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Private Equity and


Debt in Real Estate

February 2015

Copyright 2015 Nishith Desai Associates

www.nishithdesai.com

Private Equity and Debt in Real Estate

About NDA
Nishith Desai Associates (NDA) is a research based international law firm with offices in Mumbai, Bangalore,
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Private Equity and Debt in Real Estate

Contents
ABBREVIATIONS 01
1. PRIVATE EQUITY IN 2014: LESSONS LEARNT AND EXPECTATIONS IN 2015!

03

I.
Withholding Taxes 03
II.
General Anti-Avoidance Rules (GAAR) 03
III.
Companies Act, 2013 03
IV. Representation and Warranties Insurance (R&W Insurance)

04

V.
Structured Debt Transactions 04
VI.
RBIs Timeline for Regulatory Approval 05
VII.
Shareholder Activism 05
VIII.
Diligence 05
IX.
Entry and Exit Facilitation 05
X.
Externalisation 05
XI.
Depository Receipts (DRs) 05
XII.
Conclusion 07
2. REGULATORY FRAMEWORK FOR FOREIGN INVESTMENT

07

I.
Foreign Direct Investment 07
II.
FVCI Route 10
III.
FPI Route 11
IV.
NRI Route 16
3. LEGAL FRAMEWORK KEY DEVELOPMENTS

18

I.
Shares with Differential Rights 18
II.
Listed Company 18
III.
Inter-Corporate Loans and Guarantee 18
IV.
Deposits 19
V.
Insider Trading 19
VI.
Squeeze out Provisions 19
VII.
Directors 19
VIII. Control and Subsidiary and Associate Company

20

IX. Merger of an Indian Company with Offshore Company

20

4.
TAXATION FRAMEWORK 21
I.
Overview of Indian Taxation System 21
II. Specific Tax Considerations for PE Investments

23

5.
EXIT OPTIONS / ISSUES 26
I.
Put Options 26
II.
Buy-Back 26
III.
Redemption 27
IV.
Initial Public Offering 27
V.
Third Party Sale 27
VI.
GP Interest Sale 28

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

VII.
Offshore Listing 28
VIII.
Flips 28
IX.
Domestic REITs 29
6.
DOMESTIC POOLING 30
I.
AIF 30
II.
NBFC 31
7.
THE ROAD FORWARD 33
I.
REITs 33
II.
Partner issues 33
III.
Arbitration / Litigation 33
IV.
Security Enforcement 33
V. Offshore listing allowed for unlisted Indian companies

34

ANNEXURE I
Foreign Investment Norms for Real Estate Liberalized 35
ANNEXURE II
Foreign Investment Norms in Real Estate Changed

42

ANNEXURE III
Specific Tax Risk Mitigation Safeguards for Private Equity Investments

44

ANNEXURE IV
Flips and Offshore REITs 46
ANNEXURE V
Reits: Tax Issues and Beyond 49
ANNEXURE VI
NBFC Structure for Debt Funding 51
ANNEXURE VII
Challenges in Invocation of Pledge of Shares

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59

Private Equity and Debt in Real Estate

Abbreviations
Abbreviation

Meaning / Full Form

AAR

Authority for Advanced Rulings

AIF

Alternate Investment Funds

AIF Regulations

SEBI (Alternative Investment Funds) Regulations, 2012

CBDT

Central Board of Direct Taxes

CCDs

Compulsorily Convertible Debentures

CCPS

Compulsorily Convertible Preference Shares

DCF

Discounted Cash Flows

DDT

Dividend Distribution Tax

DIPP

Department of Industrial Policy and Promotion

DTAA

Double Taxation Avoidance Agreements

ECB

External Commercial Borrowing

FATF

Financial Action Task Force

FDI

Foreign Direct Investment

FDI Policy

Foreign Direct Investment Policy dated April 17, 2014

FEMA

Foreign Exchange Management Act

FIPB

Foreign Investment Promotion Board

FII

Foreign Institutional Investor

FPI

Foreign Portfolio Investor

FVCI

Foreign Venture Capital Investor

GAAR

General Anti-Avoidance Rules

GP

General Partner

HNI

High Net worth Individuals

InvIT

Infrastructure Investment Trust

InvIT Regulations

Securities And Exchange Board of India (Infrastructure Investment Trusts) Regulations,

IPO

Initial Public Offering

ITA

Income Tax Act, 1961

LP

Limited Partner

LRS

Liberalized Remittance Scheme

NBFC

Non-Banking Financial Services

NCD

Non-Convertible Debenture

NRI

Non-Residential Indian

PE

Permanent Establishment

PIO

Person of Indian Origin

PIS

Portfolio Investment Scheme

PN2

Press Note 2 of 2005

Press Note 10

Press note 10 of 2014 issued by the Ministry of Commerce and Industry dated December 03, 2014

Press Release

Press release issued by the Ministry of Commerce and Industry dated October 29, 2014

Nishith Desai Associates 2015

Abbreviations
Provided upon request only

QFI

Qualified Foreign Investor

RBI

Reserve Bank of India

REITs

Real Estate Investment Trusts

REIT Regulations

Securities And Exchange Board of India (Real Estate Investment Trusts) Regulations

REMF

Real Estate Mutual Fund

Rs./INR

Rupees

SEZ Act

Special Economic Zones Act, 2005

SBT

Singapore Business Trust

SEBI

Securities and Exchange Board of India

SPV

Special Purpose Vehicle

TISPRO Regulations

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

1. Private Equity in 2014: Lessons Learnt and


Expectations in 2015!
Just as we gear up to the transformational Budget
2015 as promised by the Modi Government, we bring
to you a crisp summary of how private equity (PE)
performed in 2014, what were the lessons learnt and
what lies ahead.
India witnessed an increase in the number and size
of PE investments made in 2014 aggregating to
around $11.5 billion, which is 17% higher in terms
of the total investment value as compared to the
same period last year.1 E-commerce (led by Flipkart
with two major rounds of funding)2 followed by
financial services, power and energy and engineering
drove most of the activity with renewed interest in
real estate sector as well. In the past years, exit routes
have always remained one of the key deterrents
for investors to invest into India, however last
year we saw as many as 221 exits (including partexit tranches) amounting to around $3.8 billion.3
Following are some of transaction trends / issues
that gained significance in 2014, and which may be
talked about more in 2015:

I. Withholding Taxes
Notwithstanding the fact that the seller was an
eligible tax resident of Mauritius or Singapore
or other treaty jurisdiction, buyers in almost all
secondary transactions insisted on withholding
full capital gains taxes, and typically negotiated
for a host of alternatives such as NIL withholding
certificate, tax escrow, tax insurance, tax opinions
and specific tax indemnities. With tax insurance not
being available in all cases, deals were seen being
done typically on the back of tax opinion and tax
indemnity. Please see our article on such safeguards.
With Cyprus notified as a non-cooperative
jurisdiction under Section 94A of the Income Tax
Act, we saw increased applications being made to
tax authorities under Section 197 of the IT Act for nil
withholding.

II. General Anti-Avoidance Rules


(GAAR)
Though the government has promised to provide tax
predictability, GAAR continues to remain a concern.
Please click here4 for our detailed article on GAAR.
Even in 2015, though there are strong indications
that GAAR may be deferred, the ability of the tax
department to bring any income generating from
impermissible avoidance arrangements post August
30, 2010 may remain a concern.

III. Companies Act, 2013


2014 also saw the implications of the new
Companies Act, 2013 (2013 Act) replacing the
Companies Act 1956 (1956 Act) as majority of
provisions of the 2013 Act were notified only
in 2014. As of this date, 1956 Act has not been
completely repealed and some of the major portions
continue to be in force along with the provisions of
the 2013 Act. We have analysed the changes brought
in by the 2013 Act in detail, please click here 5 for our
analysis. Some of the important provisions of the
2013 Act which gained significance last year are:

A. Directors liability
For the first time ever, the duties of the directors
have been codified and a monetary punishment
has been prescribed in case the directors act in
contravention of their prescribed duties. Further,
under the 2013 Act, any director who becomes
aware of any contravention of the provisions of
the 2013 Act by way of his participation in the
board meeting or receipt of information under
any proceedings etc. but does not object to such
contravention is termed as an officer in default and
the concerned director is subject to the punishment
prescribed under the 2013 Act. Such liability also

1. http://myiris.com/news/economy/private-equity-investments-is-positive-in-2015-pwc-india/20141223140914199
2. http://www.vccircle.com/news/general/2014/12/31/top-pe-deals
3. http://www.vccircle.com/news/general/2014/12/31/top-pe-exits
4. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/taxing-times-copyright-or-copyrightedarticle-the-debate-continues.html
5. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/companies-act-series.html

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Private Equity in 2014: Lessons Learnt and Expectations in 2015!


Provided upon request only

extends to the non-executive directors in addition


to the executive directors. Notification of these
provisions last year made the investors re-think
about the board position, and many investors in
practice appointed an observer even when they had
a right to appoint a director. Directors and Officers
Liability Insurance (D&O Insurance) was seen as a
necessity, even though in some cases such insurance
has been found to be inadequate.

