1. Issues under FEMA Act for Real Estate Presented by CA Natwar G. Thakrar April 27, 2013 BARODA BRANCH of the WIRC of The Institute of Chartered Accountants of India &CREDAI 1

2. AGENDA Introduction Meaning of NRI/PIO Investment (other than FDI) by NRI/PIO and a Branch of a Foreign Company, Transfer & Repatriation of Sale Proceeds Investment abroad in Real Estate by Individuals/ Companies FDI in Real Estate (including by NRI/PIOs) Investment abroad in Real Estate Developments by Person Resident in India Q&A 2April 27, 2013

3. Introduction Regulation of Acquisition & Transfer of Immovable Properties – – For Properties in India- S. 6(3)(i) of FEMA Act alongwith FDI Policy of the Government of India / Notification No. 20 of FEMA in respect of Construction - Development Projects in India Notification No. 21 in respect of purchase by NRIs/ POIs in India except for a lease not exceeding 5 years – For Properties abroad – S. 6(3(h) of FEMA Act alongwith Notification No. 7 in respect of purchase of Immovable Property abroad by Indian Residents except for a lease not exceeding 5 years Notification No. 120 in respect of Investments in immovable property abroad by an Indian company Unlike FERA, the thrust is on residential status of a person determined under Section 2(v) of FEMA and not on citizenship of a person subject to – The person concerned would have to obtain the approvals and fulfil the requirements, if any, prescribed by other authorities, such as, the State Government concerned, etc. The onus to prove his/her residential status is on the individual as per the extant FEMA provisions, if required by any authority. – General restrictions on citizens of eight countries (viz. citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan) irrespective of their residential status and – Restriction on buying agricultural land / plantation property / farm house. 3April 27, 2013

4. How do I interpret these provisions?? Meaning of NRI/ PIO/Person Resident in India 4April 27, 2013

5. 5 Non Resident Indian (NRI) The term NRI has not been defined in FEMA, 1999. Section 2(w) defines a “person resident outside India” as a person who is not resident in India. The term “NRI” has different meanings under different Notifications, e.g.- – Under Notification No. 13- Remittance of Assets- An “NRI” is defined to mean a person residing outside India, who is a citizen of India. – Under Notification No. 5 – Deposits - “An “NRI” is defined as a person resident outside India who is a citizen of India or is a Person of Indian Origin (PIO)” Therefore, meaning of NRI could change due to different PIO definitions under various Notifications issued by the RBI For the purpose of Immovable property, meaning given under Notification 13 shall be relevant as NRI does not include PIO. It is possible that a person may be an NRI under FEMA, yet may be a resident of India under Income tax laws. April 27, 2013

6. 6 Person of Indian Origin (PIO) The term PIO is also not defined in FEMA, 1999 but it is defined differently under several Notifications and hence the meaning of PIO is contextual The relevant definition of “PIO” for investment in Immovable Property is given in Regulation 2(c) of the Notification 21 to mean an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan) who - – at anytime he has held an Indian passport; or – he or either of his parents or grand parents was a citizen of India by virtue of Constitution of India or the Citizenship Act 1955; or April 27, 2013

7. 7 Definition of PIO- Notification 5 Vs. 21 PIO Who is citizen of India Whose spouse is a citizen of India Who held Indian Passport at any time Whose father, grand father, mother or grand mother was citizen of India Whose spouse held Indian Passport or whose spouse’s parents or grand parents were citizen of India Scope of PIO defined under Notification – 5 is wide. The scope of PIO is restricted under Notification – 21 and also excludes citizens of 8 neighboring countries April 27, 2013

8. 8 Person Resident in India Defined under Section 2(v) of FEMA : A person (being an individual) residing in India for more than 182 days during the course of the preceding financial year but does not include:— (A)A person who has gone out of India or who stays outside India, in either case— (a)for or on taking up employment outside India, or (b)for carrying on outside India a business or vocation outside India, or (c)for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; [RBI Clarification on Residential Status of Students Abroad- Refer AP 45 dated 8.12.2003] (B)A person who has come to or stays in India, in either case, otherwise than— (a)for or on taking up employment in India, or (b)for carrying on in India a business or vocation in India, or (c)for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; For Acquisition of Immovable Property, RBI considers stay of 182 days in India during preceding financial year as essential requirement before examination of other conditions under S. 2(v)(B) April 27, 2013

9. 9 Individual leaving India: Conditions for residence Mr. X leaves India on 1st January 2013 for taking up employment outside India for the first time. What will be his residential status? Can he acquire agricultural land in India before 30 th June, 2013? -------------------------- Mr. X will be considered a non-resident, w.e.f. 1st January, 2013 irrespective of the fact that he was residing in India for more than 182 days in the preceding financial year 2011-2012 in view of Exception (A) (a) of the definition. Therefore, Mr. X will not be eligible to purchase agricultural land in India. April 27, 2013

10. 10 Individual coming to India: Conditions for residence Mr. Y, staying in Dubai for past several years came to India on 1st May 2012 for medical treatment. He has not visited India during F.Y. 2011-2012. He is planning to return to Dubai after medical treatment. Doctors have advised him to stay in India up to 31st October 2013. What will be his residential status under FEMA for the financial years 2012- 2013 & 2013-2014? ---------------------------------- Notwithstanding his stay exceeding 182 days in India during the current year, Mr. Y was not present in India for 183 days or more during the preceding financial year 2011-2012. Hence he continues to be a non-resident during the financial year 2012-2013. His situation is also covered by Exception B(b) of the definition. His situation for financial year 2013-2014 is covered by Exception B(b) of the definition since Mr. Y’s stay in India will be for a specific purpose and not for uncertain period. Hence he will continue to be a non- resident during the financial year 2013-2014 as well. April 27, 2013

11. 11 Mr. Mark, a foreign citizen of non-Indian origin comes to India for the first time and sets up a proprietary concern in India on 1st November 2012 for carrying on business. What will be his residential status for the financial year 2012-2013?. Can he acquire Immovable property in India during Financial year 2013-2014? ----------------------- Mr. Mark will be considered resident in India, w.e.f. 1st November, 2012 as he came to India for carrying on business, irrespective of the fact that he had not at all stayed in India during the preceding financial year 2011 - 2012. His situation is covered by Exception B(c) of the definition. However, since he was not in India for a period of 182 days during the preceding financial year 2012-2013, he will not be entitled to acquire immovable property during Financial Year 2013-2014. Individual coming to India: Conditions for residence April 27, 2013

12. Investment in Real Estate in India (other than FDI) by NRIs/PIOs/ Branch Offices 12 April 27, 2013

13. Acquisition through Purchase General permission to purchase immovable property in India by: – Non-Resident Indian (NRI) – Person of Indian Origin (PIO) General permission covers only purchase of residential and commercial property – Not available for purchase of agricultural land / plantation property / farm house in India. 13April 27, 2013

14. Acquisition through Gift NRIs and PIOs can freely acquire immovable property by way of gift either from – – a person resident in India; or – an NRI; or – a PIO. However, the property can only be commercial or residential in nature. Agricultural land / plantation property / farm house in India cannot be acquired by way of gift. A foreign national of non-Indian origin resident outside India cannot acquire any immovable property in India by way of gift. 14April 27, 2013

15. Acquisition through Inheritance NRI / PIO / Foreign national of non-Indian origin can inherit and hold immovable property in India from a person who was resident in India. However, a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan should seek prior approval of the Reserve Bank for inheriting immovable property in India. NRI /PIO /Foreign national of non-Indian origin can inherit immovable property from (a) a person resident in India (b) a person resident outside India However, the person from whom the property is inherited should have acquired the same in accordance with the foreign exchange law in force or FEMA regulations, applicable at the time of acquisition of the property. 15April 27, 2013

