AMITY LAW SCHOOL,

NOIDA

RESEARCH PAPER

ON

FDI IN REAL ESTATE: OPPURTUNITIES AND

CHALLENGES
.

SUBMITTED BY SUBMITTED TO

DR. DEEPIKA
AMIT BHARDWAJ
LLM(CB&IL)
SECT I O N A
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PREFACE
Foreign direct investment (FDI) policies play a major role in the economic growth of
developing countries around the world. Attracting FDI inflows with conductive policies has
therefore become a key battleground in the emerging markets. The prospect of new growth
opportunities and outsized profits encourages large capital inflows across a range of industry
and opportunity types. And this has led to competition among the states in formulating
flexible policies and providing incentives to woo private investors to invest more and more.

India has an estimated urban housing shortage of 18.8 Million dwelling units. The housing
shortage in rural India is estimated at 47.4 Million units, in 2012. Present levels of urban
infrastructure are inadequate to meet the demands of the existing urban population. There is
need for re-generation of urban areas in existing cities and the creation of new, inclusive
smart cities to meet the demands of increasing population and migration from rural to urban
areas. Future cities of India will require smart real estate and urban infrastructure.

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LIST OF CASES
 Ram Jawaya Kapur v. State of Punjab AIR 1955 SC 549
 Manohar Lal Sharma v. Union of India MANU/SC/0520/2013
 Ref. By President, MANU SC 0891 (2002)

LIST OF ABBREVIATIONS
FDI- Foreign Direct Investment
DIPP- Department of Industrial Planning and Promotion
MNC- Multi National Company
IT- Information Technology
NRI- Non-Resident India
PIO- Person of Indian Origin
REIT- Real Estate Investment Trust
RBI- Reserve Bank of India
FEMA- Foreign Exchange Management Act
FICCI- Federation of Indian Chambers of Commerce and Industry

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INTRODUCTION
Real Estate Sector in India has been going through a rough weather for the last few years due
to lack of funds and sluggish demand. Real Estate Business 1 is one of the nine activities
where Foreign Direct Investment ("FDI") is prohibited. However, considering that "Housing
for all" is one of the key objectives of the Government, an exception has been carved out
permitting FDI in Construction-Development projects2.

India has an estimated urban housing shortage of 18.8 Million dwelling units. The housing
shortage in rural India is estimated at 47.4 Million units, in 2012. Present levels of urban
infrastructure are inadequate to meet the demands of the existing urban population. There is
need for re-generation of urban areas in existing cities and the creation of new, inclusive
smart cities to meet the demands of increasing population and migration from rural to urban
areas. Future cities of India will require smart real estate and urban infrastructure.
The Government of India is in the process of launching a new urban development mission.
This will help develop 500 cities, which include cities with a population of more than
100,000 and some cities of religious and tourist importance. These cities will be supported
and encouraged to harness private capital and expertise through Public Private Partnerships
(PPPs), to holster their infrastructure and services in the next 10 years. To provide quality
urban services on a sustainable basis in Indian cities, the need of the hour is that urban local
bodies (ULBs) enter into partnership agreements with foreign players, either through joint
ventures, private sector partners or through other models.
The size of the real estate industry in India is estimated to be around US$ 12 billion. As per
studies, this figure is growing at a pace of 30% for the last few years. Majority of the real
estate developed in India (almost 80%) is residential space and the rest comprise office,
shopping malls, hotels and hospitals. This incredible growth is mainly attributed to the off-
shoring business, including high-end technology consulting, call centres and software
programming houses. Evidently, this is the ideal time to invest in the country, even as the
1
"Real estate business" means dealing in land and immovable property with a view to earning profit there from
It shall not include development of townships, construction of residential /commercial premises, roads or
bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs)
Regulations 2014.
2
Such projects would include development of townships, construction of residential/commercial premises,
roads, bridges, hotels, hospitals, educational institutions and other basic infrastructure.