B. Insider trading
Insider trading provisions do exist for listed
companies and very recently the Securities
Exchange Board of India (SEBI) has notified the
new regulations (please click here 6 to read our
analysis on the same). However, the 2013 Act has
also introduced an insider trading provision, which
in addition to public listed companies, also applies
to unlisted companies (whether public or private).
Please click here7 for our article on the new insider
trading regulations.

C. Voting arrangements
Under 1956 Act, concept of different classes of shares
i.e. equity shares and preference shares was not
applicable to private companies, and hence such
companies were allowed to issue shares (whether
equity or preference) with differential rights. For
instance, preference shares with voting rights on
as if converted basis, etc. However under the 2013
Act, (i) the provision relating to different classes
of shares has been made applicable to both private
and public companies; (ii) no separate exemption
has been provided to private companies for the
issuance of shares (whether equity or preference)
with differential rights; and (iii) it has been
specifically provided that preference shares cannot
have voting rights; therefore, private companies
now cannot issue preference shares with voting
rights. Since, preference shares continue to be the
preferred instrument of investment because of
certain other benefits such as better enforcement of
anti-dilution and liquidation preference, we have
seen more voting rights arrangements being entered
into between the shareholders, to give effect to the

commercials.

IV. Representation and


Warranties Insurance (R&W
Insurance)
R&W insurance gained popularity in 2014, especially
in secondaries between PE players. Since in such
deals, (i) the original promoter or the company
may not directly benefit, (ii) the selling investor is
typically not involved in the day to day management
of the company, and (iii) the selling investor is not in
a position to give business related warranties, R&W
Insurance was seen as an important risk and liability
mitigation tool at a rather reasonable premium. This
also is the case, where the fund life of the selling
investor is going to end soon. The costs for such
R&W Insurance could be borne completely by the
seller, or shared between the buyer and the seller. In
cases where the promoter may not have the financial
wherewithal to honor his / its representations and
warranties, R&W Insurance offered an ideal prospect
in deal making.

V. Structured Debt Transactions


Structured debt, mostly listed non-convertible
debentures with payable-when-able structures or
variable-linked-coupon structures gained credence
in 2014 as well. Such structures were also seen in
promoter funding structures where the promoter
entity issues structured debt to acquire shares in
their listed company with the return on these debt
instruments linked to performance of the listed stock
with some downside protection. As these are debt
instruments, PE investors derived comfort from: (i)
guaranteed returns plus equity upside depending
upon the companys EBIDTA, stock prices, cash
flows, etc.; and (ii) security creation in the form of
mortgage, pledge, guarantee etc. For the promoters,
such instruments offered tax optimization
without equity dilution. Please click here 8 for our
research paper on Private Equity and Private Debt
Investments in India for a more detailed analysis.

6. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/India_s_SEBI_Approves_New_Regulations_on_Insider_Trading.
pdf
7. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/sebi-finally-introduces-stricter-insidertrading-regulations.html?no_cache=1&cHash=42ba49fb253107995ceb11da2af4163a
8. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Private_Equity_and_Private_Debt_Investments_in_India.pdf

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Private Equity and Debt in Real Estate

VI. RBIs Timeline for Regulatory


Approval
In July last year, RBI came out with certain timelines
for different kinds of regulatory approvals. Under
these timelines, RBI has made its departments
answerable in case they exceed the prescribed
timeline. The investor community and other
stakeholders have always been apprehensive
about approaching any regulatory body for
any approval and therefore the transactions
were typically structured in a way to avoid the
requirement of any approvals, at times, by even
letting go of certain rights. This was because, in
most cases, the regulatory bodies instead of opining
on the application would just hold on, leading to
unnecessary delays in the project. But now with
the RBIs Timelines for Regulatory Approvals, the
stakeholders would have more certainty from a
timeline perspective, and hence they will be more
forthcoming in approaching them for the approvals.

VII. Shareholder Activism


Shareholder activism has slowly gathered pace in
India. Several big conglomerates last year faced
the ire of minority shareholders who rejected their
various resolutions like setting up of a subsidiary
company, related party transactions, increase in
the remuneration of the top executives, disposal of
an undertaking etc.9 Some reports suggest that the
instances of shareholder activism in India are highest
in Asia.10 Advent of shareholder activism in India is
a welcome change and is being appreciated by global
investors as it brings transparency in the system
and also helps the minority shareholders to raise
their concerns directly with the top management
of the company. It also ensures that the interest of
the various investors, be it small retail investors or
an institutional investor is safeguarded at all times
and the companies provide detailed rationale for
each resolution proposed and also to address the
perceptional issues as well. While shareholder
activism may bring in more transparency into the
system, if misused it can also lead to hampering of

the decision making process in the company.

VIII. Diligence
2014 witnessed investors conducting more stringent
background checks on the promoters and key
managerial personnel. Forensic audits and anticorruption / anti-bribery compliances gained
increased importance.11

IX. Entry and Exit Facilitation


RBI relaxed the DCF based pricing for entry and
exits to a more liberal internationally accepted
pricing methodology. Put options (common mode
of exit in certain asset classes like real estate) were
legitimized.12 Capital account controls were also
relaxed to allow for partly paid shares and warrants,
which were quite helpful in structuring foreign
investments within the convoluted and stringent
Indian regulatory framework.

X. Externalisation
Externalization, or setting up of offshore holding
companies for Indian assets, continued to attract
both private equity players and their portfolio
companies, especially in the tech space. Some of the
major reasons for doing so include tax benefits at
the time of exit, avoiding Indian exchange control
issues, mitigating currency fluctuation risk, better
enforceability of rights, etc. For a more detailed
analysis on externalisation, please click here.13

XI. Depository Receipts (DRs)


Ministry of Finance allowed issuance of ADRs /
GDRs both sponsored and unsponsored by unlisted
companies in India. For further details on the new
depository receipt regulation, please click here.14
This allowed for Indian companies to tap global

9. http://www.ft.com/cms/s/0/3f0aa396-7ba7-11e4-b6ab-00144feabdc0.html#axzz3OaSRBnji
10. http://www.business-standard.com/article/markets/shareholder-activism-in-india-highest-in-asia-says-report-114092300620_1.html
11. http://articles.economictimes.indiatimes.com/2015-01-07/news/57791855_1_india-fraud-survey-j-sagar-associates-uk-bribery-act
12. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/cheers-for-offshore-funds-put-optionspermitted.html?no_cache=1&cHash=02e2afb88f85c0c69750945d7ac21f59
13. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/regulatory-regime-forcing-cosexternalisation-1.html?no_cache=1&cHash=a66f640217af2550c22a0751446e2945
14. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/access-to-global-capital-markets-madeeasier.html?no_cache=1&cHash=76d2a124a22b9184d0eda9cc21e00569

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Private Equity in 2014: Lessons Learnt and Expectations in 2015!


Provided upon request only

capital markets without first going public in India


considering that only a handful of Indian companies
went public in 2014. DRs also allow a tax optimized
entry and exit route for private equity to invest in
Indian companies.15 Please click here 16 to refer to our
article on the benefits of issuing DRs.

C. Creating vibrant public markets

Conclusion

D. Defer and Rationalize GAAR

Year 2015 started off with Sensex zooming to an


all-time high level, reduction in the lending rates
by RBI, controlled inflation, certainty of achieving
fiscal targets, RBI allowing an India conglomerate
group to give a pre-decided downside protection on
equity shares which is reportedly more than 2 time
the existing fair market value of the equity shares.
All these factors will certainly improve the image
of India in the eyes of the international investors.
However, there remain certain issues/demands
which if accommodated in the Budget 2015 will
boost the PE investments in India, such as:

While there are reports that the Government is


contemplating to defer GAAR, the government
should more importantly focus on certainty, fairness
and stability in the implementation of GAAR.

A. MAT

F. Transfer Taxes

Government should exclude Special Economic Zones


(SEZ) and transfers to real estate investment trusts
(REITs) from the purview of minimum alternate tax
(MAT). Even for other sectors the rate at which
MAT is imposed should be reduced to around 10%.

In order to ensure ease of exit, revenue should


provide tax certainity on both direct and indirect
transfers. On direct transfers, there should be
certainty to tax treaty entitlement and attendant
capital gains treatment. Such certainty will allay
the unnecessary costs of tax insurance and make
transfers of Indian assets easier. From an indirect
transfer (Vodafone case) perspective, the government
should clearly define the scope and extent of the
terms such as transfer, interest, substantially
in the context of indirect transfers, and accept
Shome Committees recommendation that the term
substantially should mean that alteast 50% of the
value of the overseas entity derives its value from
Indian assets.

B. Tax Pass Through


Tax pass through should be provided to all the
alternative investment funds, and not just Venture
Capital Funds. This should not result in any tax
leakage for the revenue since anyways either the
trust or its beneficiaries can be taxed, but will go a
long way in giving tax predictability to investors.