16. Transfer of immovable property by NRI/ PIO/ Foreign nationals NRI can sell property in India to – a person resident in India; or – an NRI; or – a PIO. PIO can sell property in India to – a person resident in India; or – an NRI; or – a PIO – with the prior approval of the RBI Foreign national of non-Indian origin including a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan can sell property in India with prior approval of the Reserve Bank to – a person resident in India – an NRI – a PIO 16April 27, 2013

17. Transfer of immovable property by NRI/ PIO/ Foreign nationals through Gift NRI / PIO can gift residential / commercial property to – – person resident in India or – an NRI or – PIO. A foreign national of non-Indian origin requires the prior approval of the RBI for gifting the residential / commercial property. NRI / PIO can gift an agricultural land / a plantation property / a farm house in India only to a person resident in India who is a citizen of India. A foreign national of non-Indian origin would require the prior approval of the Reserve Bank to gift an agricultural land / a plantation property / a farm house in India. 17April 27, 2013

18. Mode of Payments Payment by NRI / PIO for Immovable Property: (a) funds remitted to India through normal banking channels or (b) funds held in NRE / FCNR (B) / NRO account maintained in India No payment can be made either by traveller’s cheque or by foreign currency notes or by other mode except those specifically mentioned above. Repatriation of application money for booking of flat / payment made to the builder by NRI/ PIO when the flat or plot is not allotted or the booking / contract is cancelled NRIs / PIOs are allowed to credit refund of application/ earnest money/ purchase consideration on account of non-allotment / cancellation of bookings for purchase of residential/commercial property, together with interest, if any, net of income tax payable thereon, to NRE/FCNR account if originally paid out of NRE/FCNR account / Remittance from outside India provided AD is satisfied about the genuineness of the transaction. 18April 27, 2013

19. Other Aspects Renting of residential / commercial property purchased out of foreign exchange / rupee funds NRI/PIO can rent out the property without the approval of the RBI. The rent received can be credited to NRO account / NRE account or remitted abroad based on an appropriate certification by a Chartered Accountant subject to payment/ provision of applicable taxes. Holding of immovable property bought immovable when a resident after becoming an NRI/PIO A person who had bought the residential / commercial property / agricultural land/ plantation property / farm house in India when he was a resident, can continue to hold the immovable property without RBI approval even after becoming an NRI/PIO. However, agricultural/ plantation activities can not be undertaken. 19April 27, 2013

20. Acquisition by a Foreign Company General permission to purchase immovable property in India by Branch or Office or other Place of Business (excluding a liaison Office) approved by RBI under Notification No. 22 which is necessary or incidental to carrying on the approved activity provided- – All applicable laws, rules, regulations or directions for the time being in force are duly complied with; and – It files a declaration in the form IPI within ninety days from the date of such acquisition with RBI. 20April 27, 2013

21. Investment in Real Estate by NRIs/PIOs (Other than FDI under Notification No. 21) RegNRIsRegPIOsRegOthers Acquire5Branch In accordance with applicable law Remittances from abroad Form IPI has to be filed with RBI within 90 days Diplomatic offices of Foreign Government Remittances from abroad Approval from Ministry of External Affairs Repatriation Allowed Agricultural Land, Plantation, Farm House 3(a)No except Inheritance from PROI/PRII. Restriction on use/ repatriation possible 4(c)No except Inheritance from PROI/PRII Restriction on use/ repatriation possible Other Property3(a)Yes4(a) 4(c) 4(b) Purchase Inheritance of property acquired in accordance with FEMA* Gift from NRIs, PIOs & PRII 5(a) Transfer Agricultural Land3(b)Sale or Gift to PRII only4(e)Sale & gift to PRII who is Citizen of India Other PropertyGift, Sale or inheritance to NRIs, PIOs & PRII 4(d) 4(f) Sale to PRII Gift to NRIs, PIOs & PRII Sale to PIO - with prior RBI approval Repatriation 6(a) &(b) Up to Original Investment in FC and for Residential Property- maximum for 2 houses Balance under US $ 1 Million Scheme Up to Original Investment in FC and for Residential Property- maximum for 2 houses Balance under US $ 1 Million Scheme 21 Including foreign nationals excluding citizens of 8 neighboring countries – RBI FAQ-10 April 27, 2013

