developer
accountability and transparency, from the perspective of real estate companies, the regulatory
burden and compliance costs have significantly increased, with certain conditions, such as
the depositing of 70 per cent of funds, posing practical challenges. Additionally, last year
witnessed a clear disparity between states with regards to the implementation, with regions
such as Maharashtra setting the benchmark in the industry. The lack of infrastructure and
non-notification of RERDA rules by some states have led to delays and loss of revenue to
different stakeholders.

V TRANSACTIONS – STRUCTURING CONCERNS

i Equity structures
Traditionally, the real estate sector has been highly regulated for foreign investment.
Discouraging speculative activities on land has been a major theme of the regulators.
Therefore, foreign debt was highly restrictive and equity also came with conditions related to,
inter alia, development milestones and lock-ins.
With FDI conditionalities now significantly liberalised, transactions in the construction
development space have more or less become automatic in the truest sense of the word. A lot
of acquisition activity is now seen in the acquisition of completed assets. Management of
commercial assets as a separate business skill has been gaining ground, amply supported by
technology and best global practices. India’s FDI policy now specifically recognises foreign
equity investment for the purposes of operation and maintenance of completed assets. The
country has also seen significant restructuring activity in the sector from the point of view
of making real estate spaces more marketable commodities: consolidating assets, segregating

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marketable assets, restructuring for raising finance, tax structuring, court-based mergers,
demergers, conversion of LLPs into companies, restructuring partnership interests to permit
investments and capital reduction, inter alia, have been used to achieve this end.
For investments in completed assets that are part of larger projects, over and above the
‘undertaking’ test from a taxation standpoint, from an FDI perspective, the asset being hived
off should independently qualify as a completed project.
Significant structuring continues to be adopted around promoted structures and
profit-sharing arrangements to incentivise developers. It is not uncommon in commercial
projects to have asset or property management and development management arrangements
with affiliates aimed as cash-outs to developers. Indemnity or holdbacks, escrow structures,
representations and warranties and tax considerations (typically around capital gains and
withholding taxes), inter alia, are sector-agnostic, and would apply to real estate investments
and exits as well. Many investors who picked up significant stakes in the 2007–2008 bull run
are now in exit mode. Owing to limited fund life and other constitutional concerns, PE funds
are reluctant to give standard representations at the time of exit. While warranty insurance is
slowly gaining traction in India, it comes with its own problems of high premium costs and
wide exclusions (including all information known to investors, taking away from them the
traditional knowledge exclusion despite their diligence).

ii Debt and structured debt

Investors are now looking at debt investments to gain an upside for their businesses by
structuring returns based on business performance or project-based conditions. Being debt,
there is downside protection of the principal. Given the fundamental jurisprudence of debt
being an absolute obligation to repay, absorbing downside risks remains tricky. Structures
with PE investors investing in nominal equity along with private debt are not uncommon.
These structures allow investors to exercise control through affirmative voting rights, obtain
a board seat as equity holders and receive assured return on their investments as creditors.
This not only helps bridge the gap in a company’s capital structure; it is also commercially
viable for investors, as it occupies a place between senior debt and equity in terms of security,
returns and influence. There are instances where investments are purely into debt but where
veto matters are shaped as negative consent rights, which are standard in the lending arena.
NCDs usually earn mid to high yields through various combinations of a cash coupon
coupled with a redemption premium, cash flow or profit-linked coupons, market-linked
returns obtained through exposure on exchange-traded derivatives, or equity-like components
such as warrants or convertibles.
The slowdown in the real estate market, lack of funding for land acquisitions, defaulting
developers and the downgrading of their ratings have led to the sector being highly leveraged.
Consequently, developers are now relying on private debt either as fresh debt or by way of
refinancing an existing debt. With a high-risk appetite, PE players have shown interest and
invested in the NCDs of such companies. However, owing to the risks involved in such
investments, such as delays in the completion of projects, projects under litigation and a general
slackening of market demand for real estate, interest rates are substantially higher than those
found in other sectors. To insulate themselves from the risk associated with such investments,
private debt investors typically collateralise their investment by security cover depending on
the developer’s credit rating, and personal and corporate guarantees. The trend in securing
a high return and easy exit is evidenced by way of redemption premiums and default interest
being charged on the non-completion of predetermined construction milestones. The new