Institutional play in bourses needs to be encouraged,


and for that purpose restrictions on insurance
companies and pension funds on capital markets
exposure need to be relooked at.

E. FVCI Investment
FVCIs should be permitted to invest in all sectors
(except the current negative list), rather than the
current nine sectors that FVCIs are eligible to invest
in.

15. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/access-to-global-capital-markets-madeeasier.html?no_cache=1&cHash=76d2a124a22b9184d0eda9cc21e00569
16. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/How_to_raise_funds_and_monetize_investments.pdf

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

2. Regulatory Framework for Foreign


Investment
Foreign investments into India are primarily
regulated by primarily three regulators, the Reserve
Bank of India (RBI), the Foreign Investment
Promotion Board (FIPB) and the Department
of Industrial Policy and Promotion (DIPP). In
addition to these regulators, if the securities are
listed or offered to the public, dealings in such
securities shall also be regulated by the Indian
securities market regulator, Securities and Exchange
Board of India (SEBI).
Foreign investment into India is regulated under
Foreign Exchange Management Act, 1999 (FEMA)
and the regulations thereunder, primarily Foreign
Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India)
Regulations, 2000 (TISPRO Regulations). Keeping
in view the current requirements, the DIPP (an
instrumentality of the Ministry of Commerce &
Industry), and the RBI make policy pronouncements
on foreign investment through Press Notes / Press
Releases / Circulars which are notified by the RBI
as amendments to the TISPRO Regulations. These
notifications take effect from the date of issue
of Press Notes / Press Releases / Circulars, unless
specified otherwise therein.
In order to bring clarity and certainty in the policy
framework, the DIPP for the first time issued a
consolidated policy relating to FDI in India on
April 1, 2010, which is now revised annually and
represents the current policy framework on FDI.
The latest policy as of the date of this paper is dated
April 17, 2014 (FDI Policy).
Foreign investment can be classified into the
following investment regimes
i. Foreign Direct Investment (FDI);
ii. Foreign Venture Capital Investment regime, for
investments made by SEBI registered Foreign
Venture Capital Investors (FVCI);
iii. Foreign Portfolio Investor regime, for
investments made by SEBI registered Foreign
Portfolio investor (FPI);
iv. Non Resident Indian regime, for investments
made by non-resident Indians and persons of
Indian origin (NRI).
Separately, Indian entities are not permitted to avail

Nishith Desai Associates 2015

of External Commercial Borrowings (ECB), which


are essentially borrowings in foreign currency, if the
end use of the proceeds of the ECB will be utilized
towards investment in real estate. However, recently,
the ECB norms were relaxed to allow ECB in low cost
housing. This paper does not discuss ECB.
We now discuss each of the investment routes
together with their attendant regulatory challenges.
Tax issues are dealt with later on under a separate
taxation head in this paper.

I. Foreign Direct Investment


Under the FDI Policy, Indian companies with
FDI are prohibited from engaging in Real Estate
Business, however, the term Real Estate Business
was not defined in the FDI Policy. Recently, DIPP
issued press note 10 of 2014 (Press Note 10),
wherein it defined the term as dealing in land
and immoveable property with a view to earning
profit or earning income there from and does not
include development of townships, construction of
residential/ commercial premises, roads or bridges,
educational institutions, recreational facilities, city
and regional level infrastructure, townships.
Over the period of years, Government has liberalized
foreign investment in real estate sector. First
notable step in this direction was taken in 2005
when DIPP issued the press note 2 of 2005 (PN2).
PN2 permitted FDI in townships, housing, builtup 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)
subject to fulfillment of certain entity level and
project level requirements. PN2 required that real
estate companies seek foreign investments only for
construction and development of projects, and not
for completed projects.
Last year, finance minister in his budget speech
had announced that the investment conditions for
FDI in real estate will be liberalized. Thereafter,
the Ministry of Commerce and Industry issued
a press release (Press Release) on October 29th,
2014 outlining the changes proposed in the FDI
Policy. This was followed by Press Note 10 and an
7

Regulatory Framework for Foreign Investment


Provided upon request only

RBI circular dated January 22, 2015, which formally


notified the relaxations. Though most of the changes
proposed in the Press Release have substantially
been incorporated in the Press Note, there are certain
differences in the Press Note as against Press Release.
Following are few of the key changes introduced by
the Press Note 10:

A. Minimum area for the Project


Development has been Changed
i. Development of Serviced Plots
Minimum land area requirement has been done
away with, while earlier the minimum land area of
10 hectares was prescribed for the development of
serviced plots.

ii. Construction-Development Projects


Minimum area has been reduced for the
construction development projects. Press Note 10
prescribes that the minimum area for a construction
development project shall be 20,000 sq. meters
of floor area whereas earlier the minimum area
prescribed was 50,000 sq. meters of built-up area.

B. Minimum Capitalization
The minimum capitalization has been reduced
to US $5 million. Further, different minimum
capitalization prescribed for wholly owned
subsidiaries and joint ventures with the Indian
partners has been done away with.

C. Affordable Housing
An exemption is provided to the real estate projects
which allocate 30% of the total project cost towards
the affordable housing projects from complying with
the minimum land area and minimum capitalization
requirements.
Press Note defines affordable housing projects as
projects where at least 40% of the FAR / FSI is for
dwelling unit of floor area of not more than 140 sq.
meters, and out of the total FAR / FSI reserved for
affordable housing, at least 1/4th (one-fourth) should

be for houses of floor area of not more than 60 sq.


meters.

D. Complete Assets
Press Note 10 has clarified that 100 percent FDI
under the automatic route is permitted in completed
projects for operation and management of townships,
malls/ shopping complexes and business centres.
It has been long debated whether FDI should be
permitted in commercial completed real estate.
By their very nature, commercial real estate
assets are stable yield generating assets as against
residential real estate assets, which are also seen as
an investment product on the back of the robust
capital appreciation that Indian real estate offers.
To that extent, if a company engages in operating
and managing completed real estate assets like a
shopping mall, the intent of the investment should
be seen to generate revenues from the successful
operation and management of the asset (just like a
hotel or a warehouse) as against holding it as a mere
investment product (as is the case in residential
real estate). The apprehension of creation of a
real estate bubble on the back of speculative land
trading is to that naturally accentuated in context of
residential real estate. To that extent, operation and
management of a completed yield generating asset
is investing in the risk of the business and should be
in the same light as investment in hotels, hospitals
or any asset heavy asset class which is seen as
investment in the business and not in the underlying
real estate. Even for REITs, the government was
favorable to carve out an exception for units of a
REIT from the definition of real estate business on
the back of such understanding, since REITs would
invest in completed yield general real estate assets.
The Press Note 10 probably aims to follow the
direction and open the door for foreign investment
in completed real assets, however the language is not
entirely the way it should have been and does seem
to indicate that foreign investment is allowed only in
entities that are operating an managing completed
assets as mere service providers and not necessarily
real estate. While it may seem that FDI has now
been permitted into completed commercial real
estate sector, the Press Note 10 leaves the question
unanswered whether these companies operating and
managing the assets may own the assets as well.
Please refer to Annexure I17 for our analysis on the
Press Release.

17. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/fdi-in-real-estate-liberalized.html?no_
cache=1&cHash=aab4287c1bb5517a914df41d068bd6fc

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Private Equity and Debt in Real Estate

As mentioned above, though substantial part of the


Press Release has been incorporated in the Press Note
there are some differences as well, some of which
have been highlighted below:

i. Lock-in restriction
The Press Release proposed that a foreign
investor could exit its investment either on
completion of the project or completion of three
years from the date of final investment, subject
to the development of the trunk infrastructure.18
The Press Note 10 has done away with such
restrictions, now a foreign investor can exit
its investment only on the completion of the
project or after the development of the trunk
infrastructure. This will entail both positive
and negative consequences. As this will provide
stimulus for small projects wherein the project
can be completed before three years. But, it
will pose practical issues to the projects which
are developed in phases, because it is unclear
whether a foreign investor can now exit upon
completion of any phase of project, when the
trunk infrastructure for other phases is not
developed.

ii. Combination project


The Press Release had retained the investment
condition for the development of a combination
project i.e. a combination project will have to comply
with the minimum area requirement proposed
for the service plots or construction development
projects. However, it seems that the concept of
combination project has been done away with as
there is no mention of the combination project in
the Press Note 10.
Please refer to Annexure II 19 for our detailed analysis
on the differences in the Press Note as against the
Press Release.
The liberalization of the FDI in the real estate sector
will definitely provide real estate sector with the
much needed impetus. However, the following issue
may cause concern to the investors at large:

Hitherto under the FDI Policy, a condition was


imposed that the FDI into a project can only be
brought in within 6 months of the commencement
of business of the company. However, the term
commencement of business was not defined,
regulators view was that the period of 6 months
was to be calculated from the earlier of the date on
which the investment agreement was signed by the
investor, or the date the funds for the first tranche are
credited into the account of the company. But, under
the Press Note 10 this condition has been changed
to 6 months from the commencement of the project,
which is defined as the date of approval of the
building plan/lay out plan by the relevant statutory
authority. This will hinder foreign investment in the
brownfield projects and under construction projects
which are stalled due to funding requirement.