22. Investment abroad in Immovable Property by Individuals & Companies 22April 27, 2013

23. Immovable Property abroad by Individuals An Indian citizen resident in India cannot acquire or transfer immovable property outside India without RBI approval except – out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with FEMA – under US $ 200,000 Scheme. Payments can be made in installments. However, no loan can be taken. Foreign citizens who are Indian residents, are free from any restrictions regarding immovable property transactions outside India. Acquiring property on lease up to 5 years is freely permitted. An Indian resident can acquire property: – as gift or inheritance from Returning Indian. He can not acquire by way of gift from other persons. – by purchase out of RFC account funds, or out foreign funds acquired as a NR. An Indian resident can transfer the above property as gift to his relative who is also an Indian resident. Relative means - Spouse, brother or sister, lineal ascendant or descendant. 23April 27, 2013

24. Immovable Property abroad by Companies Within the limits of remittance for overseas branches, an Indian company can acquire: - immovable property for its business. - residence of its staff. 24April 27, 2013

25. FDI in Real Estate Development 25April 27, 2013

26. Entry Routes & Compliances Automatic RoutePrior Permission FDI in India General rule Inform RBI within 30 days of inflow in Annex (Advance Reporting & KYC) Issue shares within 180 days of inward remittance and file FC-GPR within one month thereafter Pricing: FEMA Regulations Unlisted – DCF Valuation except initial investment through Subscription of A&MA) Listed – As per SEBI Guidelines File Annual Return of Foreign Liabilities & Assets by 31 st July every year By exception Approval of Foreign Investment Promotion Board (FIPB) needed. Subsequent procedures are same as under Automatic route 26April 27, 2013

27. Relevant Statutory Regulations Consolidated FDI Policy: – Latest FDI Policy - DIPP Circular No. 1 dated April 5, 2013. RBI Notifications / Circulars: – Notification No. 20 - Schedule 1- Annexure B – Updated from time to time in accordance with the FDI Policy of the Government of India – AP. Dir Circulars issued from time to time – Master Circular issued in July every year. 27April 27, 2013

28. General Restrictions Investors who require prior FIPB approval: – Citizen of Pakistan/Entities incorporated in Pakistan can invest (excluding defence, space & atomic energy and other sectors/ activities prohibited for foreign investment) only with prior FIPB approval subject to sectoral caps. – Citizen of Bangladesh/Entities incorporated in Bangladesh can invest in all the sectors where FDI is permitted upon prior FIPB approval subject to sectoral caps. Activities Prohibited: – Real Estate Business (RBI Master Circular 2012) “real estate business” means dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. – Construction of Farm Houses – Trading in Transfer Development Rights (TDRs) 28April 27, 2013

29. Entities in which FDI can be made FDI in an Indian Company: – General FDI Guidelines - discussed separately – Certain Relaxations in FDI policy (including Investments by NRIs/PIOs) – discussed separately FDI in Partnership Firm / Proprietary Concern: – NRIs/ PIOs can invest under automatic route. Others will require prior RBI approval – The firm or proprietary concern with FDI cannot engage in agricultural/plantation activities or real estate business or print media sector – Original investment on repatriation basis is possible only with the prior RBI approval – Current Income freely repatriable after payment of taxes FDI in Limited Liability Partnerships (LLPs): – Permissible with prior FIPB approval in sectors where 100% FDI is permitted and no performance related conditions are attached – Therefore, FDI in LLP in Real Estate Sector is not permissible (Except by NRIs/ PIOs as they are not affected by performance related conditions). 29April 27, 2013

