Sure in M&As in real-estate broking services after amendment of 100 per cent FDI under automatic route
Real Estate

Sure in M&As in real-estate broking services after amendment of 100 per cent FDI under automatic route

Being a developing country, India is a hub for various sectors and, thereby, attracts many foreign entities to explore potential markets. The government has been on a spree of issuing various amendments in regulating laws to bring about ease of doing businesses in the country. Such amendments in regulating laws are a major catalyst for the surge of mergers and acquisitions (M&As) in India. 

Governing M&As
The regulatory frameworks that govern M&As in India include the Companies Act, 2013; the Income Tax Act 1961; the Foreign Exchange and Management Act, 1999; the Indian Stamp Act, 1899; the Competition Act, 2002; and various other regulations.

Among the above specified laws, the Foreign Exchange Management Act (FEMA) regulates foreign investments in India; in pursuance, the Foreign Direct Investment (FDI) Policy is formulated by the Government of India. Foreign investments in India can be made either through the 'automatic route' or the 'specific approval route' as specified by the government with regard to various sectors.

In this article, we are specifically dealing with the real-estate sector. In its endeavour to augment FDI in India, the government has brought noteworthy relaxations to the consolidated foreign direct policy of India.

Amendments in FDI
Accordingly, significant changes via amendments have been issued by the government from time to time to attract foreign investments via M&As in the construction-development sector. One major relaxation in the construction development sector was issued on January 10, 2018, wherein it has been clarified that 100 per cent FDI in real-estate brokerage services has been brought under the automatic route. The aforesaid clarification has been shared via a release from the Press Information Bureau, wherein liberalisation of FDI policy in key sectors has been discussed.
The amendment, via modification of the existing provisions under the regulatory frameworks, is still awaited to be issued by the authorities.

The underlining aim of liberalising FDI policy is to provide ease of doing business, which will result in increasing FDI inflow into the construction-development sector, leading to attraction of foreign entities via the M&A mode.

Earlier, real-estate broking services were considered under the real-estate business, wherein 49 per cent FDI was allowed under the automatic route. However, it has now been clarified that real-estate brokerage services do not fall under the real-estate business. The term 'real-estate business' means dealing in land and immovable property with a view to earning profit and does not include development of townships, construction of residential or commercial premises, roads and bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships. Therefore, real-estate broking services are eligible for 100 per cent FDI under the automatic route.

Previously, 100 per cent FDI was permitted in construction-development projects with the following conditions:
  • Minimum floor area to be developed of 20,000 sq m.
  • Mandatory infusion of FDI of minimum $5 million within six months of commencement of the project.
  • Permission for investor to exit on completion of the project or after development of trunk infrastructure, ie, roads, water supply, street lighting, drainage and sewerage.
  • Transfer of investment from the foreign investor to another non-resident investor required government approval.
However, despite the fact that 100 per cent FDI was permitted under the automatic route, this sector was not showing any sign of recovery as the minimum thresholds were suggesting that FDI was permitted only in new projects and not in existing projects that are pending owing to availability of funds.
In November 2015, the government relooked at the policy and relaxed it. The amended policy broadly provided:
  • Minimum thresholds related to the area to be developed and the amount to be infused was removed.
  • The foreign investor has been given the liberty to exit the project even before its completion or development of basic infrastructure, subject to a lock-in period of three years.
  • No prior approval is required for the sale of investment by the foreign investor to another non-resident, wherein no repatriation of investment
  • is involved.
  • Each phase of the project would be considered as a separate project for the purpose of investment.

Boost to real estate
Apart from the above, it has also been clarified that 100 per cent FDI under the automatic route is permitted in completed projects for operation and management activities, etc. It has been further clarified that earning of rent or income on lease of the property will not be regarded as real-estate business.

The government has amended the FDI policy, clarifying that real-estate brokerage services will not come under the real-estate business. This clarification is a welcome step for startups or foreign firms who see Indian real-estate brokerage services as a money-making sector. Multinational firms can now enter the Indian market without the help of local partners. Another benefit from such relaxation will be the availability of technological know-how. Foreign firms will bring in advanced technology in the country, which will enhance customer satisfaction in real estate. More so, this step can be seen as a strong signal towards institutionalisation of real-estate brokerage services in India.

Through this amendment, foreign firms can directly invest in the real-estate sector without prior approval from the government, making the country a global retail market for construction development in real estate. This will also reduce the problem of non-availability of funds in the market, resulting in increased growth and higher contribution to the country's economy. Market players can now accordingly develop their strategy of bringing about synergy by collaborating with existing real-estate brokers through M&A propositions.

About the author:
Manoj K Singh, Founding Partner, Singh & Associates
, has carved a niche for himself in the areas of insolvency and bankruptcy, arbitration and commercial litigation.

To share your views on this article, write in at feedback@ConstructionWorld.in

Being a developing country, India is a hub for various sectors and, thereby, attracts many foreign entities to explore potential markets. The government has been on a spree of issuing various amendments in regulating laws to bring about ease of doing businesses in the country. Such amendments in regulating laws are a major catalyst for the surge of mergers and acquisitions (M&As) in India.  Governing M&As The regulatory frameworks that govern M&As in India include the Companies Act, 2013; the Income Tax Act 1961; the Foreign Exchange and Management Act, 1999; the Indian Stamp Act, 1899; the Competition Act, 2002; and various other regulations. Among the above specified laws, the Foreign Exchange Management Act (FEMA) regulates foreign investments in India; in pursuance, the Foreign Direct Investment (FDI) Policy is formulated by the Government of India. Foreign investments in India can be made either through the 'automatic route' or the 'specific approval route' as specified by the government with regard to various sectors. In this article, we are specifically dealing with the real-estate sector. In its endeavour to augment FDI in India, the government has brought noteworthy relaxations to the consolidated foreign direct policy of India. Amendments in FDI Accordingly, significant changes via amendments have been issued by the government from time to time to attract foreign investments via M&As in the construction-development sector. One major relaxation in the construction development sector was issued on January 10, 2018, wherein it has been clarified that 100 per cent FDI in real-estate brokerage services has been brought under the automatic route. The aforesaid clarification has been shared via a release from the Press Information Bureau, wherein liberalisation of FDI policy in key sectors has been discussed. The amendment, via modification of the existing provisions under the regulatory frameworks, is still awaited to be issued by the authorities. The underlining aim of liberalising FDI policy is to provide ease of doing business, which will result in increasing FDI inflow into the construction-development sector, leading to attraction of foreign entities via the M&A mode. Earlier, real-estate broking services were considered under the real-estate business, wherein 49 per cent FDI was allowed under the automatic route. However, it has now been clarified that real-estate brokerage services do not fall under the real-estate business. The term 'real-estate business' means dealing in land and immovable property with a view to earning profit and does not include development of townships, construction of residential or commercial premises, roads and bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships. Therefore, real-estate broking services are eligible for 100 per cent FDI under the automatic route. Previously, 100 per cent FDI was permitted in construction-development projects with the following conditions: Minimum floor area to be developed of 20,000 sq m. Mandatory infusion of FDI of minimum $5 million within six months of commencement of the project. Permission for investor to exit on completion of the project or after development of trunk infrastructure, ie, roads, water supply, street lighting, drainage and sewerage. Transfer of investment from the foreign investor to another non-resident investor required government approval.However, despite the fact that 100 per cent FDI was permitted under the automatic route, this sector was not showing any sign of recovery as the minimum thresholds were suggesting that FDI was permitted only in new projects and not in existing projects that are pending owing to availability of funds. In November 2015, the government relooked at the policy and relaxed it. The amended policy broadly provided: Minimum thresholds related to the area to be developed and the amount to be infused was removed. The foreign investor has been given the liberty to exit the project even before its completion or development of basic infrastructure, subject to a lock-in period of three years. No prior approval is required for the sale of investment by the foreign investor to another non-resident, wherein no repatriation of investment is involved. Each phase of the project would be considered as a separate project for the purpose of investment. Boost to real estate Apart from the above, it has also been clarified that 100 per cent FDI under the automatic route is permitted in completed projects for operation and management activities, etc. It has been further clarified that earning of rent or income on lease of the property will not be regarded as real-estate business. The government has amended the FDI policy, clarifying that real-estate brokerage services will not come under the real-estate business. This clarification is a welcome step for startups or foreign firms who see Indian real-estate brokerage services as a money-making sector. Multinational firms can now enter the Indian market without the help of local partners. Another benefit from such relaxation will be the availability of technological know-how. Foreign firms will bring in advanced technology in the country, which will enhance customer satisfaction in real estate. More so, this step can be seen as a strong signal towards institutionalisation of real-estate brokerage services in India. Through this amendment, foreign firms can directly invest in the real-estate sector without prior approval from the government, making the country a global retail market for construction development in real estate. This will also reduce the problem of non-availability of funds in the market, resulting in increased growth and higher contribution to the country's economy. Market players can now accordingly develop their strategy of bringing about synergy by collaborating with existing real-estate brokers through M&A propositions. About the author: Manoj K Singh, Founding Partner, Singh & Associates, has carved a niche for himself in the areas of insolvency and bankruptcy, arbitration and commercial litigation. To share your views on this article, write in at feedback@ConstructionWorld.in

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