i. Instruments for FDI


As per the FDI Policy, FDI can be routed into Indian
investee companies by using equity shares, fully, and
mandatorily/Compulsorily Convertible Debentures
(CCDs) and fully and Compulsorily Convertible
Preference Shares (CCPS).20 Debentures which are
not CCDs or optionally convertible instruments are
considered to be ECB and therefore, are governed by
clause (d) of sub-section 3 of section 6 of FEMA read
with Foreign Exchange Management (Borrowing or
Lending in Foreign Exchange) Regulations, 2000 as
amended from time to time. RBI recently amended
the TISPRO Regulation to permit issuance of partly
paid shares and warrants to non-residents (under the
FDI and the FPI route) subject to compliance with
the other provisions of the FDI and FPI schemes.
Since, these CCPS and CCDs are fully and
mandatorily convertible into equity, they are
regarded at par with equity shares and hence the
same are permissible as FDI. Further, for the purpose
of minimum capitalization, in case of direct share
issuance to non-residents, the entire share premium
received by the Indian company is included.
However, in case of secondary purchase, only the
issue price of the instrument is taken into account
while calculating minimum capitalization.
Herein below is a table giving a brief comparative
analysis for equity, CCPS and CCDs:

i. Commencement of business vis--vis


Commencement of project
18. Roads, water supply, street lighting, drainage and sewerage.
19. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/foreign-investment-in-real-estaterelaxed.html?no_cache=1&cHash=021a0562161f0d9533d322edc706bbfe
20. Please refer below to paragraph (3)(1) on put options

Nishith Desai Associates 2015

Regulatory Framework for Foreign Investment


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Particulars

Equity

CCPS

CCD

Basic Character

Participation in governance
and risk based returns

Assured Dividend
Convertible into Equity

Assured Coupon
Convertible into Equity

Liability to Pay

Dividend can be declared


only out of profits

Fixed dividend if profits


accrue

Fixed Interest payment - not


dependent on accrual of
profits

Limits to Payment

No cap on dividend

Dividend on CCPS cannot exceed 300 basis points over and


above the prevailing SBI prime lending rate in the financial
year in which CCPS is issued. No legal restriction on interest
on CCD, however in practice it is benchmarked to CCPS
limits.

Tax Efficiency

No tax deduction, dividend payable from post-tax income Dividend taxable @ 15% 21 in the hands of the company

Liquidation Preference

CCD ranks higher than CCPS in terms of liquidation preference. Equity gets the last
preference.

Others

Buy-back or capital reduction CCPS and CCDs need to be converted to equity before they
permissible
can be bought back or extinguished by the Indian company.

ii. Pricing Requirements


TISPRO Regulations regulate the price at which
a foreign direct investor invests into an Indian
company. Recently, RBI amended the TISPRO
Regulations wherein it rationalized the pricing
guidelines from the hitherto Discounted Cash Flows
(DCF) / Return on Equity (RoE) to internationally
accepted pricing methodologies. Accordingly, shares
in an unlisted Indian company may be freely issued
or transferred to a foreign direct investor, subject to
the following conditions being satisfied:
i. The price at which foreign direct investor
subscribes to / purchases the Indian companys
shares is not lower than the floor price computed
on the basis of the internationally accepted
pricing method. However, if the foreign investor
is subscribing to the memorandum of the
company, the internationally accepted pricing
methodologies does not apply22;
ii. The consideration for the subscription / purchase
is brought into India prior to or at the time of the

Interest expense deductible


Withholding tax as high as
40% but it can be reduced to
5% if investment done from
favourable jurisdiction

allotment / purchase of shares to / by the foreign


direct investor.
If any of the above conditions is not complied with,
then the prior approval of the FIPB and / or the RBI
would be required. If the foreign investor is an FVCI
registered with the SEBI, then the pricing restrictions
would not apply. In addition, if the securities are
listed, the appropriate SEBI pricing norms become
applicable.

II. FVCI Route


SEBI introduced the SEBI (Foreign Venture Capital
Investors) Regulations, 2000 (FVCI Regulations) to
encourage foreign investment into venture capital
undertakings.23 The FVCI Regulations make it
mandatory for an offshore fund to register itself with
SEBI.
FVCIs have the following benefits:

21. All tax rates mentioned herein are exclusive of surcharge and education cess.
22. RBI clarified in its A.P. (DIR Series) Circular No. 36 dated September 26, 2012, that shares can be issued to subscribers (both non-residents and NRIs)
to the memorandum of association at face value of shares subject to their eligibility to invest under the FDI scheme. The DIPP inserted this provision
in the FDI Policy, providing that where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of CA 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility
to invest under the FDI scheme. This addition in the FDI Policy is a great relief to non-resident investors (including NRIs) in allowing them to set up
new entities at face value of the shares and in turn reduce the cost and time involved in obtaining a DCF valuation certificate for such newly set up
companies.
23. Venture capital undertaking means a domestic company:- (i) whose shares are not listed in a recognised stock exchange in India; (ii) which is engaged in the business of providing services, production or manufacture of articles or things, but does not include such activities or sectors which are
specified in the negative list by the Board, with approval of Central Government, by notification in the Official Gazette in this behalf.

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Private Equity and Debt in Real Estate

A. Free Pricing
The entry and exit pricing applicable to FDI regime
do not apply to FVCIs. To that extent, FVCIs can
subscribe, purchase or sell securities at any price.

B. Instruments
Unlike FDI regime where investors can only
subscribe to only equity shares, CCDs and CCPS,
FVCIs can also invest into Optionally Convertible
Redeemable Preference Shares (OCRPS),
Optionally Convertible Debentures (OCDs) and
even Non-Convertible Debenture (NCDs).

C. Lock-in
Under the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 (ICDR
Regulations) the entire pre-issue share capital
(other than certain promoter contributions which
are locked in for a longer period) of a company
conducting an initial public offering (IPO)
is locked for a period of 1 year from the date
of allotment in the public issue. However, an
exemption from this requirement has been granted
to registered FVCIs, provided, the shares have been
held by them for a period of at least 1 year as on the
date of filing the draft prospectus with the SEBI. This
exemption permits FVCIs to exit from investments
immediately post-listing.

D. Exemption under the SEBI


(Substantial Acquisition of Shares
and Takeovers) Regulations, 2011
Takeover Code (Takeover Code)

However, the RBI while granting the permission/


certificate mandates that an FVCI can only invest
in the following sectors, viz. infrastructure sector,
biotechnology, IT related to hardware and software
development, nanotechnology, seed research and
development, research and development of new
chemical entities in pharma sector, dairy industry,
poultry industry, production of bio-fuels and hotelcum-convention centers with seating capacity of
more than three thousand.

III. FPI Route


Last year SEBI introduced the SEBI (Foreign Portfolio
Investment) Regulation 2014 (FPI Regulations).
FPI is the portfolio investment regime. The Foreign
Institutional Investor (FII) and Qualified Foreign
Investor (QFI) route have been subsumed into
the FPI regime. Exiting FIIs, or sub-account, can
continue, till the expiry of the block of three years for
which fees have been paid as per the SEBI (Foreign
Institutional Investors) Regulations, 1995, to buy,
sell or otherwise deal in securities subject to the
provisions of these regulations. However, FII or subaccount shall be required to pay conversion fee of
USD 1,00024on or before the expiry of its registration
for conversion in order to buy, sell or otherwise deal
in securities under the FPI Regulations. In case of
QFIs, they may continue to buy, sell or otherwise
deal in securities subject to the provisions of these
regulations, for a period of one year from the date
of commencement of FPI Regulations, or until he
obtains a certificate of registration as FPI, whichever
is earlier. Under the new regime SEBI has delegated
the power to designated depository participants
(DDP) who will grant the certificate of registration
to FPIs on behalf of SEBI.

A. Categories

SEBI has also exempted promoters of a listed


company from the public offer provisions in
connection with any transfer of shares of a listed
company, from FVCIs to the promoters, under the
Takeover Code.

Each investor shall register directly as an FPI,


wherein the FPIs have been classified into the
following three categories on the basis of risk-based
approach towards know your customer.

E. QIB Status

i. Category I FPI

FVCIs registered with SEBI have been accorded


qualified institutional buyer (QIB) status and are
eligible to subscribe to securities at an IPO through
the book building route.

Category I includes Government and governmentrelated investors such as central banks,


Governmental agencies, sovereign wealth funds
or international and multilateral organizations or
agencies.