30. Entities in which FDI can be made (Contd..) FDI in Venture Capital Fund (VCF): – Investments subject to General FDI policy. – If the domestic VCF is set up as a trust, investment requires prior FIPB approval – A SEBI registered Foreign Venture Capital Investor (FVCI) can make 100% investment in - Indian Venture Capital Undertaking (IVCU) and also set up a domestic AMC to manage the fund. Domestic Venture Capital Fund (VCF) registered under the SEBI (Venture Capital Fund) Regulations, 1996 – SEBI registered FVCIs can invest under the FDI Scheme, as non-resident entities, subject to FDI Policy and FEMA regulations. FDI in Trusts: – FDI in Trusts other than VCF is not permitted 30April 27, 2013

31. Types of Projects Included Township, Housing & Built-Up Infrastructure and Construction Development Projects To include projects such as Housing, Commercial Premises, Hotels, Resorts, Hospitals, Educational Institutions, Recreation Facilities & City and Regional Level Infrastructure. Objects – Generate economic activity – Create New Employment Opportunities – Add to the available Housing Stock and Built-up Infrastructure 31April 27, 2013

32. Mandatory Guidelines Minimum Area: – In case of Development of Serviced Housing Plots- Minimum of 10 Hectares of Land – In case of Construction-Development Projects- Minimum built- up Area of 50,000 sq. mts – In case of a combination project, compliance with any one of these condition would suffice Minimum Capitalization: – For WOS  US $ 10 million – For JV with a resident in India  US $ 5 million – Funds (USD 10/5 Million as the case may be) should be brought in within 6 Months of the commencement of the business 32April 27, 2013

33. Project Development/ Repatriation / Exit Policy Project Development: – At least 50% of each of the project must be developed within a period of 5 years from the date of obtaining statutory clearances – Investor is not allowed to sell undeveloped plots “Undeveloped plots” will mean where roads, water supply, street lighting, drainage, sewerage, and other conveniences, as applicable under the prescribed regulations, have not been made available. Investor is required to provide stipulated infrastructure and obtain completion certificate from the concerned local body/service agency before he is allowed to dispose of these serviced housing plots. Repatriation / Exit Policy: – Original Investment [entire amount brought in as FDI] can not be repatriated before a period of 3 years from the date of completion of minimum capitalization. Earlier exit permitted only with Prior FIPB approval – The lock-in period will apply from the date of receipt of each installment / tranche of FDI or from the date of completion of minimum capitalization, whichever is later 33April 27, 2013

34. Other Conditions The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities, as laid down in the local building control regulations, bye- laws, rules and regulations. It will be the responsibility of the investor & investee company to- – Obtain all the approvals (including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities) – Pay development, external development and other charges – Comply with all other requirements prescribed under rules/bye- laws/regulations of the State Government/ Municipal/Local Body concerned. The State Government/ Municipal/ Local Body concerned, which approves the building / development plans also required to monitor compliance of these conditions by the developer. 34April 27, 2013

35. Relaxations in FDI Conditions Types of FDI Projects/ Investors entitled for relaxations – FDI in Hotels & Tourism – Hospitals – Special Economic Zones (SEZs), – Education Sector – Old age Homes – Investment by NRIs/ PIOs Relaxation in respect of 4 conditions relating to - – Minimum Area – Minimum capitalisation & 6 Months Capitalization Period – 50% Project development within 5 years, and – Lock in period on repatriation of initial investment 35April 27, 2013

36. FDI in Real Estate Development 36 Certain critical Issues April 27, 2013

37. Meaning of Township, Housing, Built up Infrastructure, Construction – Development Projects Townships – – In Maharashtra- Area specified under Bombay Tenancy and Agricultural Land Act, 1948 – In Other States – Area Notified under regional town planning acts of the respective states Housing Built up Infrastructure & Construction-Development projects. Can company give land to a builder under development agreement where consideration is received in terms of certain constructed areas? Whether FDI guidelines relating to real estate is applicable to Road, Ports, Bridges, etc? – Annexure A- Notification No. 20 – Earlier Separate entry No. 12 permits 100 % FDI in Roads and Highways, Ports & Harbors. 37April 27, 2013