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policy makers have begun to emphasize on developing adequate infrastructure for the
country. After agriculture, the real estate sector is the second largest employment generator in
India. The persistent demand from the Information Technology (IT) sector has also impacted
the urban landscape in India. As per estimates, there is demand for 66 million square feet of
IT space over the next five years. Several multinational companies continue to move their
operations to India to make the most of lower costs of skilled manpower and logistics.
Human resources being the key element in the IT industry, the hiring and housing of people,
both at their work place and home, has assumed great significance. As such, there is a
persistent need to create space for people to work and live, which in turn sets off the growth
of other allied infrastructure.

Though the real estate sector in India is asserted to be the most promising sector today, it is
still hugely plagued by market uncertainties and traditional inhibitions. The real estate market
in India mostly continues to remain unorganized, fairly fragmented, mostly characterized by
small players with local presence.

LITERATURE REVIEW
1. The article Foreign Direct Investment (FDI) And Economic Growth Of The States Of India,
shed light on the general policies of FDI in India. Also it gave info on what specific measures
are being taken by the individual states for the promotion of FDI in their respective areas of
business. It helped to get a miscellanea of information of FDI in generality which certainly
helped to corelate the problems being faced by the Real Estate sector in FDI.
2. Further in the article Foreign Direct Investment In Real Estate ,the specifics related to the
FDI policy in relation to Real Estate sector has been discussed. The paper clearly lays down
the policies of Pre-October 2015 and Post-October 2015. It helped in understanding the old as
well as further compare them to the new policies formulated by the government to boost the
FDI in Real Sector.
3. In the survey report on “Impact of FDI Reforms on Indian Real Estate Sector” by FICCI, the
facts related to the development, after the Central Government came up with ambitious Real
Estate policies in October 2015, in Real Estate sector are extensively studied. It gives clear
understanding as to how much the new policies were effective in tackling the slowdown of
the Real Estate sector by the easing the FDI inflow.

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STATEMENT OF PROBLEM
i. Can the radical FDI policy change in Real Estate sector check its beaming slowdown?

ii. Are the FDI policies of Central Government sufficient to overcome the dynamic challenges
of Real Estate sector in India?

OBJECTIVE OF STUDY
The FDI policy was recently changed in regards to the slowing Real Estate sector. The
government came out with easement of FDI norms in the sector in order to promote its
growth. The objective of the project is to find out as to much purpose has been acquired by
these new norms by the government. The project will try to discuss the suggestions for
further growth of real estate’s FDI inflow as and when observed.

RESEARCH METHODOLOGY
The research methodology for this project adopted by the researcher is purely doctrinal due to
the nature of the research subject which requires study of material and reports discussing
about the same. Secondary data from the website of Industrial Policy & Promotion
(www.dipp.nic.in) and Planning Commission (www.planningcommission.nic.in) have been
used for the analysis. Also data from Make in India website (www.makeinindia.com) is used.

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FDI IN REAL ESTATE

It refers to an investment made by a foreign individual or a company in the productive
capacity of another country. It can be considered as the movement of capital across national
frontiers in a manner that allows the investor to have a control over the investment. Firms that
provide FDI are referred to as MNCs. The investors can invest in existing industries/business
or can promote new industries. There can be two types of FDI- inward and outward. The
cumulative of two, results in net FDI inflow. FDI is freely allowed in all the sectors except a
few sectors, though in certain sectors FDI is not allowed beyond a ceiling.

FDI plays a major role in developing countries like India. They act as a long term source of
capital as well as a source of advanced and developed technologies. The investors also bring
along best global practices of management. As large amount of capital comes in through
these investments more and more industries are set up. This helps in increasing employment.
FDI also helps in promoting international trade. This investment is a non-debt, non-volatile
investment and returns received on these are generally spent on the host country itself thus
helping in the development of the country.

Some of the sectors that attract high FDI inflows in India are the hotel and tourism industry,
insurance sector, telecommunication, real estate, retail, power, drugs, financial services,
infrastructure and pollution control etc. FDI is not permitted in the following sectors, namely,
railways, atomic energy, defence, coal and lignite

The decision to liberalise the FDI norms in the construction sector is perhaps the most
significant economic policy decision taken by the Government of India. Until now, only Non-
Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the
housing and the real estate sectors. Foreign investors, other than NRIs, were allowed to invest
only in development of integrated townships and settlements, either through a wholly owned
subsidiary or through a joint venture company in India, along with a local partner. However,
the guidelines prescribed via Press Note 2 (2005) series, issued by Ministry of Commerce &
Industry, have further opened out FDI in townships, housing, built-up infrastructure and

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construction-development projects. Major corporations are taking initiative and are wooing
international players soliciting investments for major projects.

Pre- October 2015 scenario

Until October 2015, 100% FDI was permitted in Construction-Development projects with
following conditions:-

1. Minimum floor area to be developed of 20,000 sq. metres.

2. Mandatory infusion of FDI of minimum USD 5 million within 6 months of the
commencement of the project.
3. The investor was permitted to exit on completion of the project or after development
of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
4. Transfer of investment from the foreign investor to another non-resident investor
required government approval.

However, despite the fact that 100% FDI was permitted under automatic route, this sector
was not showing any sign of recovery as the minimum thresholds were suggesting that the
FDI was permitted only in new projects and not permitted in the existing projects which were
pending because of availability of funds.

Post- October 2015 scenario

However, the Government in November, 2015 has re-looked at the policy and relaxed it. The
amended policy broadly provides as follows3 :-

Construction - Development projects (which include development of townships, construction

of residential/commercial premises, road or bridges, hotels, resorts, hospitals, educational
institutes, recreational facilities, city and regional level infrastructure, townships) - 100% FDI
through automatic route is permitted. The conditions under this sector are:

1. No minimum land area requirement in case of development of serviced plots.

2. In case of construction-development projects, minimum floor area of 20,000 sq. mts.
3. The investee company should bring in a minimum FDI of USD 5 Million within six
months of commencement of the project. The commencement of the project will be
3
Construction: FDI Policy (Oct.15 2017, 7:45 PM), available at
http://www.makeinindia.com/sector/construction.

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the date of approval of the building plan/layout plan by the relevant statuary authority.
Subsequent tranches of FDI can be brought within the period of 10 years from the
commencement of the project or before the completion of project, which ever expires
earlier.
4. The investor will be permitted to exit on completion of the project or after the
development of trunk infrastructure i.e., roads, water supply, street lighting, drainage
and sewerage.
5. The government may, in view of facts and circumstances of a case permit repatriation
FDI or transfer of stake by one Non-Resident investor to another Non-Resident
investor before the completion of project. These proposals will be considered by FIPB
on case to case basis.
6. The Indian investee company will be permitted to sell only developed plots. (plots
where trunk infrastructure is available).
7. It is clarified that 100% FDI under automatic route is permitted in completed projects
for operations and management of townships, malls/shopping complexes and business
constructions.
8. FDI is not allowed in the real estate business or construction of a farmhouse and
trading in transferable development rights (TDR).
9. 100% FDI is allowed under the automatic route for urban infrastructure areas like
urban transport, water supply, sewerage and sewage treatment subject to relevant
rules and regulations.

FDI Policy for Industrial Parks:

100% FDI is allowed under the automatic route. ‘Industrial Park’ is a project in which quality
infrastructure in the form of plots of developed land or built-up space or a combination with
common facilities is developed and made available to all the allottee units for the purposes of
industrial activity.

 FDI in industrial parks is not subject to the conditionalities applicable for construction
development projects etc., provided the industrial parks meet with the under-mentioned
conditions.

 It should comprise a minimum of 10 units and no single unit should occupy more than 50%
of the allocable area.

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 The minimum percentage of the area to be allocated for industrial activity will not be less
than 66% of the total allocable area.

Therefore, it would imply that any project regardless of size which is under construction can
have access to any amount of FDI. Apart from the above, it has also been clarified that 100%
FDI under automatic route is permitted in completed project for operation and management
activities etc. It has been further clarified that earning of rent / income on lease of the
property will not be regarded as 'Real Estate Business'. Accordingly, FDI would also be
permitted in completed projects where intention is to earn rental income.