24. Specified in Part A of the Second Schedule of the FPI Regulations

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Regulatory Framework for Foreign Investment


Provided upon request only

ii. Category II FPI

B. Investment Limits

Category II includes the following:

The FPI Regulations states that a single FPI or an


investor group shall purchase below ten percent
of the total issued capital of a company. The
position under the FII Regulations was that such
shareholding was not to exceed ten percent of the
share capital.

i. Appropriately regulated broad based funds;


ii. Appropriately regulated persons;
iii. Broad-based funds that are not appropriately
regulated but their managers are regulated;
iv. University funds and pension funds; and
v. University related endowments already
registered with SEBI as FIIs or sub-accounts
The FPI Regulations provide for the broad-based
criteria. To satisfy the broad-based criteria two
conditions should be satisfied. Firstly, fund should
have 20 investors even if there is an institutional
investor. Secondly, both direct and underlying
investors i.e. investors of entities that are set up
for the sole purpose of pooling funds and making
investments shall be counted for computing the
number of investors in a fund.

Under the FPI Regulations ultimate beneficial


owners investing through the multiple FPI entities
shall be treated as part of the same investor group
subject to the investment limit applicable to a single
FPI.

C. ODIs/P Note

iii. Category III FPI

An offshore derivative instrument (ODIs)


means any instrument, by whatever name called,
which is issued overseas by a foreign portfolio
investor against securities held by it that are
listed or proposed to be listed on any recognized
stock exchange in India, as its underlying units.
Participatory Notes (P-Notes) are a form of ODIs.25

Category III includes all FPIs who are not eligible


under Category I and II, such as endowments,
charitable societies, charitable trusts, foundations,
corporate bodies, trusts, individuals and family
offices.

P-notes are, by definition a form of ODI including


but not limited to swaps26, contracts for difference27,
options28, forwards29, participatory notes30, equity
linked notes31, warrants32, or any other such
instruments by whatever name they are called.
Below is a diagram that illustrates the structure of an
ODI.

25. Section 2(1)(j) of the FPI Regulations


26. A swap consists of the exchange of two securities, interest rates, or currencies for the mutual benefit of the exchangers. In the most common swap
arrangement one party agrees to pay fixed interest payments on designated dates to a counterparty who, in turn, agrees to make return interest payments that float with some reference rate.
27. An arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical
goods or securities. At the end of the contract, the parties exchange the difference between the opening and closing prices of a specified financial
instrument.
28. An option is a financial derivative that represents a contract sold by one party to another party. It offers the buyer the right, but not the obligation, to
call or put a security or other financial asset at an agreed-upon price during a certain period of time or on a specific date.
29. A forward contract is a binding agreement under which a commodity or financial instrument is bought or sold at the market price on the date of
making the contract, but is delivered on a decided future date. It is a completed contract as opposed to an options contract where the owner has the
choice of completing or not completing.
30. Participatory notes (P-notes) are a type of offshore derivative instruments more commonly issued in the Indian market context which are in the
form of swaps and derive their value from the underlying Indian securities.
31. An Equity-linked Note is a debt instrument whose return is determined by the performance of a single equity security, a basket of equity securities,
or an equity index providing investors fixed income like principal protection together with equity market upside exposure.
32. A Warrant is a derivative security that gives a holder the right to purchase securities from an issuer at a specific price within a certain time frame.

12

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Private Equity and Debt in Real Estate

Returns on underlying portfolio


Counterparty (holder of ODI)

Eligible FPIs

Investment
holdings
to hedge
exposures
under the ODI
as issued

Fixed or variables payments.


Eg: LIBOR plus a margin on a sum
equivalent to a loan on the value of the
underlying portfolio of the issued ODI

Distributions including
dividends and capital gains

Portfolio of listed securities on


any recognized stock exchange in
India
Fig 1: Investment through ODIs.

The position of the holder of an ODI is usually that


of an unsecured counterparty to the FPI. Under
the ODI (the contractual arrangement with the
issuing FPI), the holder of a P-note is entitled only
to the returns on the underlying security with no
other rights in relation to the securities in respect of
which the ODI has been issued. ODIs have certain
features that prevent the holder of such instruments
from being perceived as the beneficial owner of
the securities. These features include the following
aspects: (i) whether it is mandatory for the FPI to
actually hedge its underlying position (i.e. actually
hold the position in Indian securities), (ii) whether
the ODI holder could direct the voting on the shares
held by the FPI as its hedge, (iii) whether the ODI
holder could be in a position to instruct the FPI to
sell the underlying securities and (iv) whether the
ODI holder could, at the time of seeking redemption
of that instrument, seek the FPI to settle that
instrument by actual delivery of the underlying
securities. From an Indian market perspective, such
options are absent considering that the ownership
of the underlying securities and other attributes
of ownership vest with the FPI. Internationally,
however, there has been a precedence of such
structures, leading to a perception of the ODI holder
as a beneficial owner albeit only from a reporting
perspective under securities laws.33
The FPI Regulations provide that Category I FPIs
and Category II FPIs (which are directly regulated
by an appropriate foreign regulatory authority) are
permitted to issue, subscribe and otherwise deal

in ODIs.34 However, those Category II FPIs which


are not directly regulated (which are classified
as Category-II FPI by virtue of their investment
manager being appropriately regulated) and all
Category III FPIs are not permitted to issue, subscribe
or deal in ODIs.
On November 24, 2014, SEBI issued a circular1
(Circular) aligning the conditions for subscription
of offshore derivative instruments (ODIs) to those
applicable to FPIs. The Circular makes the ODI
subscription more restrictive. As per the Circular,
read with the FPI Regulations, to be eligible to
subscribe to ODI positions, the subscriber should be
regulated by an IOSCO member regulator or in case
of banks subscribing to ODIs, such bank should be
regulated by a BIS member regulator.
It states that an FPI can issue ODIs only to those
subscribers who meet certain eligibility criteria
mentioned under regulation 4 of the FPI Regulations
(which deals with eligibility criteria for an applicant
to obtain registration as an FPI) in addition to
meeting the eligibility criteria mentioned under
regulation 22 of the FPI Regulations. Accordingly,
ODIs can now only be issued to those persons
who (a) are regulated by an appropriate foreign
regulatory authority; (b) are not resident of a
jurisdiction that has been identified by Financial
Action Task force (FATF) as having strategic AntiMoney Laundering deficiencies; (c) do not have
opaque structures (i.e. protected cell companies
(PCCs) / segregated portfolio companies (SPCs)

33. CSX Corporation v. Childrens Investment Fund Management (UK) LLP. The case examined the total return swap structure from a securities law
perspective, which requires a disclosure of a beneficial owner from a reporting perspective.
34. Reference may be made to Explanation 1 to Regulation 5 of the FPI Regulations where it is provided that an applicant (seeking FPI registration) shall
be considered to be appropriately regulated if it is regulated by the securities market regulator or the banking regulator of the concerned jurisdiction in the same capacity in which it proposes to make investments in India.

Nishith Desai Associates 2015

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Regulatory Framework for Foreign Investment


Provided upon request only

or equivalent structural alternatives); and (d) comply


with know your client norms.
The Circular clarifies that opaque structures
(i.e. PCCs / SPCs or other ring-fenced structural
alternatives) would not be eligible for subscription
to ODIs. The Circular further requires that multiple
FPI and ODI subscriptions belonging to the same
investor group would be clubbed together for
calculating the below 10% investment limit.
The existing ODI positions will not be affected by
the Circular until the expiry of their ODI contracts.
However, the Circular specifies that there will not be
a rollover of existing ODI positions and for any new
ODI positions, new contracts will have to be entered
into, in consonance with the rules specified in the
Circular.35
FPIs shall have to fully disclose to SEBI any
information concerning the terms of and parties
to ODIs entered into by it relating to any securities
listed or proposed to be listed in any stock exchange
in India (Fig 1).
Please refer to our research paper Offshore Derivate
Instruments: An Investigation into Tax Related
Aspects 36, for further details on ODIs and their tax
treatment.

D. Listed Equity
The RBI has by way of Notification No. FEMA.
297/2014-RB dated March 13, 2014 amended the
TISPRO Regulations to provide for investment by
FPIs. Under the amended TISPRO Regulations, the
RBI has permitted Registered Foreign Portfolio
Investors (RFPI) to invest on the same footing as
FIIs.
A new Schedule 2A has been inserted after Schedule
2 of the TISPRO Regulations to provide for the
purchase / sale of shares / convertible debentures of
an Indian company by an RFPI under the Foreign
Portfolio Investment Scheme (FPI Scheme).
The newly introduced Schedule 2A largely
mirrors Schedule 2 of TISPRO which provides for
investments in shares / convertible debentures by
FIIs under the portfolio investment scheme (PIS).
Accordingly, an FPI can buy and sell listed securities
on the floor of a stock exchange without being

subjected to FDI restrictions.


Since, the number of real estate companies that are
listed on the stock exchange are not high, direct
equity investment under erstwhile FII route was
not very popular. FPI investors are also permitted to
invest in the real estate sector by way of subscription
/ purchase of Non-Convertible Debenture (NCD),
as discussed below.

