FEMA ISSUES IN REAL ESTATE INVESTMENTS Legal & Regulatory Issues

1. FEMA ISSUES IN REAL ESTATE INVESTMENTS Legal & Regulatory Issues By: Ruchir Sinha NISHITH DESAI ASSOCIATES Legal and Tax Counseling Worldwide Mumbai | Bangalore | Silicon Valley | Singapore

2. Regulatory Framework • The Regulators • Reserve Bank of India (RBI) • Department of Industrial Policy and Promotion (DIPP) • Foreign Investment Promotion Board (FIPB) • Cabinet Committee on Economic Affairs (CCEA) • The Regulations • Foreign Exchange Management Act, 1999 • Foreign Exchange Management (Transfer and Issue of Securities to persons Resident Outside India) Regulations, 2000 • Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000 • Press Notes issued by DIPP • Now, the Consolidated FDI Policy, 2010

3. Foreign Investment in immovable property Foreign Co. • Non residents may acquire an interest in immovable property in India through an Indian entity holding the immoveable property by acquiring an interest in such entity. • Foreign investment in a partnership, trust or a sole proprietorship is not permitted without prior approval of the RBI. Real Estate Co. Real Estate Project

4. Investment Regimes • FDI • Purchase or subscription of equity / instruments compulsorily convertible to equity • Press Note 2 of 2005: Project level restrictions and entity level restrictions • Pricing Restrictions • Minimum floor price and maximum ceiling • Discounted free cash flows valuation • FVCI • New window opened for promoting opportunistic investments • Pricing restrictions not applicable • Regime not available for real estate • FII • Invest in listed securities on the floor of stock exchange • Press Note 2 not applicable • Few real estate companies are listed

5. Investment Regimes • NRI • Investment into a Real estate Company - Press Note 2 restrictions not applicable • Direct investment in real estate • NRI can repatriate up to USD 1 million from their NRO account • Investments through a Company not regarded as NRI Investment

6. Regulatory Milestones Press Note 2 (2009) and Press Note 4 (2009) Indirect foreign investment in India REMF Regulations, 2008 • Press Note 4 (2001) • FDI in integrated township (100 acres) • FDI in hotels & tourism • FDI in IT Parks (2002) April 2004 Amendment to VCF & FVCI Regulations removing RE from negative list Banks – inv. in VCF priority sector 2009 Press Note 2 (2005) SEBI proposed draft REIT Regul 2008 FDI in real estate further relaxed 2007 • Press Note 2 (2000) • FDI by NRI in housing & RE Real Estate VCFs 2005 Opening of FDI in select projects 2004 Relaxation of investment norms for NRIs 2002 1999

7. Press Note 2 (2005 Series) • MINIMUM AREA TO BE DEVELOPED • Serviced housing plots: Min.10 hectares/ 25 acres area • Construction-development projects: Min built-up area of 50,000 sq mts • Combination project: Any one of above two conditions INVESTMENT CONDITIONS • Min. capitalization: 1) WOS- US$ 10 million and 2) JV with Indian partner: US$ 5 million • Funds to be brought in within 6 months of commencement of business • Original investment cannot be repatriated before a period of 3 years from completion of minimum capitalization. Investor may be permitted to exit earlier with prior Government approval • OTHER CONDITIONS • At least 50% of project must be developed within of 5 years from date of obtaining all statutory clearances • Investor not permitted to sell undeveloped plots** • Project to conform to norms & standards laid down by respective State authorities • Investor responsible for obtaining all necessary approvals as prescribed under applicable rules/bye-Iaws/regulations of the State • Concerned Authority to monitor compliance of prescribed conditions by developer ** “Undeveloped” plot means where roads, water supply, street lighting, drainage, sewerage & other conveniences have not been made available. It will be necessary that investor provides this infrastructure & obtains a completion certificate prior to sale of serviced housing plot

8. Press Note 2: Few Issues • What comprises ‘built-up area’? • Ambiguity; Term not defined or standardized; • Only FSI or also below grade areas that are not included for FSI • Lock – in: Does “original investment” mean “minimum capitalization”? • Press Note 2 – industry view – minimum capitalization • FDI Policy 2010 – each tranche of foreign investment locked in from the date of infusion • Is premium on shares counted towards minimum capitalization? • Counted for primary • Premium paid to transferor, in case of secondary not counted

