INDIA (DOMESTIC FIRMS): An Introduction to Real Estate: Bengaluru-based

Introduction to Real Estate 

India is a country with a federal structure (it is governed by both a State and a Union or Centre). According to the Constitutional scheme, immovable property falls under the List III of the seventh schedule: that is, matters under which both the State and the Union can legislate on.

The primary legislation that deals with immovable property is the Transfer of Property Act, 1882. This Act applies across India and deals with the inter-vivos transfer of immovable property. The Act deals with transfer of both movable and immovable property. With respect to immovable property, it includes transfer by way of sale, lease, mortgage, kinds of mortgage, exchange, gift or actionable claims.

The Transfer of Property Act, 1882 read with the Registration Act, 1908, mandates the registration of certain instruments related to immovable property including gift, sale, lease (provided it is for more than one year), mortgage deeds, etc, having a value of more than Rs.100.

Some of the other regulations applicable to the real estate sector include the Indian Stamp Act, 1899, the Succession laws of various religious communities and various state specific legislations, which deal with agricultural lands and limitation on holdings.

The key legislative changes in the recent past are highlighted below:

1. Right to Fair Compensation and Transparency of Land Acquisition, Rehabilitation and Resettlement Act, 2013

This act stipulates a fair compensation mechanism to those whose land is acquired by the Government for projects pertaining to infrastructure, sports, health, tourism, industrial corridors, etc. Apart from monetary compensation, it includes the provision to provide for employment, allotment of alternative housing units, substitute land and other entitlements.

2. The Real Estate (Development and Regulation) Act, 2016

The Union legislature enacted the Real Estate (Development and Regulation) Act, 2016 (“RERA Act”) in March 2016, with a view to streamline the interests of the builders (“Promoters”) and homebuyers ( “Allottees”).

The Act has brought about major changes into the real estate regulatory regime of India. Registration of each project under the Act is now a prerequisite to sell units in flats and commercial spaces. The Promoters must submit details regarding past performance, proforma of agreement to sale, conveyance deed, etc, along with declarations to set timelines for the completion of project.

The Act establishes a Real Estate Regulation Authority (“RERA”) and Real Estate Appellate Tribunal at the state level, for speedy adjudication of disputes within the real estate domain.

The Act has truly provided a level playing field for both, the Promoters and Allottees, by giving a better bargaining power to the Allottees. 

3. Insolvency and Bankruptcy Code, 2016

In the year 2016, the Government of India enacted the Insolvency and Bankruptcy Code (“IBC”), aimed at resolution and realising value from sick industries.

IBC, in matters of real estate has a concurring jurisdiction with the Real Estate Regulatory Authority. IBC categorised the allottees of real estate as financial creditors, which enables either a group of 100 allottees or 10% of the total number of allottees to institute corporate insolvency resolution process against defaulting promoters of a real estate project, thereby finding representation in the committee of creditors.

Notably, the relief to allottees under IBC is in addition to the relief mechanism under the RERA Act, which allows the homebuyers refund of amount in case of delay in construction or discontinuance of project.

4. Foreign Direct Investment (“FDI”),

FDI in the Construction Development Sector amounted to roughly 4.97% of India’s total FDI inflows. The Consolidated FDI policy, 2020, provides for investment by persons resident outside India in the Construction Development sector which includes inter alia the development of townships, residential and/or commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, etc.

FDI in Townships, Housing, Built-up infrastructure, and Construction Development Projects

The Consolidated FDI Policy of 2020 permits 100% equity investment without any cap in Construction Development Projects. The policy liberalised the conditions relating to minimum capitalisation and minimum land area, however, and stipulates other conditions pertaining to the exit of foreign investors.

An investor shall be permitted to exit, as follows:

(a) Upon completion of the project or after development of trunk infrastructure such as roads, water supply, etc, provided that each phase of the construction development project shall be considered a separate project.

(b) Before the completion of a project provided that such investor completes a three-year lock-in period for each tranche of foreign investment.

(c) A foreign investor may transfer stake owned in a project to another foreign investor, without repatriation of foreign investment; without obtaining any government approval or completion of the lock-in period.

Additionally, FDI in sub-sectors of Construction Development such as Hotels and Tourism, Hospitals, Special Economic Zones, Educational Institutions, Old Age Homes shall not be subject to the exit conditions as mentioned above.

FDI in Industrial Parks

The Consolidated FDI Policy of 2020 permits 100% FDI in Industrial Parks subject to certain conditions. “Industrial Park” means a project in which quality infrastructure in the form of plots of developed land or built-up space or a combination with common facilities, developed and made available for the purposes of industrial activity.

Per FDI 2020, an Industrial Park shall mean:

(a) A minimum of ten units and no single unit shall occupy greater than 50% of the total allocable area of the said park.

(b) The minimum percentage of area allocable for industrial activity should not be less than 66% of the total allocable area of the said park.

FDI Investment Options

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”), permits a non-resident Investor to invest in equity instruments issued by an Indian Company. Equity instruments include equity shares, compulsorily convertible debentures, compulsorily convertible preference shares and share warrants.

The Foreign Exchange Management (Debt Instrument) Regulations permits a Foreign Portfolio Investor (“FPI”) to purchase securities other that equity instruments such as non-convertible debentures or bonds issued by an Indian Company.

5. Real Estate Investment Trusts and Infrastructure Investment Trusts

In 2014, the Securities and Exchange Board of India (“SEBI”) recognised Real Estate Investment Trusts (“REIT”) and Infrastructure Investment Trusts (“InvIT”) to enable investors to invest directly in real estate as well as infrastructure projects. A REIT is a company that owns, operates or finances income generating real estate. Similarly, an InvIT is an entity which enables direct investment of small amounts of money from possible individual and/or institutional investors to invest in infrastructure projects. FDI is permitted in REIT’s and InvITs.

6. The Information Technology Act, 2000 (“Act”), gives validity to the e-signatures and electronic execution of agreements and contracts. Schedule 1 of the Act lays down various transactions and documents not governed by the Act. A contract relating to sale of immovable property or any interest in such property was a document listed in the said schedule.

The Central Government on 26 September 2022 amended Schedule 1 of the Act to omit the contract for sale of immoveable property or creation of interest in such property from the list of transactions or documents to which the Act does not apply.