E. Listed NCDs
Under Schedule V of the amended TISPRO
Regulations, read with the provisions of the FPI
Regulations, FPIs are permitted to invest in, inter
alia, listed or to be listed NCDs issued by an Indian
company. FPIs are permitted to hold securities only
in the dematerialized form.
Currently, there is an overall limit of USD 51 Billion
on investment by FPIs in corporate debt, of which
90% is available on tap basis. Further, FPIs can also
invest up to USD 30 Billion in government securities.
Listing of non-convertible debentures on the
wholesale debt market of the Bombay Stock
Exchange is a fairly simple and straightforward
process which involves the following intermediaries:
i. Debenture trustee, for protecting the interests of
the debenture holders and enforcing the security,
if any;
ii. Rating agency for rating the non-convertible
debentures (there is no minimum rating required
for listing of debentures); and
iii. Registrar and transfer agent (R&T Agent), and
the depositories for dematerialization of the
NCDs.
The entire process of listing, including the
appointment of the intermediaries can be
completed in about three weeks. The typical cost of
intermediaries and listing for an issue size of INR
One Billion is approximately INR One Million.
Herein below is a structure chart detailing the steps
involved in the NCD route:

35. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/sebi-rewrites-rules-on-offshore-derivative-instruments-odi.html?no_cache=1&cHash=60c81c4a0fcc1c1ffbbe8d2aae5e2e5bzz
36. Offshore Derivate Instruments: An Investigation into Tax Related Aspects
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Offshore_Derivative_Instruments.pdf

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Regulatory Framework for Foreign Investment

Private Equity and Debt in Real Estate

FPI
Offshore

Buy

India
Step 3: Trading of
NCDs on the floor
of stock exchange

Stock Exchange (WDM)

Step 2

Listing of NCDs

NCDs
Issuing Company

Warehousing Entity
Cash
Step 1: Issuance of NCDs
Fig 2: Investment through NCDs

Recently, the RBI and SEBI permitted direct


subscription of to be listed NCDs by the FII (now
FPIs), thus doing away with the requirement of
warehousing entity. These to be listed NCDs have to
listed on a recognized stock exchange within 15 days
of issuance, else, the FPI shall be required to disposeoff the NCDs to an Indian entity / person.
Under this route, any private or public company can
list its privately placed NCDs on the wholesale debt
market segment of any recognized stock exchange.
An FPI entity can then purchase these NCDs on the
floor of the stock exchange from the warehousing
entity. For an exit, these debentures may be sold
on the floor of the stock exchange37, but most
commonly these NCDs are redeemed by the issuing
company. So long as the NCDs are being offered
on private placement basis, the process of offering
and listing is fairly simple without any onerous
eligibility conditions or compliances.
The NCDs are usually redeemed at a premium that
is usually based on the sale proceeds received by the
company, with at least 1x of the purchase price being
assured to the NCD holder.
Whilst creation of security interest38 is not
permissible with CCDs under the FDI route, listed
NCDs can be secured (by way of pledge, mortgage

of property, hypothecation of receivables etc.) in


favor of the debenture trustee that acts for and in the
interest of the NCD holders.
Also, since NCDs are subscribed by an FPI entity
under the FPI route and not under the FDI route,
the restrictions applicable to FDI investors in
terms of pricing are not applicable to NCD holders.
NCDs, in fact, are also in some situations favored by
developers who do not want to share their equity
interest in the project. Further, not only are there no
interest caps for the NCDs (as in the case of CCDs or
CCPS), the redemption premium on the NCDs can
also be structured to provide equity upside to the
NCD holders, in addition to the returns assured on
the coupon on the NCD.
Separately, purchase of NCDs by the FPI from the
Indian company on the floor of the stock exchange
is excluded from the purview of ECB and hence,
the criteria viz. eligible borrowers, eligible lenders,
end-use requirements etc. applicable to ECBs, is not
applicable in the case of NCDs.
The table below gives a brief comparative analysis
for debt investment through FDI (CCDs) and FPI
(NCDs) route:

37. There have been examples where offshore private equity funds have exited from such instruments on the bourses.
38. Security interest is created in favour of the debenture trustee that acts for and on behalf of the NCD Holders. Security interest cannot be created
directly in favour of non-resident NCD holders.

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Regulatory Framework for Foreign Investment


Provided upon request only

Particulars

CCD FDI

NCD - FPI

Equity Ownership

Initially debt, but equity on conversion

Mere lending rights; however, veto rights can


ensure certain degree of control.

ECB Qualification

Assured returns on FDI compliant instruments,


or put option granted to an investor, may be
construed as ECB.

Purchase of NCDs by the FPI from the Indian


company on the floor of the stock exchange
is expressly permitted and shall not qualify as
ECB.

Coupon Payment

Interest pay out may be limited to SBI PLR +


300 basis points. Interest can be required to
accrue and paid only out of free cash flows.

Arm's length interest pay out should be


permissible resulting in better tax efficiency.
Higher interest on NCDs may be disallowed.
Interest can be required to accrue only out of
free cash flows.
Redemption premium may also be treated as
business expense.

Pricing

Internationally accepted pricing methodologies

DCF Valuation not applicable

Security Interest

Creation of security interest is not permissible


either on immoveable or movable property

Listed NCDs can be secured (by way of


pledge, mortgage of property, hypothecation
of receivables etc.) in favor of the debenture
trustee who acts for and in the interest of the
NCD holders

Sectoral
conditionalities

Only permissible for FDI compliant activities

Sectoral restrictions not applicable.

Equity Upside

Investor entitled to equity upside upon


conversion.

NCDs are favorable for the borrower to reduce


book profits or tax burden. Additionally,
redemption premium can be structured to
provide equity upside which can be favourable
for lender since such premium may be
regarded as capital gains which may not be
taxed if the investment comes from Singapore.

Administrative
expenses

No intermediaries required

NCD listing may cost around INR 10-15 lakh


including intermediaries cost. In case of FPI,
additional cost will be incurred for registration
with the DDP and bidding for debt allocation
limits, if required.

IV. NRI Route


A. Investment in Listed Securities
Similar to FPIs, the NRIs can also purchase the
shares of a real estate developer entity under the PIS.
Under Schedule 3 of the TISPRO Regulations, NRIs
are permitted to invest in shares and convertible
debentures on a stock exchange subject to various
conditions prescribed therein. The regulations
prescribe the following limits on the investment by
NRIs:
i. The total investment in shares by an NRI cannot
exceed 5% of the total paid up capital of the
company and the investment in convertible
debentures cannot exceed 5% of the paid up
16

value of each series of convertible debentures


issued by the company concerned; and
ii. The aggregate of the NRI investments in the
company cannot exceed 10% of the paid up
capital of the company. However, this limit could
be increased up to the sectoral cap prescribed
under the FDI policy with a special resolution of
the company.

B. Direct Investment in Unlisted


Securities
i. Investment on repatriation basis
Investment by NRI in unlisted securities on
repatriation basis is in a manner similar to any
Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

other investment allowed under Schedule 1 of


TISPRO Regulations; however, as stated earlier the
onerous requirements of minimum area, minimum
capitalization, lock-in etc. applicable for FDI in
construction development projects are not required
to be met by NRIs per paragraph 6.2.11.2.

ii. Investment on Non-repatriation Basis


Under Schedule 4 of TISPRO Regulations, NRIs on
a non-repatriation basis are permitted to purchase
shares or convertible debentures of an unlisted
Indian company without any limit and permission
to purchase. The above permission is not available to
NRIs for certain prohibited companies. 39

C. Direct Acquisition of Immovable


Property
The Foreign Exchange Management (Acquisition
and Transfer of Immovable Property in India)
Regulations, 2000, deal with direct acquisition of
immovable property by a person resident outside
India. Under the regulations a person resident
outside India has been classified into two sections:
i. A person resident outside India, who is a citizen
of India i.e. an NRI.
ii. A person resident outside India, who is of Indian
origin i.e. a person of Indian Origin40 (PIO)
Both NRIs and PIOs have been under the regulations
allowed to directly purchase or sell immovable
property other than agricultural property, plantation
or a farm house in India. However there are certain
conditions imposed under the regulations on the
payment of the purchase price and on repatriation of
the sale consideration received.

i. Purchase Price Conditions


The payment of the purchase price can be made only
by the following means:
Funds received in India through normal banking
channels by way of inward remittance from any
place outside India; or
Funds held in any non-resident account
maintained in accordance with the provisions
of the FEMA and the regulations framed by RBI
from time to time.

ii. Repatriation of Sale Proceeds


NRIs/ PIOs are allowed to freely repatriate the sale
proceeds provided:
The immovable property was acquired in
accordance with the regulations;
The amount remitted outside India does not
exceed the amount paid for the acquisition of the
immovable property;
In case of residential property, the repatriation is
not for the amount received on sale of more than
two residential properties.
However, any upside that is obtained on sale of such
property after being subject to applicable capital
gains tax and withholding can be remitted outside
India through a Non-Resident Ordinary Rupee
Account. However, the amount so repatriated cannot
exceed USD 1 (One) million a year.

39. Prohibited companies means - company which is a chit fund or a nidhi company or is engaged in agricultural/plantation activities or real estate
business or construction of farm houses or dealing in transfer of development rights
40. A PIO means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan) who
1.

at any time, held an Indian Passport or

2.

who or either of whose father or mother or whose grandfather or grandmother was a citizen of India by virtue of the Constitution of India or the
Citizenship Act, 1955 (57 of 1955).

