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Backdoor Entry for Foreign Companies for Realty ????


Backdoor Entry for Foreign Companies for Realty ????

Last updated: April 17 2008
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  • Backdoor Entry for Foreign Companies for Realty ????

    Came across this article today in ET and wonderin what are the implications in the realty market in future ??

    MUMBAI: Foreign investors are buying agricultural land in India, treading a regulatory twilight zone with the help of local builders and smart lawyers.

    These investors are entering into agreements to ensure that the land will be transferred to them once the plot is converted from an agricultural to a non-agricultural category. A few are resorting to a more aggressive interpretation of the law, by claiming that foreign investment is prohibited only in agricultural activities, but not in purchase of agricultural land.

    Their point, which is also endorsed by some of the top legal eagles, is that they can buy the agri land (as long as it is not used for farming) to carry out non-agricultural activities like setting up a township or commercial complex where foreign direct investment is allowed, subject to a few conditions that can be easily followed or side-stepped.

    What may have increased the number of such deals is the expansion of municipal limits by several city development authorities in the past few months. This has resulted in the inclusion of large tracts of agri lands within the municipal boundaries. Domestic builders have bought such land and are in the process of roping in foreign investors.

    Since it is difficult for a foreign investor to buy an agricultural land directly, certain interesting structures are put in place to push through the deal. First, farmers owning the land sell them to an entity, which is a special purpose vehicle (SPV) controlled by the family and associates of the real estate developer.

    The developer then moves an application with the local authorities for converting the status of land into a non-agricultural one. This takes six months to one year, and even longer in some cases. Even as this happens a parallel transaction takes place to bring in a foreign investor.

    Technically, the foreign investor can neither buy the agri land nor buy the SPV which owns the land. It has to wait till the land is notified as a non-agricultural land. So, a separate deal takes place. And, this is where a bit of financial innovation comes in.

    The foreign investor forms its own SPV, and then infuses money in it. There is no law that stops it floating a wholly owned arm in India and capitalising it. Once this is done, the SPV owned by the foreign gives a ‘deposit’ or ‘advance’ to the SPV owned by the Indian developer. Once the land gets a ‘non-agri’ tag, the foreign SPV buys the shares of the SPV owned by the builder.

    The ‘deposit’ or ‘advance’ simply helps the foreigner to book the land till the conversion takes place. Once the conversion happens, the deposit money is used to buy the shares of the builder’s SPV. This final transaction gives the foreign investor the control and ownership of a plot which a year ago was an agricultural land.

    It may be pointed out that FDI up to 100% is permitted with prior government approval for development of integrated townships and settlements. Development of integrated townships includes houses, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges and mass rapid transit systems and manufacture of building materials.

    FDI up to 100% is allowed under this sector subject to prior government approval. Development of land and providing allied infrastructure will form an integral part of township development.

    According to an advice given by a leading law firm to one of its clients, “... when such land is being purchased for a proposed commercial development the same would not be documented as agricultural land. The nature of the land though agricultural in the hands of the previous seller would cease to be so in the hands of the new owner when the land would be only registered as VACANT LAND or LAND without any mention of agriculture. The only restriction here would be in terms of the Fifteen Standard Acres to be registered in the name of one Company in order not to violate the Land Reforms Act.”

    The advice adds that upon purchase such land would be subjected to zone conversion and process for plan approval for the overall development where again the it is treated as non-agricultural. As a result the land to be purchased by the company would not be agriculture in nature both in the hands of the owner company as well as in terms of future usage of the said property.
    Last edited October 22 2007, 03:36 PM.
  • #2


    Re : Backdoor Entry for Foreign Companies for Realty ????

    Foriegn investors are showing interest to buying the property in India specially in Goa,Bombay and Gujarat which is very good place for enjoying.


    Have any questions or thoughts about this?