Confusion prevails over what constitutes real estate business under FDI Policy

Confusion prevails over what constitutes real estate business under FDI Policy

Bar & Bench

Trisheet Chatterjee of J. Sagar Associates discusses the confusion that prevails over what constitutes ‘real estate business’ under the revised Consolidated FDI Policy.

The reluctance or inability of the Government to have a clear and comprehensive definition of ‘real estate business’ in the revised Consolidated FDI Policy that has been made effective from April 1, 2011 (the “FDI Policy”), is beyond comprehension. Currently, the FDI Policy prohibits foreign direct investment (“FDI”) in ‘real estate business’. However, FDI up to 100 percent is allowed under the automatic route that is without any prior approval of the Government in development of townships, housing, built-up infrastructure and construction development projects which also include commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure. FDI is allowed in the aforesaid development activities on fulfilment of certain prescribed conditions that includes but not limited to development of minimum area and minimum capitalisation of the Indian entity to be engaged in such activities.

The only “words of wisdom” provided by the Government in the FDI Policy explaining what is ‘real estate business’ state as follows – “dealing in land and immovable property with a view to earning profit or earning income there from”, which is as vague as it can be. This has resulted in defeating the objective of the Government to have a policy framework which is transparent, clear, investor friendly and free from regulatory burden.

Interested sections of the public that include industry players, advisors, consultants, brokers and valuers have been kept waiting by the Government in anticipation that someday the Government will come up with a clear, comprehensive and unequivocal definition of ‘real estate business’ in the subsequent revisions of the policy.

In the early part of this year, prior to the issue of the FDI Policy, it was heard that the Government proposes to introduce a wider definition of ‘real estate business’, which will include consultancy or advisory services relating to any kind of property issues and will also bring consultants, advisors, agents and brokers dealing with any aspect of immovable property within its ambit. The proposed inclusion of the above in a wider definition is a completely different debate and merits a separate discussion. However, the issue remains that no such wider definition or for that matter any definition of ‘real estate business’ was included by the Government in the FDI Policy.

The lack of clarity in the FDI Policy in respect of this issue has created apprehension in the minds of foreign investors and interested parties leading to filing of clarifications with the Foreign Investment Promotion Board (“FIPB”), the Government body that deals with clearance of proposals on FDI. Hence, substantial time, energy and resources are being spent by the foreign investors and interested parties to file such clarifications. Additionally, the lack of clear provisions relating to what is ‘real estate business’ under the FDI Policy acts as a hindrance to foreign investors proposing to invest in this sector thereby resulting in less inflow of foreign investment amount in a sector which is always in need of funds. In a country like India with an ever increasing population pressure, constant development and expansion of the real estate sector can hardly be over emphasised and it should be the constant effort of the Government to ensure that adequate funds are available for the sector.

It is high time that the Government wakes up and ensures to incorporate relevant provisions in the next edition of the policy so that the much needed clarity in respect of what is ‘real estate business’ is understood.

Trisheet Chatterjee is a Partner at J. Sagar Associates, Advocates & Solicitors. His practice area covers Corporate Commercial Laws with special focus on M&A, Joint Ventures and Foreign Investments.

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