Nishith Desai Associates 2015

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Provided upon request only

3. Legal Framework Key Developments


CA 2013 recently replaced CA 1956. CA 2013
introduces several new concepts and modifies
several existing ones. Some of the relevant new
provisions introduced by CA 2013 are as follows:
i.

Shares with Differential Rights

ii. Listed Company


iii. Inter-Corporate loans
iv. Deposits
v. Insider trading
vi. Squeeze out provisions
vii. Directors
viii. Subsidiary and Associate Company

ii. The company shall have a consistent track record


of distributable profits for the last 3 (three) years;
iii. The company should not have defaulted in filing
financial statements and annual returns for the
preceding 3 (three) financial years.
With this change, structuring different economic
rights for different class of equity shareholders
may become difficult given the conditions
that companies have to comply with under the
Companies (Share Capital and Debentures) Rules,
2014. For instance, investors in real estate expecting
a preferred IRR could earlier take their preferred
returns by way of dividends on different class of
equity, which may be difficult now. Any returns
on preference shares will be capped at a dividend
of around 13% (SBI prime lending rate + 300 basis
points).

ix. Merger of an Indian company with offshore


company.

II. Listed Company


I. Shares with Differential Rights
Under CA 1956, private companies were allowed
to issue shares with differential rights for their
contractual agreements because of an exemption
available to them.41 However, with the replacement
of CA 1956 with CA 2013, this flexibility is no
longer available to private companies. Now, private
Companies, like public companies, can issue only
equity and preference shares and shares with
differential rights subject to certain conditions, as
discussed below.42 Accordingly, preference shares
with voting rights on an as-if-converted basis may
not be permitted now.
The Companies (Share Capital and Debentures)
Rules, 2014 for issuance of equity share capital43
prescribe several conditions for any company issuing
equity shares with differential voting rights to
adhere to, such as:
i. Share with differential rights shall not exceed
26% (twenty six per cent) of the total post issue
paid up equity share capital, including equity
shares with differential rights issued at any point
of time;

CA 2013 defines listed company as a company which


has any of its securities listed on any recognized
stock exchange.44 Even private companies with their
NCDs listed on any recognized stock exchange will
be considered as a listed company. CA 2013 places
a whole gamut of obligations on listed companies,
such as:
i. Returns to be filed with the registrar of
companies if the promoter stake changes;
ii. Onerous requirements relating to appointment of
auditors;
iii. Formation of audit committee, nomination
and remuneration committee and stakeholders
relationship committee;
iv. Secretarial audit.

III. Inter-Corporate Loans and


Guarantee
Under CA 1956, loans made to or security provided
or guarantee given in connection with loan given

41. Section 90(2) of CA 1956 exempts applicability of Sections 85 to 89 to a private company unless it is a subsidiary of a public company
42. Sections 43 and 47 of CA 2013
43. Chapter IV, Share Capital and Debentures, Rules under CA 2013
44. Section 2(52), CA 2013

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Private Equity and Debt in Real Estate

to the director of the lending company and certain


specified parties required previous approval of
the Central Government. However, section 185 of
CA 2013 which has by far been the most debated
section of CA 2013, imposes a total prohibition on
companies providing loans, guarantee or security
to the director or any other person in whom the
director is interested, unless it is in the ordinary
course of business of the company to do so. Whilst
the restriction contained in CA 1956 applied
only to public companies, CA 2013 has extended
this restriction to even private companies. Such
restriction would create significant difficulties
for companies which provide loans, or guarantee/
security to their subsidiaries or associate companies
for operational purposes.

IV. Deposits
Under CA 2013, acceptance of deposits by an Indian
company is governed by stricter rules. Securities
application money that is retained for more than
60 days without issuance of securities shall be
deemed as a deposit. CA 2013 lays down stringent
conditions for issuance of bonds and debentures
unsecured optionally convertible debentures are
treated as deposits. CA 2013 also specifies additional
compliances for deposits accepted prior to the
commencement of CA 2013.

V. Insider Trading
CA 2013 now has an express provision for insider
trading wherein insider trading of securities of
a company by its directors or key managerial
personnel is prohibited.45 SEBI had notified the SEBI
(Prohibition of Insider Trading) Regulations, 1992
to govern public companies. The provision governs
both public and private companies. Hence, nominee
director appointed by a private equity investor
may also be subjected to insider trading provisions.
However, the practical application of section 195 of
CA 2013, with respect to a private company remains
to be ambiguous.

VI. Squeeze out Provisions


Under CA 2013 an acquirer or person acting in
concert, holding 90% of the issued equity share
capital has a right to offer to buy the shares held by
the minority shareholders in the Company at a price
determined on the basis of valuation by a registered
valuer in accordance with prescribed rules.46 The
corresponding provision under the 1956 Act was
permissive and not mandatory in nature.47 In this
regard, private equity investors may want to exercise
some caution while the majority shareholders
approach the 90% shareholding threshold in a
company. Interestingly, there is no provision that
minority shareholders will be bound to transfer their
shares to an acquirer or person acting in concert
and the section lacks the teeth required to enforce a
classic squeeze up.

VII. Directors
CA 2013 introduces certain new requirements with
respect to directors48 such as:
i. Independent Director: Independent Directors
have been formally introduced by CA 2013,
earlier the listing agreements49 provided for
appointment of independent directors. CA 2013
provides that Every listed public company
shall have at least one-third director of the total
number of directors as independent directors.
The term every listed public company is
ambiguous as it is the only instance in CA 2013
which applies to the listed public company and
not just listed company. This is relevant because
under CA 2013, a listed company also includes
a private company which has its NCDs listed on
the stock exchange.
ii. Resident Director: Every company to have a
director who was resident in India for a total
period of not less than 182 days in the previous
calendar year.
iii. Women Director: Prescribed class of companies
shall have atleast one woman director.
CA 2013 has for the first time, laid down specific
duties of directors, as follows:

45. Section 195, CA 2013


46. Section 236, CA 2013
47. Section 395, CA 1956
48. Section 149, CA 2013
49. Listing agreements set out the conditions that a company or issuer of share has to abide. Clause 49

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Legal Framework Key Developments


Provided upon request only

i. To act in accordance with the articles of the


company;
ii. To act in good faith in order to promote the
objects of the company for the benefit of its
members as a whole and in the best interests of
the company, its employees, the shareholders,
and the community and for the protection of
environment;
iii. To exercise his duties with due and reasonable
care, skill and diligence and shall exercise
independent judgment;
iv. Not to involve himself in a situation in which
he may have a direct or indirect interest that
conflicts or possibly may conflict, with the
interest of the company;
v. Not to achieve or attempt to achieve any
undue gain or advantage either to himself or
his relatives, partners, or associates and if such
director is found guilty of such, he shall be
liable to pay an amount equal to that gain to the
company;
vi. Not to assign his office and any such assignment
shall be void.
Having said the above, the liability of an
independent director and non-executive director
has been restricted to such acts of omission
or commission which had occurred with his
knowledge, attributable through board processes,
and with his consent or connivance or where he had
not acted diligently.

VIII. Control and Subsidiary and


Associate Company

i. According to CA 2013, control,50 shall include


the right to appoint majority of the directors or
to control the management or policy decisions
exercisable by a person or persons acting
individually or in concert, directly or indirectly,
including by virtue of their shareholding or
management rights or shareholders agreements
or voting agreements or in any other manner.
It is for the first time that the control has been
defined in the company law.
ii. Subsidiary Company: An entity will be subsidiary
of the holding company, if holding company
controls the composition of the board of directors
of the company or controls (directly or indirectly)
more than one half of the total share capital.51
iii. Associate Company: An entity will be an
associate of the company, if the company has a
significant influence over the entity, but it is not
the subsidiary company of the company.52
The concept of control as provided in the definition
of subsidiary company is narrower than what is
provided in the definition of the control.

IX. Merger of an Indian Company


with Offshore Company
Section 234 of CA 2013 permits mergers and
amalgamations of Indian companies with foreign
companies. However, the provisions of Section 234
go on to say that such mergers and amalgamations
are permitted only with companies incorporated
in the jurisdictions of such countries notified from
time to time by the Central Government. Hitherto,
only inbound mergers were permitted, whereby a
company incorporated outside India could merge
with an Indian company.