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concentration limits applied by the RBI have ensured that no single investor (along with its
related parties) can invest in more than 50 per cent of an issue and invest more than 20 per
cent overall in a corporate. While these change were aimed at streamlining the FPI route, the
consequences of this on the real estate sector will be significant as no single corporate will be
able to access more than 20 per cent of funds from one FPI.
While PE players enjoy the many advantages of investing in debt instruments in India,
given that NCDs are traded on a wholesale debt market segment, a large part of deal specifics
are to be disclosed to the stock exchanges, where information is publicly available. Further,
with new listing norms being applicable across the board, key changes to the structure of
the debentures also require the approval of the stock exchanges, making changes to bilateral
structures subject to regulatory consent.

iii Taxation-related aspects

India has entered into various protocols with the governments of Mauritius,12 Singapore13
and Cyprus14 to revise the double taxation avoidance agreements (DTAAs) it had entered
into with these countries to provide for source-based taxation of capital gains arising from an
alienation of shares instead of a residence-based taxation with a view to preventing double
non-taxation, curb revenue loss and check the menace of black money through an automatic
exchange of information. It may be noted that the amended DTAAs grandfather investments
made prior to 1 April 2017:15 shares acquired before 1 April 2017 will continue to be taxed
based on the principle of residence-based taxation (this is subject to a limitation of benefits
clause in the case of the India–Singapore DTAA).16 Furthermore, the India–Singapore and
India–Mauritius DTAAs provide for a concessional rate of taxation of capital gains17 at
50 per cent of the applicable tax rate in respect of investments in shares made between April
2017 and 31 March 2019, subject to the fulfilment of conditions in a limitation of benefits
clause.18 Investments made after 31 March 2019 will be taxable at the full domestic tax rate
as per the principle of source-based taxation. It may be noted that the exemption from capital
gains tax under the abovementioned DTAAs would be available even for the preference shares
which got converted into equity shares after 1 April 2017 as well, so long as the preference
shares were acquired before 1 April 2017.

12 Protocol amending the Agreement between the Government of Republic of India and the Government of
Republic of Mauritius for the avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income and capital gains and for the encouragement of mutual trade and investment, signed on
10 May 2016.
13 Third Protocol amending the Agreement between the Government of India and the Government of
Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income, signed on 30 December 2016.
14 A revised Agreement between the Government of Republic of India and Government of Republic of
Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on
income, along with its Protocol, was signed on 18 November 2016.
15 Article 13 of the India–Mauritius DTAA, India–Singapore DTAA and India–Cyprus DTAA.
16 Article 24A of the India–Singapore DTAA.
17 Article 13 of the India–Mauritius DTAA and the India–Singapore DTAA.
18 Article 27A of the India–Mauritius DTAA and Article 24A of the India–Singapore DTAA.

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Subsequent to the introduction of the concept of a place of effective management

(POEM)19 for the determination of the residential status of the company under the Finance
Act, 2015,20 the government issued a final guiding principles for determination of POEM on
24 January 2017.21 In cases where a foreign company establishes its POEM in India, it will be
regarded as an Indian tax resident, will be liable to pay taxes in India on its global income and
may not be entitled to any DTAA benefits. PE funds should ensure that the POEM is outside
India and for this purpose, all major decisions relating to the investment and divestment of
Indian securities should be taken outside India, and their fund managers should be located
outside India.
Furthermore, the provisions of General Anti Avoidance Rules (GAAR) are effective
from financial year 2017 to 2018 onwards.22 By virtue of the GAAR, the Indian tax authorities
are now empowered to declare any arrangement or transaction to be an impermissible
arrangement or transaction if it is of the view that the main purpose of carrying out the said
arrangement or transaction is, inter alia, for the purpose of a tax benefit.23 Thus, considering
the wide ambit of GAAR, a number of legitimate business transactions could come within its
purview unless the taxpayer is able to establish its commercial substance before the Indian tax
authorities. The threshold limit for the invocation of GAAR is 30 million rupees. However,
the GAAR provisions shall not apply to income from the transfer of investments made before
1 April 2017. Having said this, it may be noted that the GAAR provisions shall apply to any
arrangement, irrespective of the date on which it has been entered into, in respect of a tax
benefit obtained on or after 1 April 2017. Further, on 27 January 2017, the Central Board of
Direct Taxes issued a circular providing various clarifications in a Q&A format with respect
to GAAR, including the interplay between the GAAR and the Specific Anti-Avoidance Rules
provided in the DTAAs.
The Finance Act, 2017 has introduced a couple of provisions that deem the fair market
value of shares applicable to determining income from transfers of unquoted shares. As per
the provisions,24 the fair market value of unquoted shares shall be substituted as the full value
of the consideration when the consideration received or accruing is less than the fair market
value in the hands of the transferor. If the shares (quoted or unquoted) are received by the
transferee either for no or inadequate consideration, the excess of the fair market value over
the consideration paid shall be treated as deemed income in the hands of the transferee.
Besides the above, taxation issues in PE transactions are traditionally centred around
withholding tax deductions on payments made to non-residents and issues under Section 281
of the Income Tax Act 1961. Withholding tax issues are settled mostly through a combination
of tax indemnity, a certificate from a chartered accountant or a certificate from the Indian
taxation authorities indicating the tax required to be withheld on the consideration payable
to the seller. In terms of Section 281 of the Income Tax Act 1961, any transaction involving

