INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Brijita Prakash, JSA
Exemptions on payment of stamp duty and certain tax benefits are available to entities operating out of special economic zones (SEZs). Generally, capital gains tax would also be payable by the seller on transfer of property (directly or indirectly). For tax residents of India, the tax rate would range from 12.5% (plus surcharge and cess) for long-term capital gains to 30% (plus surcharge and cess) for short-term capital gains, depending on the status of the seller and the period for which the asset being transferred is held. Unlisted shares or immovable property held for more than 24 months are considered as long-term capital assets. Depreciable property would generally be considered a short-term capital asset. 2.11 Legal Restrictions on Foreign Investors Persons resident outside India can acquire property or invest in real estate in India only in accordance with FEMA. While foreign investment in construction and develop - ment has been liberalised significantly, certain restric - tions remain, including that the investment must be locked in for three years, calculated with reference to each tranche of investment, unless the construction of “trunk infrastructure” is completed. Transfer of stake between persons resident outside India, without repa - triation of foreign investment, is not subject to lock-in. The lock-in is also not applicable to construction of hotels and tourist resorts, hospitals, SEZs, educa - tional institutions and old-age homes. FDI is permitted in the operation and management of townships, malls/shopping complexes and busi - ness centres, with three years’ lock-in. Earning of rent/ income on lease of property not amounting to transfer is not considered real estate business. Exchange control laws regulate foreign investments in India by countries that share land borders with India. If the investing/acquiring entity or beneficial owner in an investing/acquiring entity is an entity set up in, or an individual resident in, such a country, the invest - ing/acquiring entity would require prior government approval for its proposed investment (primary or secondary) in an Indian company. “Beneficial own - ership” has recently been defined to mean (i) 10%
of the shareholding, capital or profits of such invest - ing/acquiring entity, or (ii) exercise of control over the investing/acquiring entity, or (iii) exercise of ultimate effective control over the investing/acquiring entity. This approval requirement will also be triggered in a transfer of ownership of any existing/future FDI in an Indian entity which directly/indirectly results in the beneficial ownership falling within the above restric - tion. Certain additional conditions may apply, especially under any project-specific approvals obtained, lease documents, etc, if, for instance, a foreign entity is gaining control over an Indian investee entity, or if there is any reconstitution of the board of directors of the Indian investee entity, or where the Indian investee entity takes on additional debt and if any charge is created on the project land, etc. 3. Real Estate Finance 3.1 Financing Acquisitions of Commercial Real Estate Typical fundraising means for real estate companies include FDI, REITs, alternative investment funds (AIFs) and debt financing (loans/debt capital markets, exter - nal commercial borrowings (ECBs)). FDI The foreign exchange regime prohibits foreign invest - ment into companies that are engaged purely in “real estate business”. FDI up to 100% is permitted under the automatic route for companies engaged in con - struction development and industrial park develop - ment, subject to certain limited conditions. Entities engaged in real estate broking services are also permitted to receive up to 100% FDI under the automatic route. Earning of rental income is also not considered real estate business. FDI may be through subscription to or purchase of equity/equity-linked instruments and must comply with pricing guidelines and reporting obligations pre - scribed by the Reserve Bank of India (RBI).
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