The Government had also introduced the concept of Real Estate Investment Trust ("REITs")
in 2014 for attracting retail funding in real estate sector. REITs were given a pass-through
status for the purpose of taxation under the Indian Taxation Laws. However, it is important to
note that REITs are subjected to some minimum thresholds like the value of asset owned by
such entities should not be less than INR 500 crore and the initial offer size of unit is required
to be atleast 250 crore. Since 2016, REITs have been allowed to invest up to 20% of its
investments in under-construction projects, up from a maximum of 10% allowed earlier.

However, despite various steps taken by the Government, the sector has not witnessed revival
so far owing to other macro-economic factors.

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Validity of press notes issued by DIPP in absence of subsequent amendments

The Government of India, through its various organs, releases Press Notes to make
announcements or as a policy document for the information of general public. These press
notes attain validity without undergoing any legislative process. The Department of Industrial
Policy and Promotion (DIPP) is empowered by law to make such policy pronouncements for
Foreign Direct Investment (FDI) Policy through press notes. However, since the FDI Policy
has major economic consequences, it is required that the Reserve Bank of India (RBI)
provides its sanction to the press notes before the suggested changes are incorporated in the
Foreign Exchange Management Act, 1999 (FEMA). Owing to the delays of procedure, RBI’s
sanction may take some time after the release of press notes. This article aims to examine the
legality of press notes without the sanction of RBI and the need for compliance of such press
notes right after they are released by the DIPP.

 DO PRESS NOTES HAVE THE FORCE OF LAW?

The DIPP is constitutionally empowered to make executive policy on FDI as per the
Government of India (Allocation of Business) Rules, 1961 framed by the President of India.

Issuing Press Notes and Policy circulars is a part of the executive action of Union
Government. Article 73 of the Constitution of India states that the executive power of Union
shall extend to the matters with respect to which Parliament has the power to make laws.

In addition, FDI falls under the residuary Entry 97 of the Union List which makes it subject
to executive action. Therefore, the Union Government through DIPP makes policy
pronouncements on FDI through Press Notes/Press Releases/Policy Circulars as an executive
action.

The Supreme Court in Ref. By President4 while examining questions of law with respect to
actions of the Election Commission of India, defined what are the executive powers of the
Union Government saying, “It is the executive that has the main responsibility for
formulating the government policy by “transmitting it into law” whenever necessary. “The
4
Ref. By President, MANU SC 0891 (2002).

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executive function comprises both the determination of the policy as well as carrying it into
execution. This evidently includes the initiation of legislation, the maintenance of order, the
promotion of social and economic welfare, the direction of foreign policy, in fact, the
carrying on or supervision of the general administration of the State”.

In Ram Jawaya Kapur v. State of Punjab 5, the court adjudicated upon a dispute regarding
the validity of executive orders by the State Government and whether the executive requires
the sanction of legislation to exercise its functions. It was observed by the Supreme Court
that,  “However, the Executive can never go against the provisions of the Constitution or of
any law, but it does not follow that in order to enable the executive to function there must be
a law already in existence and that the powers of executive are limited merely to the carrying
out of these laws.”

It has been observed that, unless the policy framed is absolutely capricious, unreasonable &
arbitrary and based on mere assertion without proof of the executive or is unconstitutional or
invalid in the statutory mandate, court’s interference is not called for.

The above has been reiterated recently by the Supreme Court in Manohar Lal Sharma v.
Union of India6. The Petitioner, in this case, challenged the validity of Press Notes 4,5,6,7,8
(2012 Series) allowing FDI in retail in the absence of subsequent amendments by RBI to
FEMA Regulations, 2000. The Petitioner also argued the Press Notes were against provisions
of FEMA Regulations in force.

Thus, it can be concluded from the above stated judicial decisions and constitutional
provisions that the Press Notes/Releases/Clarifications and FDI Policy Circulars released by
DIPP in an exercise of the executive functions have the force of law.