19 POEM means a place where key management and commercial decisions, necessary for the conduct of the
business as a whole are, in substance, made.
20 Section 6(3) of the Income tax Act, 1961.
21 Central Board of Direct Taxes Circular 06/2017 dated 24 January 2017.
22 Section 95 of the Income Tax Act, 1961.
23 Section 96 of the Income Tax Act, 1961.
24 Section 50CA and Section 56(2)(x) of the Income Tax Act, 1961.

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the creation of a charge on an asset by way of a sale, for example, while a tax proceeding is
pending would be void as against a claim in such tax proceeding. Almost all PE transactions
face this issue.

iv Taxation of REITs
Under the Income Tax Act, 1961, REITs are accorded a pass-through status for interest
income received by the REITs from an SPV and also for rental income earned by the REITs.25
In other words, interest or rental income distributed by a REIT shall be deemed to be income
of the unitholders, and will be chargeable to tax in the hands of the unitholders. However,
a REIT is required to withhold tax at appropriate rates,26 whose credit can be claimed by
the unitholders against their final tax liability payable on the income earned from the REIT.
Where the assets in a REIT are held by an SPV, dividend distribution tax (DDT) of
approximately 20 per cent27 would be applicable to distributions made to the REIT, making
the structure tax-inefficient. However, no DDT is required to be paid for distributions made
by SPVs that are 100 per cent REIT-owned (or co-owned with a minimum mandated holding
by the co-owner under law), and such dividend received by the REIT and its unitholders shall
not be taxable in the hands of the REIT or its unitholders. While these are welcome steps,
given that the exemption is limited to only 100 per cent REIT-owned SPVs, the benefits
would not trickle down to joint ventures, which form a significant part of the sector’s assets.
Certain other issues that still require addressing from an industry standpoint include
the fact that the tax deferral scheme made available to sponsors on the transfer of SPV shares
to a REIT has not been extended to the direct transfer of assets and transfers of interest in
LLPs; and that the holding period of REIT units has not been brought on a par with other
listed securities at one year for availing of long-term capital gains benefits.

VI CONCLUSION
The real estate sector is slowly but steadily picking itself up from the lows of 2009 and 2010.
Large platform deals are an indication of growing investor confidence. With the government’s
impetus regarding infrastructure growth and its continual attempts at economic liberalisation,
the road ahead could be said to be smoother, if not rosy.
Key areas to look out for in respect of the real estate sector are undoubtedly the
REIT platform and the asset class that goes up for trading. While demonetisation caused
considerable tumult, it has brought about greater transparency in the real estate sector as the
Indian real estate sector comes to grip with RERDA and GST implementation. This would
represent a major push to the public market for real estate assets. Clearly, the story of the
growth of India’s real estate is far from over.

25 Section 10(23FC) and Section 10(23FCA) of the Income Tax Act, 1961.
26 Section 194LBA of the Income Tax Act, 1961.
27 Includes applicable surcharge and education cess.

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