The lack of clarity in defining foreign investment in real estate has left scope for corporates to use the proceeds of external commercial borrowings (ECBs) in real estate businesses.
According to government sources, the Foreign Exchange Management Act (Fema) defines real estate, for the purposes of foreign investment, as infrastructure like roads and bridges.
The ECB guidelines, however, do not lay down clear cut guidelines as far as real estate investments are concerned. They also do not differentiate between real estate business and real estate investments.
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As per the ECB guidelines, while ECB proceeds can be used for infrastructure projects like roads and bridges, they can also be used for project financing.
Funds can thus be utilised for buying and developing land where land is an integral part of the project.
It does not specify, though, in clear terms whether the funds could be deployed in real estate business, or in other words, for selling or purchasing land or trading in real estate.
Sources said, currently, multinational corporations cannot buy properties in the country unless they operate through fully-owned subsidiaries.
They can only lease or take property on rent for a maximum of five years. In case of 100 per cent subsidiaries, MNCs can buy property for official purposes. Non-resident Indians are, however, permitted to invest in real estate.
While ECBs can be raised for working capital, capital investment and project finance, sources have said the corporates are required to furnish quarterly details to the Reserve Bank of India on the amount drawn and where it has been deployed.
As per Fema, the government has retained considerable flexibility in allowing real estate investments.
While the government does not approve foreign investment in real estate purely for acquisition, it permits investments on a case-to-case basis depending on the nature of the real estate development that is proposed.