About a decade ago, as I was passing through Gurgaon (one of the four satellite towns around Delhi), my German co-passenger remarked that the construction activity in that area reminded him of Berlin after unification. I looked at him with certain disbelief and laughed within as it was a guileless comparison to put the mindless growth around Delhi at par with the development in one of the greatest cities of the world. By way of confession, I must admit that I never had the admiration for the humongous efforts being undertaken by prominent builders to develop Gurgaon. I always wondered who was going to occupy all the residential and office spaces being created in that area. Ten years later, I am glad that I did not confront the German. I had not foreseen the bottomless appetite of the Indian consumers for real estates. Infact, I often wonder that had I gauged the importance of the German's remarks then, today I would have become a millionaire, ten times over. His remarks, in a way, predicted the things to come in the Indian real estate sector.

Today Indian real estate sector is booming, not only in the big cities but even in second tier cities. Skeptics have already started to drum about overheating and forecast market correction. Even if one discounts for a reasonable market correction, the return on investment in the Indian real estate sector over the last five-six years has been phenomenal. Given the current drive and the emerging trends, the phenomenon is reasonably expected to continue in the coming years. No wonder, this sector has elicited interest of investors from all parts of the world and investor's space in this sector is increasingly getting crowded. For those yet to take a decision, this article gives an overview of the legal framework governing the investment by NRIs and PIOs in the Indian real estate sector and also briefly discusses the various options available to them.

Under the scheme of the Foreign Exchange Management Act, 1999, (“FEMA”), the legislation that governs foreign investments and foreign exchange transactions, an NRI is understood as a person resident outside India, who is a citizen of India. For the purposes of availing the facilities of opening and maintaining bank accounts and investments in shares/securities in India, the term NRI includes a PIO, meaning thereby, that with respect to investments in shares or securities, NRI and PIO are treated at par and have the same rights and privileges. In this context, the term PIO means a citizen of any country other than Bangladesh or Pakistan if:

(a) He at any time held Indian Passport; or
(b) He or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955) or
(c) The person is a spouse of an Indian citizen or a person referred to in sub clause (a) or (b). However, with respect to investments as individuals in immovable property, PIO means an individual (not being a citizen of Pakistan or Bangladesh or Afghanistan or Bhutan or Sri Lanka or Nepal or China or Iran):

(a) Who at any time, held an Indian Passport; or
(b) Who or either of whose father or whose grandfather were a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955. In light of the above, the following options are available to NRIs and PIOs to invest in the real estate sector in India.

OPTION NO. 1
As per the existing foreign direct investment (“FDI”) policy NRIs and PIOs are allowed to invest directly up to 100% in any Indian company in the housing and real estate sector without any approval. The profits and capital are fully repatriable subject to withholding tax.

Activities permitted under this route are as under:

a) Development of serviced plots and construction of built up residential premises
b) Investment in real estate covering construction of residential and commercial premises including business centres and offices
c) Development of townships
d) City and regional level urban infrastructure facilities, including both roads and bridges
e) Investment in manufacture of building materials, which is also open to FDI
f) Investment in participatory ventures in (a) to (e) above.
g) Investment in housing finance institutions, which is also open to FDI as an NBFC, i.e., non-banking financial company.
NRIs can directly set up companies in India, other than in the nature of venture capital in India and do business in India.

OPTION NO. 2
NRIs/PIOs can also make direct investment under the FDI policy through an overseas entity into companies in the Real Estate Sector as per the terms of Press Note 2 of 2005 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India. This route allows investment in townships, housing, built-up infrastructure and construction-development projects (which would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure). There are also certain restrictions on the repatriation of capital invested (subject to a lock in period of 3 years), minimum capitalization/investment requirements, minimum project area/size requirements, etc. that have to be complied with.

OPTION NO. 3
Another option would be to invest through a venture capital fund, in real estate sector as per the Securities Exchange Board of India (“SEBI”) guidelines and regulations. It would be pertinent to note that real estate investment trust is not yet permitted to operate in India by SEBI. However, trusts if registered with SEBI as domestic Venture Capital Fund (“VCF”) or as Foreign Venture Capital Investor (“FVCI”) are allowed to invest in India subject to restrictions imposed under SEBI Regulations and FDI caps.

NRIs could operate through a domestic VCF or an offshore fund set up as an FVCI. Either of the funds would invest into domestic companies, i.e., Venture Capital Undertakings (“VCU”) engaged in real estate activities.

In case NRIs intends to setup FVCI, the suitable jurisdiction for setting up of such FVCI would be countries which offer concessions on capital gains tax such as Mauritius, Cyprus, UAE, Netherlands, etc.

As per SEBI regulations, VCF can be established in India either as a trust or a company. Domestic Venture Capital Fund (“DVCF”) needs to be registered with SEBI under the regulations before making any investments. A VCF may raise monies from any investor whether Indian, foreign or non-resident Indians by way of issue of units. So there are no restrictions on the DVCF for raising funds.

OPTION NO. 4
Presently, both the NRIs and PIOs, as individuals, can purchase / acquire and invest in any immoveable property in India, other than agricultural, plantation property and farm house subject to provisions of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. Further, both NRIs and the PIOs can also freely rent out their immovable property in India without seeking any permission from the Reserve Bank of India (RBI) and such rental income being a current account transaction is freely repatriable outside India.

Any NRI or PIO desirous of investing in the Real Estate Sector in India may choose from any of the above options and be a party to the great Indian real estate revolution.