5
Ram Jawaya Kapur v. State of Punjab, AIR 1955 SC 549.
6
Manohar Lal Sharma v. Union of India, MANU SC 0520 (2013).

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EASEMENT OF FDI IN REAL ESTATE: THE AFTERMATH

i. Industry is happy and satisfied with current FDI reforms in construction development sector
On the level of satisfaction a majority of respondents surveyed have rated the recent steps of
the Central Govt. as positive and feel satisfied with the policy development. According to the
survey, about 22% of the respondents are highly satisfied and 56% are satisfied with the
changes made in FDI policy for construction development sector while 22% respondents
have given a neutral rating.

ii. Increased confidence and optimism in industry towards future flow of FDI in real estate
Industry has shown high level of confidence and optimism towards future flow of foreign
capital into realty sector. Almost all (100%) respondents have felt that recent FDI reform
measures will certainly increase flow of FDI into realty sector in coming months. About 55%
of the respondents feel that there will be more than 15% annual increase in FDI flow into
realty sector due to current steps while 23% are of the view that increase will be in the range
of 10-15% and a similar percentage 22% feeling that increase in FDI flow will be less than
10% annually from hereon. (See Figure 1 in appendix)
iii. Commercial & Retail and Residential real estate to significantly gain from FDI reforms
According to the survey analysis, majority of the respondents has opined that in coming
months the commercial & retail sector (Rank 1) will receive maximum foreign capital due to
current FDI liberalization followed by the residential sector including affordable housing
projects (Rank 2). Other segments that stand to gain in order of priority are township projects
(Rank 3), hotels & tourist resorts and old age homes tied at (Rank 4), hospitals (Rank 5) and
special economic zones (SEZs) and educational institutions both tied at (Rank 6). (See Figure
2 in appendix)

iv. A Commercial & Retail and Residential real estate to significantly gain from FDI reforms
path breaking step
Permission to exit and repatriate foreign investment before the completion of project under
automatic route, but with a lock-in-period of 3 years for each tranche and transfer of stake
from one non-resident to another non-resident, without repatriation of investment and without
any lock-in period or any government approval. Almost all (100%) respondents felt that
Government’s decision to allow exit and repatriate foreign investment before the completion
of project under automatic route, but with a lock-in-period of 3 years for each tranche of
investment and transfer of stake from one non-resident to another non-resident, without
repatriation of investment and without any lock-in period or any government approval is a
path breaking step. According to them it is going to cheer foreign investor community and
will have a major impact on attractiveness of Indian Real Estate going forward. FICCI in its
recommendation had also suggested to DIPP that there should be no restriction on non-
resident (NR) to non-resident (NR) transfer as repatriation of FDI was not taking place.

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v. Big boost to Real Estate Investment Trusts (REITs) from 100% FDI under automatic route in
completed projects for operation and management
According to government reports, majority of the respondents (89%) feel that allowing of
100% FDI under automatic route in completed projects for operation and management of
townships, malls/shopping complexes and business centres is a significant step taken by the
Government and will boost the market for REITs. However, rest 11% feel that this policy
change will not be a game changer for REITs in India.
FICCI had suggested to DIPP that FDI investor making investments for operation and
management of completed projects of malls/shopping complexes and business centres should
be entitled to lease such projects. The recent FDI reforms announced has clarified this point.

vi. Scope for further improvements in the FDI regime of India for real estate investments vis-à-
vis other countries; States have to take an active role in attracting FDI7
A major outcome of the survey is that industry feels there is further scope for improvements
in the FDI regime of the country. According to our analysis a majority of about 67%
respondents feel that current FDI regime for real estate in India vis-à-vis other countries is
“average” while only 33% feel that the FDI regime in India for real estate investments is
“good”.

FINDING(s)
7
Shikha Singh, Foreign Direct Investment (Fdi) And Economic Growth Of The States
Of India, SSRN (Oct. 15 2017, 10:00 PM), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1324058.

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The new FDI policy introduced by the Central Government though aimed at easement of FDI
inflow in Real Estate sector but the slowdown of sector could not still be checked effectively.
These also can be attributed to external factor, if not solely the policies involved. The
external factor that can be attributed to this slowdown can be demonetisation and introduction
of new taxation system of GST. However still on the basis of the observations of new FDI
policy of October 2015, certain suggestions are given to further promote FDI inflow in the
real estate sector.
1) Since real estate is a state specifc subject, majority of respondents highlighted that states
should enhance their involvement in attracting foreign investments in real estate and reaping
the benefits of relaxed FDI norms by announcing investor and developer friendly regulations.

