INDIA: An Introduction to Real Estate: Bengaluru-based
India is a country with a federal structure meaning it is governed at both a state-level and national level. According to the Constitution, immovable property falls under List III of the seventh schedule, meaning it can be legislated on both a state-level and a national level.
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 vivostransfer of immovable property. The Act deals with the 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 actional claims.
The Transfer of Property Act, 1882 when read with the Registration Act, 1908, mandates the registration of certain instruments related to immovable property including gifts, sales, leases (provided it is for more than one year) and mortgage deeds,., worth more than INR100.
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 legislation, which deal with agricultural lands and limitations on holdings.
Recent key legislative changes are highlighted below.
Right to Fair Compensation and Transparency of Land Acquisition, Rehabilitation and Resettlement Act, 2013
This Act stipulates a fair compensation mechanism for 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.
The Real Estate (Development and Regulation) Act, 2016 (RERA)
The Union legislature enacted the RERA Act in March 2016, with a view to streamlining the interests of builders (Promoters) and homebuyers (Allottees).
The Act has brought about major changes to 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. 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 the 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 arena.
The Act has provided a truly level playing field for both Promoters and Allottees, by giving better bargaining power to Allottees.
Insolvency and Bankruptcy Code, 2016 (IBC)
In 2016, the Indian government enacted the IBC to resolve and realise value from sick industries.
The IBC in matters of real estate has concurring jurisdiction with the Real Estate Regulatory Authority. It categorises 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 processes 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 a refund of the amount in case of delay in construction or discontinuance of a project.
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 of 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, 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, it stipulates other conditions pertaining to the exit of foreign investors.
An investor will be permitted to exit, as follows:
- 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 will be considered a separate project.
- Before the completion of a project provided that the investor completes a three-year lock-in-period for each tranche of foreign investment.
- A foreign investor may transfer a 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 subsectors of construction development such as hotels and tourism, hospitals, special economic zones, educational institutions and old age homes will not be subject to the exit conditions as mentioned above.
FDI in industrial parks
The Consolidated FDI Policy, 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 is developed and made available for the purposes of industrial activity.
Under the Consolidated FDI Policy, 2020, an Industrial Park will mean:
- A minimum of 10 units and no single unit will occupy more than 50% of the total allocable area of the said park.
- 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), permit 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 permit a Foreign Portfolio Investor (FPI) to purchase securities other than equity instruments such as non-convertible debentures or bonds issued by an Indian company.
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
In 2014, the Securities and Exchange Board of India (SEBI) recognised REITs and InvITs 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 that enables direct investment of small amounts of money from possible individual and/or institutional investors to invest in infrastructure projects. FDI is permitted in REITs and InvITs.
Small and Medium Real Estate Investment Trusts (SM REITs)
In March 2024, SEBI recognised SM REITs to enable smaller investors to invest in the real estate market. Unlike traditional REITs which require a minimum asset offer size of at least INR5 billion. SM REITs offer a more affordable range with the asset offer size being between INR5 and INR5 billion. While REITs primarily cater towards larger investors, SM REITs are tailored to encourage the inclusion of smaller investors with the minimum subscription amount for a unit, set at ten lakhs.
Insolvency and Bankruptcy Board of India (IBBI) – Discussion Paper on Real Estate Issues
Stress in the real estate market constitutes a significant portion of loans outstanding to lenders, making insolvency resolutions a critical legal framework to be resolved, particularly as it interacts with RERA. Recent amendments in the IBC include allottees of real estate projects being treated as financial creditors and representatives of allottees to form part of the committee of creditors. The IBBI also plans further amendments to enable associations of allottees to act as resolution applicants to take over real estate projects.
About the firm:
