Insights & Events

BlogEventsCase StudiesContent by membersNews
< Back to list

Foreign Direct Investment In Real Estate Sector And Status Of Home Buyers Under IBC - India

Uday S. Ahlawat

Ahlawat and Associates

I. INTRODUCTION

The Real Estate sector is the second largest employment sector in India after the agriculture sector. It is considered to be one of the most critical sectors of the Indian economy due to its huge multiplier effect on the economy. Any impact on the Real Estate sector has a direct bearing on the economic growth. Though the Real Estate sector in India is asserted to be the most promising sector today, it is still overcoming the market uncertainties and traditional inhibitions. The real estate market in India mostly continues to remain unorganized, fragmented, mostly characterized by small players with local presence.  You may also read our previous comments on FDI

BACKGROUND: CHANGING REGULATORY SCENARIO

The gates of real estate business were opened for the Foreign Direct Investment (‘FDI’) by the foreign investors for the first time in the year 2001, which permitted FDI up to 100% for development of integrated townships, including housing, commercial premises, hotels, resorts etc. However, such FDI was subject to the prior approval of the Government.

Further, in the year 2005, FDI up to 100% was allowed under the automatic route with a view to further liberalise and catalyse investment in the real estate sector, but following few conditions were stipulated for the same:

* Minimum investment cap of US$ 10 million for wholly owned subsidiaries and US$5 million for joint ventures with Indian partners.

* Minimum area to be developed under each project in case of development of serviced housing plots was 10 hectares, and in case of construction-development projects, a minimum built-up area of 50,000 sq. mts.

* Original investment could not be repatriated before a period of 3 years; however, investor may be permitted to exit earlier with prior Government approval.

* Also, at least 50% of the project was to be developed within 5 years from the date of obtaining statutory clearances.

However, notwithstanding the fact that 100% FDI was permitted under automatic route, this sector was not showing any sign of recovery as the minimum thresholds suggested that the FDI was permitted only in new projects and not in the existing projects which were pending because of availability of funds. In order to provide further impetus to this sector, the Government in 2015 via Press Note 12 (2015 series) revamped the policy, and the majority of onerous conditions with which FDI was subjected to, were relaxed and done away with.

Also, in order to attract more significant FDI into the sector, Government permitted 100% FDI under automatic route in completed projects also, for operation and management of townships, malls, shopping complexes etc.

CURRENT POSITION OF FDI IN REAL ESTATE SECTOR

At present, 100% FDI under automatic route is allowed for construction development projects including but not limited to development of townships, roads or bridges, hotels, resorts, hospitals etc. However, it is important to note that FDI is not permitted in an entity which is engaged in Real Estate business or construction of farm houses.

The current FDI policy defines Real estate business as “dealing in land and immovable property with a view to earning profit there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business.”

The present FDI policy also stipulate following few conditions:

* Each phase of the construction development project would be considered as a separate project.

* The investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage. However, a foreign investor can exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in period of 3 years has been completed.

* The project shall conform to the norms and standards, including land use requirements and provision of community amenities and common facilities as per applicable laws.

* The Indian investee company shall be responsible for obtaining all necessary approvals, including building plans/sanctions and comply with all bye-laws and regulations of the concerned State Government/Municipal Board.

The policy also talks about few clarifications with respect to the above-mentioned conditions and are stated as follows:

* Hotels & tourist resorts, hospitals, Special Economic Zones (SEZs), educational institutions, old age homes and investment by NRIs, are exempted from the condition of lock-in period of 3 years.

* In case of investment in completed projects, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted but subject to the lock-in period of three years, calculated with reference to each portion of FDI, and transfer of immovable property or any part thereof is not permitted during this period.

2018 AMENDMENT IN FDI POLICY

* The Department of Industrial Policy and Promotion issued Press Note 1 dated 23 January 2018, making certain amendments to the FDI Policy of 2017.

* The amendment exempted the real-estate broking services from the purview of real estate business, and further allowed 100% FDI in real-estate broking services under automatic route.

 

II. AMENDMENT IN INSOLVENCY AND BANKRUPTCY CODE AND ITS EFFECT ON HOME BUYERS

In 2018, the Government of India paved a welcome relief to the homebuyers by amending the Insolvency and Bankruptcy Code 2016 (‘IBC’) to come up with the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (‘Amendment Act’), which gave the homebuyers, recognized as ‘allottee’ under the Real Estate (Regulation and Development) Act, 2016 (‘RERA’) the status of “financial creditors” (pursuant to the amendment to the definition of ‘financial debt’ under the amended IBC). These Amendments have significantly strengthened the position of homebuyers by putting them on the same footing as any other stakeholder participating in the real estate project and grants them due representation in the committee of creditors.

This Amendment in the IBC has made a vast impact on the real estate sector. There are several real estate developer companies that have for various reasons delayed their loan repayments. The homebuyers who are now regarded as financial creditors, can file an application against such defaulting companies. Amendments focused on eliminating 'fly by night' real estate developers at the cost of homebuyer’s money.

POST AMENDMENT SCENARIO

The Amendment Act was enacted to rectify the shortcomings in the IBC along with the provisions of RERA. The amendment incorporates the key recommendations of the Insolvency Law Reform Committee’s (‘ILRC’) report. To curb the problem of homebuyers and provide them a proper remedy, the ILRC in November 2017, noted that sum paid by an allottee will be treated as means to raise finance for real estate project.

The term allottee is defined under RERA as “a person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent.”

The Amendment Act mainly stated the following:

a. It clarified that allottee will be treated as a financial creditor;

b. The voting ratio of Committee of Creditors (CoC) for routine decisions was reduced to 51% and further to 66% for key decisions;

c. Lastly, a resolution application for insolvency can be withdrawn from NCLT with the approval of 90% of the Committee of Creditors.

Post-amendment, the allottee or homebuyers can file an application in NCLT (National Company Law Tribunal) for initiating corporate insolvency resolution against the defaulting developer.

STATUS AS CREDITORS UNDER RERA

The introduction of the Amendment Act has sought to bring a sense of security and protection to the allottee. However, the allottees also have similar rights under the RERA, which includes:

* As per the second proviso of section 8 of RERA, in case of revocation of registration of a real estate project under RERA, the association of allottees have the first right of refusal for carrying out the remaining development work.

* Further, as per section 11(4)(h) of RERA, mortgage cannot be created over units in respect of which agreement to sell has been executed by the promoters/developers and even if such mortgage is created the same shall not affect the right and interest of the concerned allottee.

Therefore, the provisions of RERA as mentioned above read with the definition of 'Security Interest' under IBC is wide enough to ensure that allottees are treated as secured creditors.

CONCLUSION

Through the last decade the amendments in the FDI policies with respect to real-estate sector have gradually opened-up the options for foreign investment in the real-estate sector.

One of the aims behind the relaxation of conditions on FDI in real estate sector was to make affordable housing available in India. With the objective of easing the conditions related to minimum area and minimum investment amount was to enable foreign investments in smaller projects, for instance, in large cities where the availability of plots is limited, and the sizes of plots are small.

With respect to the inclusion of real estate brokerage services under FDI, the step will lead to an organised and transparent market as all brokerage firms will now have to register themselves under the RERA. They will have to effectively declare themselves accountable for their business activities and practices.

Further, now both IBC and RERA provides recognition to the homebuyers and protects the interest of homebuyers. Moreover, in various recent cases, the Supreme Court of India opted that homebuyers will receive preference over banks while stating that home buyers’ stake couldn’t be overlooked to protect the interest of creditor bank.

The amendments made under IBC read with the provisions of RERA have placed the allottees in a better position than other financial creditors to the extent that the mortgage held by secured financial creditors shall be subject to the rights of the allottees.

Need more info Ahlawat & Associates : 

Uday S. Ahlawat, Partner - uday@ahlawatassociates.in

Newsletter

Subscribe to our newsletter to get notification about new updates, information, etc..