2) States should put in place a more efficient approval process system, ensure better governance
through measures such as, single window clearance, time bound clearances; quicker legal
remedies for investors and faster resolution of consumer woes through regulations such as
state real estate regulators etc.

3) Government of India should bring more clarity over the entry and exit norms and processes to
be followed by investors post recent reform announcements.

4) Both Centre and State must work together to ensure removal of bottlenecks for faster
implementation of reform measures for foreign investments in real estate.

5) Government of India could also consider a reduced lock-in-period applicable for FDI
investments from 3 years currently to 1-2 years to further enhance investor interests.

6) To boost market for Real Estate Investment Trusts (REITs), the following two liberalizations
would further enhance the attractiveness for REITs:
 Exemption of the asset SPV from the incidence of Dividend Distribution Tax (DDT)
and
 Exemption from stamp duty incidence at the time of transfer.

CONCLUSION

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The finding points to the fact the developer and investor communities still have some doubts
in their minds when it comes to attracting foreign investments into Indian real estate. The
reason for the “average rating” of FDI regime particularly for real estate sector by majority
could be the past experience of investors with regard to laws and regulations that governed
foreign investments in realty sector. The major challenges faced by investor community in
India has been the long and time-consuming approval procedures for real estate projects, lack
of timely approvals for projects from government authorities and lack of transparency and
legal title to property. It can also be seen that the focus of recent reforms has been more on
rental income for investors. Accordingly, they feel that the investments would come more in
commercial and retail segments and less in other segments and therefore the FDI inflow may
not be substantial. It is amply clear that States will have to play a major role in attracting FDI
into the country.
The decisions governing FDI have been spread over many areas that have to be streamlined
or a practical policy has to be developed. Thus the impact of the reforms in India on the
policy environment for Foreign Direct Investment presents a mixed picture. The industrial
reforms have gone far, though they need to be supplemented by more infrastructure reforms,
which are a critical missing link. But in spite of all odds, in the near future, FDI in real estate
will specifically help the country in removing infrastructure bottlenecks, increasing exports,
providing skilled and trained manpower, removing regional disparity in the states. But
besides central governments, the state governments also have to look into the matter of real
estate’s FDI inflow and have to strive to make conducive environment.

BIBLIOGRAPHY

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 Jaya Gupta, Globalization and Indian Economy: sector –wise analysis of FDI Inflows
in India, The ICFAI Journal of Industrial Economics, vol. IV, no.3, 2007.
 Kulwinder Singh, Foreign Direct Investment in India: A Critical Analysis of FDI
from 1991 – 2005, The ICFAI Journal of Public Finance, Vol. IV, No. 3, 2006.
 Mohd Ashraf Ali and Shahid Alam, FDI in India: An overview, Investment Climate,
ICFAI, 2008.
 Nirupam Bajpai and Jeffrey D. Sachs, Foreign Direct investment in India – I, The
Hindu,2000
 Ronald J.Abraham and Shreyasi Bhaumik,”Attracting FDI”,India Seminar,2007,
http://www.india-seminar.com/2006/562/562-rj-abraham_s-bhaumik.htm
 Rajarshi Ghosh, Foreign Direct Investment policies and experiences, ICFAI
University press,2005
 S Rameshkumar and V Alagappan, Foreign Direct Investment in India During the
Post – Liberalization Period, ICFAI University Press, 2008
 http://www.banknetindia.com/banking/eco07b.htm
 http://indiabudget.nic.in
 http://business.gov.in/indian_economy/capital_inflows.php
 http://business.mapsofindia.com/
 www.planningcommission.nic.in
 www.makeinindia.com
 www.dipp.nic.in
 www.scconline.com
 www.manupatra.com

APPENDIX

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 FIGURE 1

 FIGURE 2

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