9. Press Note 2: Few Issues • Time Limit for Minimum Capitalization: When does the 6-month period for capitalization commence with respect to projects undertaken by existing companies? • Up to what stage in a project can an FDI investor participate? • What does repatriation mean? • Will lock-in apply even from a transfer from a non-resident to another non-resident? • Can an FII subscribe to shares of a real estate company? • Pre-IPO • Post IPO

10. Permitted Investments • Construction Development Projects • (PN 2 of 2005) • Hotel, Hospitals and Tourism • (PN 4 of 2001 and PN 2 of 2006) • Industrial Park • (PN 3 of 2008)

11. Types of Instruments Equity Shares with equal rights Equity Equity Shares with differential rights Fully / Compulsorily Convertible Preference Shares Partly / Optionally Convertible Non – Convertible Fully / Compulsorily convertible Debentures Partly / Optionally convertible Non – convertible Debt Other External Commercial Borrowings Warrants

12. Infusion of Debt • June 2007 – RBI issued a circular clarifying that only equity, CCPS and CCDs shall be regarded as FDI, and all other instruments shall be regarded as debt, and hence will be regarded as ECB. • ECB not permitted for real estate; limited window for integrated townships of 100 acres until December 31, 2010 • CCD v. CCPS • Compulsorily Convertible Preference Shares • Dividends – SBI PLR + 300 basis points; • Interest on CCDs? Unclear, Benchmark – same as CCPS • CCD Tax Advantages • CCPS and CCD – tax on conversion into equity

13. Can FDI be infused into Real Estate Co.? YES Foreign Co. Real Estate Co. Non FDI Compliant Project

14. Solution • If Hold Co.(in which a foreign entity has invested in) is owned and controlled by an Indian Citizen or Company, then investment can be made by such Hold Co. into real estate sector, as the investment of the Hold Co. shall be considered as domestic investment and thus, does not fall under the purview of FDI policy. • However keep in mind: • Press Note 4 of 2009:If the Hold Co. is only an investment company then prior approval of the Government/FIPB is required before any foreign investment is made into the Hold Co. irrespective of the amount of investment. • If the Hold Co.’s • (i) Financial Assets is more than 50% of its total assets; and • (ii) Income from financial assets is more than 50% of total income of the company; and • (iii)The total value of the financial assets is more than 100 crores then- • Hold Co. would require to be registered as an NBFC with the RBI Foreign Entity Hold Co. Real Estate Co. Non-FDI Compliant project

15. Foreign investor(s) Domestic investor(s) Indian investing Company (“Hold Co”) Indian investee company (“Op Co”) Press Note 2 of 2009 • For calculation of Foreign Investment: • If Hold Co. is owned and controlled by an Indian citizen or company , then, foreign investment through the Hold Co. would not be considered for calculation of the indirect foreign investment . • If Hold Co. is owned or controlled by Non-resident entity, the entire investment by the Hold Co. into the subject Indian Company would be considered as indirect foreign investment . Investment Real Estate Project “Owned” by resident Indian citizens would mean that the resident Indian citizens on a look through basis beneficially own more than 50% of the equity interest of the Hold Co. “Controlled” by resident Indian citizens would similarly mean that the resident Indian citizens on a look through basis have the power to appoint a majority of directors of the Hold Co.

16. Structuring – Key Issues • Structuring of investment instruments • Entity level investment v. project level investment • Equity, Preference, FCCDs, Warrants, ECBs • Factors: Ownership, taxes, assurance of returns, capital investment • Structuring distribution waterfall • Promote structure • Shares with differential rights • Convertibles • Security • Mortgage of property • Pledge of shares

17. Thank You! Please email your queries to us on: ruchir@nishithdesai.com Phone: 91 22 6669 5000 Cell: 99877 81598 Disclaimer We acknowledge that this presentation is merely an overview and has been prepared by us for your benefit and should not be construed as a legal opinion. It may not be relied upon by any other person for any other purpose, nor is it to be quoted or referred to in any public document or shown to, or filed with any government authority, agency or other official body without our consent. We are relying upon relevant provisions of the Indian laws, and the regulations thereunder, and the judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislative, regulatory, administrative, or judicial decisions.