38. Meaning? -T he Plinth area – Length x Breadth x Floors? -Area up to outer wall of the premises? -Carpet area? Will it include Balconies, Parking space and Open areas? DIPP – Area as certified as salable by local authorities. 38April 27, 2013 Built Up Area

39. Joint Venture/ Project Development JV at what level – Company or Project Level? Project? – FIPB view - Greenfield project at the early stage of implementation Commencement of business? – Date of signing of property purchase agreement /Shareholders Agreement 50% Project Development? – Should this mean 50% of the constructed area should be ready with occupation certificate? – Depends upon local laws All statutory approvals? - – Completion certificate/ Occupation Certificate/ Part- occupation certificate? 39April 27, 2013

40. Minimum Capitalization & Lock-in Minimum amount – Face value or total investment (including share premium)? Lock-in starts when? Lock-in – will it apply to the entire investment brought in as FDI or to minimum capitalization amount? – Entire amount brought in as FDI – Tranche by trench lock-in – Staggered Lock-in Subsequent projects – Lock in? – Further investment? 40April 27, 2013

41. Purchase/ Sale of shares Can NR purchase shares from a resident / another non- resident in FDI Compliant project? NR to NR transfer- does this amount to repatriation? – Two main conditions to be fulfilled for exit: Lock-in period of 3 years. 50% project completion within 5 years of obtaining statutory clearances. 41April 27, 2013

42. Other issues Can a Company receive FDI in when - – It has both FDI compliant and FDI non-compliant projects? – It has FDI compliant real estate project along with other FDI permitted business? Is it necessary to sale premises before exit? – The condition is “development” and not “sale”. Purchase of Agricultural Land for Real estate development? Depends upon State Policy In Maharashtra- Possible if approved under S. 63(1)(a) of Bombay Tenancy and Agricultural Land Act, 1948 Construct and lease – is it permitted? Can builder offer a minimum return to the non-resident investor? Call and Put options? 42April 27, 2013

43. Investment in Real Estate Development Projects abroad 43April 27, 2013

44. Outbound Investment in Real Estate Development Projects Investment in foreign entities involved in real estate business is prohibited – Notification No. 120- Regulation 5(2). – "Real estate business" means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges - Regulation 2(p) Investment in foreign entities doing development of townships, construction of residential/commercial premises, roads or bridges - – Individuals under US $ 200,000 Scheme ? – Others can invest up to 400% of their Net worth – Mode of Funding - Under Regulation 4 of the Notification No. 120 - from RFC Account or out of funds held outside India by persons not permanently resident in India Drawal of Foreign Exchange permissible under Regulation 6 -Notification No. 120 44April 27, 2013

45. Outbound Investment in Real Estate Development Projects Drawal of Foreign Exchange – Total permissible Financial Commitment - Up to 400% the Net Worth of the Indian Party. – To include remittances from India, ECB, Capitalization of Exports and 100% of Guarantees Other Conditions – Foreign entity to carry on bonafide business activities only – Investor is not on RBI’s Caution List/ investigation by ED. – Investor submits request in Form ODI to the AD and remits the fund only after obtaining UIN – Investor to route all remittances though a designated branch of an AD. – Investor to file Annual Performance Report (APR) – Investor to submit Annual Return of Foreign Liabilities and Assets by 31 st July every year 45April 27, 2013

46. Thank You N. G. Thakrar & Co Chartered Accountants 4, Big Three Building, 1 st Floor, 88, Anandilal Poddar Marg, Mumbai- 400 002 Tel: 2201 8184/ 2207 9094 Mobile: 98210-21841 Email: natwarthakrar@gmail.comnatwarthakrar@gmail.com 46April 27, 2013