Investment by an NRI in Real Estate activity in India

A. Facts:

1. In the present factual matrix, a client who is an NRI has invested in an Indian Company in the
year 2014.

2. The company in which the client has invested is involved in the Real Estate activity.

3. The client has made a term deposit in a bank.

4. This company has taken a third-party loan by the bank by keeping the term deposit of an NRI
as security.

5. The company has taken the loan by forgery i.e., by making false documents.

B. Queries:

1. Whether investment in Real Estate activity was permissible in case of NRI?

2. Whether third party loan can be taken against security of such FDs of NRI?

C. Relevant legal provisions:

1. Foreign Exchange Management Act, 1999[hereinafter FEMA]: An Act to consolidate and

a. Section 2 of FEMA provides with the relevant definitions. The term security is defined
under Section 2(za) of FEMA. Relevant extract of the section is reproduced below:

“(za) “security” means shares, stocks, bonds and debentures, Government securities as
defined in the Public Debt Act, 1944 (18 of 1944), savings certificates to which the
Government Savings Certificates Act, 1959 (46 of 1959) applies, deposit receipts in
respect of deposits of securities and units of the Unit Trust of India established under
sub-section (1) of section 3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any
mutual fund and includes certificates of title to securities, but does not include bills of
exchange or promissory notes other than Government promissory notes or any other
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 instruments which may be notified by the Reserve Bank as security for the purposes of
this Act;”

Further sub-section (w) of Section 2 of FEMA defines a person who is not a resident of
India.
b. In exercise of the powers conferred by clause (b) of sub-section (3) of Section 6 and
Section 47 of the FEMA, the Reserve Bank makes the following regulations to prohibit,
restrict or regulate, transfer or issue security by a person resident outside India. These
Regulations are called as the Foreign Exchange Management (Transfer or issue of
Security by a Person Resident outside India) Regulations, 2000 [hereinafter FEMA
Regulations]. Section 5 of FEMA Regulation talks about the permission for purchase of
shares by certain persons resident outside India. Relevant extract of the section is
reproduced below:

“(1) A person resident outside India (other than a citizen of Bangladesh or Pakistan or
Sri Lanka) or an entity outside India, whether incorporated or not, (other than an entity
in Bangladesh or Pakistan) , may purchase shares or convertible debentures of an Indian
company under Foreign Direct Investment Scheme, subject to the terms and conditions
specified in Schedule 1.
(2) A registered Foreign Institutional Investor (FII) may purchase shares or convertible
debentures of an Indian company under the Portfolio Investment Scheme, subject to the
terms and conditions specified in Schedule 2.
(3) A non-resident Indian or an overseas corporate body may purchase shares or
convertible debentures of an Indian company –
(i) on a stock exchange under the Portfolio Investment Scheme, subject to the terms and
conditions specified in Schedule 3; or/and
(ii) on non-repatriation basis other than under Portfolio Investment Scheme, subject to
the terms and conditions specified in Schedule 4.
(4) A non-resident Indian or an overseas corporate body or a registered FII may
purchase securities, other than shares or convertible debentures of an Indian company,
subject to the terms and conditions specified in Schedule 5.”

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 Schedule 1
1. Purchase by a person resident outside India of equity/preference/convertible
preference shares and convertible debentures issued by an Indian company
(1) A person resident outside India referred to in sub-regulation (1) of Regulation 5, may
purchase shares or convertible debentures issued by an Indian company up to the extent
and subject to the terms and conditions set out in this schedule.
(2) If the person purchasing the shares under this Scheme proposes to be collaborator or
proposes to acquire the entire share holding of a new Indian company, he should obtain
a prior permission of Central Government if he has a previous venture or tie-up in India
through investment in shares or debentures or a technical collaboration or a trade mark
agreement or investment by whatever name called in the same field or allied field in
which the Indian company issuing the shares is engaged.
2. Automatic Route of Reserve Bank for Issue of shares by an Indian company
(1) An Indian company which is not engaged in any activity, or in manufacturing of item
included in Annexure 'A' to this Schedule, may issue shares or convertible debentures to
a person resident outside India, referred to in paragraph 1 upto the extent specified in
Annexure B, subject to compliance with the provisions of the Industrial Policy and
Procedures as notified by Secretariat for Industrial Assistance (SIA) in the Ministry of
Commerce and Industry, Govt. of India, from time to time. Provided that:
i) the activity of the issuer company does not require an industrial licence under the
provisions of the Industries (Development & Regulation) Act, 1951 or under the
locational policy notified by Government of India under the Industrial Policy of 1991 as
amended from time to time.
ii) the shares or convertible debentures are not being issued by the Indian company with
a view to acquiring existing shares of any Indian company.
3. Issue of shares by a company requiring the Government approval
A company which is engaged or proposes to engage in any activity specified in Annexure
'A' or which proposes to issue shares to a person resident outside India beyond the
sectoral limits stipulated in Annexure 'B' or which is otherwise not eligible to issue
shares to a person resident outside India, may issue shares to a person resident outside
India referred to in paragraph 1, provided it has secured prior approval of Secretariat

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for Industrial Assistance or, as the case may be of the Foreign Investment Promotion
Board of the Government of India and the terms and conditions of such an approval are
complied with.
8. Mode of payment for shares issued to persons resident outside India
A company in India issuing shares or convertible debentures under this Schedule to a
person resident outside India shall receive the amount of consideration for such shares –
i) by inward remittance through normal banking channels, or
ii) by debit to NRE/FCNR account of the person concerned maintained with an
authorised dealer/authorised bank.
9. Report by the Indian company
“(1) An Indian company issuing shares or convertible debentures in accordance with
these Regulations shall submit to Reserve Bank,
A) not later than 30 days from the date of receipt of the amount of consideration, a report
indicating:
i) Name and address of the foreign investors
ii) Date of receipt of funds and their rupee equivalent
iii) Name and address of the authorised dealer through whom the funds have been
received, and
iv) Details of the Government approval, if any.
B) not later than 30 days from the date of issue of shares, a report in form FC-GPR
together with, (i) a certificate from the Company Secretary of the company accepting
investment from persons resident outside India certifying that
(a) all the requirements of the Companies Act, 1956 have been complied with;
(b) terms and conditions of the Government approval, if any, have been complied with;
(c) the company is eligible to issue shares under these Regulations; and
(d) the company has all original certificates issued by authorised dealers in India
evidencing receipt of amount of consideration in accordance with paragraph 9;
(ii) a certificate from Statutory Auditors or Chartered Accountant indicating the manner
of arriving at the price of the shares issued to the persons resident outside India.”
Annexure A

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 As per Annexure A (5) of Foreign Exchange Management Act, 1999, automatic route of
Reserve Bank for Investment from Persons Resident Outside India is available for
Housing & Real Estate Development sector for investment from NRIs/OCBs.
Annexure B
As per Annexure B (2) of Foreign Exchange Management Act, 1999, 100% Sectoral cap
on Investments by Persons Resident Outside India in Housing and Real Estate Sector in
the areas listed below :
a) Development of serviced plots and construction of 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
f) Investment in participatory ventures in (a) to (e) above g) Investment in housing
finance institutions
c. In exercise of the powers conferred by clause (f) of sub-section (3) of section 6, sub-
section (2) of section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999),
the Reserve Bank makes the Foreign Exchange Management (Deposit) Regulations,
2000 [hereinafter Deposit Regulations] for transactions relating to deposits between a
person resident in India and a person resident outside India. As per Schedule 1(6) of
Deposit Regulations,
“Authorised dealers and authorised banks may grant any type of fund based and/or non-
fund based facilities to resident individuals/firms/ companies in India against the
collateral of fixed deposits held in NRE account subject to the following conditions:
i) There should be no direct or indirect foreign exchange consideration for the
nonresident depositor agreeing to pledge his deposits to enable the resident
individual/firm/company to obtain such facilities.
ii) Regulations relating to margin, interest rate, purpose of loan, etc., as stipulated by
Reserve Bank from time to time should be complied with.

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 iii) The loan should be utilised for personal purposes or for carrying on business
activities other than agricultural/plantation activities or real estate business. The
loan should not be utilised for relending.
iv) The usual norms and considerations as applicable in the case of advances to
trade/industry shall be applicable to such credit facilities.”
D. Response to Queries:

Query 1: Whether investment in Real Estate activity was permissible in case of NRI?

Response:

1. As per Section 5 of FEMA Regulations, a person who is non-resident of India can invest
in an Indian Company under Foreign Direct Investment Scheme, provided it should
comply with Schedule 1/2/4/5 of the Act.
2. In the present factual matrix, a Non-resident Indian in the year 2014 can invest in Real
Estate as it is permissible under Regulation 5(1) of the FEMA Regulations. As per
Schedule 1(1) of FEMA Regulations, a NRI may purchase shares or convertible
debentures issued by an Indian company up to the extent and subject to the terms and
conditions set out in this schedule. Adding to this under Schedule 1(2) of FEMA
Regulations an NRI/OCI can follow the automatic Route of Reserve Bank for Issue of
shares by an Indian company by complying with Annexure A and Annexure B of
Schedule 1. As per Annexure A (5) of FEMA Regulations, automatic route of Reserve
Bank for Investment from Persons Resident Outside India is available for Housing &
Real Estate Development sector for investment from NRIs/OCBs. Further, as per
Annexure B (2) of Foreign Exchange Management Act, 1999, 100% Sectoral cap on
Investments by Persons Resident Outside India in Housing and Real Estate Sector.

Query 2: Whether third party loan can be taken against security of such FDs of NRI?

Response:

3. As mentioned above in A.4, this company has taken a third-party loan by the bank by
keeping the term deposit of an NRI as security. For this query Deposit Regulations [C.c]
will govern this issue as Deposit Regulations deals with the transactions relating to
deposits between a person resident in India and a person resident outside India. Schedule

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 1(6) of the Deposit Regulations allows the third party to take loan against security of
term-deposits of an NRI, but with certain conditions. As mentioned above [C.c], under
Deposit Regulations, to issue a loan to a third party against the term-deposit as security,
the loan should be utilised for personal purposes or for carrying on business activities
other than agricultural/plantation activities or real estate business.

E. Conclusion:

1. Since the Client has invested in the year 2014, the applicable regulation for that transaction is
Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside
India) Regulations, 2000, wherein the investment by an NRI in a real estate activity is
permissible. Thus, responding to the first query, the investment in Real Estate activity is
permissible in case of NRI in the present case.

2. In the present case the company has taken loan by keeping term-deposit of an NRI as a
security. Thus, the Foreign Exchange Management (Deposit) Regulations, 2000, will be
applicable in deciding the validity of such loans. As per the provisions of the Deposit Regulation,
third-party loan can be taken but with certain restrictions, such as the loan should be utilised for
personal purposes or for carrying on business activities other than agricultural/plantation
activities or real estate business, and the present factual matrix the investment is related to Real
Estate Activity. Therefore, the third-party loan can’t be taken against security of such FDs of
NRI in the present case.

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