CA 2013 defines the term control and the definition


of subsidiary and associate company has changed:

50. Section 2(27), CA 2013


51. Section 2(87), CA 2013
52. Section 2(6), CA 2013

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Private Equity and Debt in Real Estate

4. Taxation Framework
I. Overview of Indian Taxation
System
Income tax law in India is governed by the Income
Tax Act, 1961 (ITA). Under the ITA, individuals and
entities, whether incorporated or unincorporated,
if resident for tax purposes in India, shall be taxed
on their worldwide income in India. Companies are
held to be resident in India for tax purposes a) if they
are incorporated in India; or b) if they are controlled
and managed entirely in India. Therefore, it is
possible for companies incorporated outside India
to be considered to be resident in India if they are
wholly controlled in India. Non-residents are taxed
only on income arising from sources in India.
India has entered into more than 80 Double Taxation
Avoidance Agreements (DTAAs or tax treaties).
A taxpayer may be taxed either under domestic law
provisions or the DTAA to the extent that it is more
beneficial. In order to avail benefits under the DTAA,
a non-resident is required furnish a tax residency
certificate (TRC) from the government of which it
is a resident in addition to satisfying the conditions
prescribed under the DTAA for applicability of the
DTAA. Further, the non-resident should also file
tax returns in India and furnish certain prescribed
particulars to the extent they are not contained
in the TRC. For the purpose of filing tax returns
in India, the non-resident should obtain a tax ID
in India (called the permanent account number
PAN). PAN is also required to be obtained to claim
the benefit of lower withholding tax rates, whether
under domestic law or under the DTAA. If the nonresident fails to obtain a PAN, payments made to
the non-resident may be subject to withholding
tax at the rates prescribed under the ITA or 20%,
whichever is higher.

A. Corporate Tax
Resident companies are taxed at 30%. A company
is said to be resident in India if it is incorporated in
India or is wholly controlled and managed in India.
A minimum alternate tax (MAT) is payable by
companies at the rate of around 18.5%. Non-resident
companies are taxed at the rate of 40% on income
derived from India, including in situations where
profits of the non-resident entity are attributable to a
permanent establishment in India.

Nishith Desai Associates 2015

B. Tax on Dividends and Share


Buy-back
Dividends distributed by Indian companies are
subject to a distribution tax (DDT) at the rate of 15%,
payable by the company. However, the domestic law
requires the tax payable to be computed on a grossed
up basis; therefore, the shareholders are not subject
to any further tax on the dividends distributed to
them under the ITA. An Indian company would
also be taxed at the rate of 20% on gains arising to
shareholders from distributions made in the course
of buy-back or redemption of shares.

C. Capital Gains
Tax on capital gains depends upon the holding
period of a capital asset. Short term capital gains
(STCG) may arise if the asset has been held for less
than three years (or in the case of listed securities,
less than one year) before being transferred; and
gains arising from the transfer of assets having
a longer holding period than the above are
characterized as long term capital gains (LTCG).
The 2014 Finance Budget proposes a minimum
holding period of 3 years for LTCG with respect to
unlisted securities.
LTCG earned by a non-resident on sale of unlisted
securities may be taxed at the rate of 10% or 20%
depending on certain considerations. LTCG on sale of
listed securities on a stock exchange are exempt and
only subject to a securities transaction tax (STT).
STCG earned by a non-resident on sale of listed
securities (subject to STT) are taxable at the rate of
15%, or at ordinary corporate tax rate with respect
to other securities. Foreign institutional investors
or foreign portfolio investors are also subject to
tax at 15% on STCG and are exempt from LTCG
(on the sale of listed securities). The 2014 Budget
also proposes to treat all income earned by Foreign
Institutional Investors or Foreign Portfolio Investors
as capital gains income. In the case of earn-outs or
deferred consideration, Courts have held that capital
gains tax is required to be withheld from the total
sale consideration (including earn out) on the date of
transfer of the securities / assets.
India has also introduced a rule to tax non-residents
on the transfer of foreign securities the value of
which may be substantially (directly or indirectly)
derived from assets situated in India. Therefore,

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Legal Framework Key Developments


Provided upon request only

the shares of a foreign incorporated company can


be considered to be a situate in India and capable
of yielding capital gains taxable in India, if the
companys share derive their value substantially53
from assets located in India. However, income
derived from the transfer of P-notes and ODIs derive
their value from the underlying Indian securities
is not considered to be income derived from the
indirect transfer of shares in India because holding
such derivative instruments which are linked to
underlying shares in India does not constitute an
interest in the Indian securities.
Tax is levied on private companies and firms that
buy/ receive shares of a private company for less
than their fair market value. Therefore, where the
consideration paid by a private company or firm
is less than the fair market value of the shares, the
purchaser would be taxed on the difference under
these provisions.

D. Interest
Interest earned by a non-resident may be taxed at a
rate between 5% to around 40% depending on the
nature of the debt instrument. While a concessional
withholding tax rate of 5% for interest on long
term foreign currency denominated bonds is
available until July 1, 2017, the eligibility of rupeedenominated non-convertible debentures for the
same benefit expires on June 1, 2015.

E. Minimum Alternate Tax


Where the tax payable by the investee company
is less than 18.5 percent of its book profits, due to
certain exemption such company is still required to
pay atleast 18.5 percent (excluding surcharge and
education cess) as Minimum Alternate Tax.

F. Safe Harbor Rules


Safe harbour rules have been recently notified with
the aim of providing more certainty to taxpayers
and to address growing risks of transfer pricing
litigation in India. Under this regime, tax authorities
will accept the transfer price set by the taxpayer if
the taxpayer and transaction meet eligibility criteria
specified in the rules. Key features of these rules are:
i. The rules will be applicable for 5 years beginning

assessment year 2013-14. A taxpayer can opt for


the safe harbor regime for a period of his choice
but not exceeding 5 assessment years. Once opted
for, the mutual agreement procedure would not
be available.
ii. Safe harbor margins have been prescribed
for provision of: (i) IT and ITeS services; (ii)
Knowledge Process Outsourcing services;
(iii) contract R&D services related to generic
pharmaceutical drugs and to software
development; (iv) specified corporate guarantees;
(v) intra-group loan to a non-resident wholly
owned subsidiary; (vi) manufacture and export of
core and non-core auto components.
iii. For provision of IT and ITeS services, KPO and
contract R&D services, the rules would apply
where the entity is not performing economically
significant functions.
iv. Taxpayers and their transactions must meet the
eligibility criteria. Each level of the authority
deciding on eligibility (i.e. the Assessing
Officer, the Transfer Pricing Officer and the
Commissioner) must discharge their obligations
within two months. If the authorities do not
take action within the time allowed, the option
chosen by the taxpayer would be valid.
v. Once an option exercised by the taxpayer has
been held valid, it will remain so unless the
taxpayer voluntarily opts out.
The option exercised by the assessee can be held
invalid in an assessment year following the initial
assessment year only if there is change in the facts
and circumstances relating to the eligibility of the
taxpayer or of the transaction.

G. Wealth Tax
Buildings, residential and commercial premises held
by the investee company will be regarded as assets as
defined under Section 2(ea) of the Wealth Tax Act,
1957 and thus be eligible to wealth tax in the hands
of the investee company at the rate of 1 percent on
its net wealth in excess of the base exemption of INR
30,00,000. However, commercial and business assets
are exempt from wealth tax.

H. Service Tax
The service tax regime was introduced vide Chapter

53. Although, substantial has not been defined under ITA, as per draft DTC 2013, substantial is proposed to be 20%

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Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

V to the Finance Act, 1994. Subsequent Finance Acts,


(1996 to 2003) have widened the service tax net by
way of amendments to Finance Act, 1994. Service
tax is levied on specified taxable services at the rate
of 12.3654 percent on the gross amount charged by
the service provider for the taxable services rendered
by him. The Finance Act, 2004 has introduced
construction services as a taxable service and thus
such services provided by the investee company
would be subject to service tax in India. Further, the
Finance Act, 2007, has brought services provided
in relation to renting of immovable property, other
than residential properties and vacant land, for use
in the course or furtherance of business or commerce
under the service tax regime.

ground of substance requirements. For instance, the


India-Singapore DTAA denies benefits under the
DTAA to resident companies which do not meet the
prescribed threshold of total annual expenditure
on operations. The limitation on benefits (LoB)
clause under the India-Luxembourg DTAA permits
the benefits under the DTAA to be overridden by
domestic anti-avoidance rules. India and Mauritius
are currently in the process of re-negotiating
their DTAA to introduce similar substance based
requirements.

I. Stamp Duty and Other Taxes

Profits of a non-resident entity are typically not


subject to tax in India. However, where a permanent
establishment is said to have been constituted
in India, the profits of the non-resident entity are
taxable in India only to the extent that the profits
of such enterprise are attributable to the activities
carried out through its permanent establishment
in India and are not remunerated on an arms
length basis. A permanent establishment may be
constituted where a fixed base such as a place of
management, branch, office, factory, etc. is available
to a non-resident entity; or where a dependent
agent habitually exercises the authority to conclude
contracts on behalf of the non-resident entity.
Under some DTAAs, employees or personnel of
the non-resident entity furnishing services for the
non-resident entity in India may also constitute a
permanent establishment. The recent Delhi High
Court ruling in e-Funds IT Solutions/ e-Funds
Corp vs. DIT 55 laid down the following principles
for determining the existence of a fixed base or a
dependent agent permanent establishment:

The real estate activities of the venture capital


undertaking would be subject to stamp duties and
other local/municipal taxes, property taxes, which
would differ from State to State, city to city and
between municipals jurisdictions. Stamp duties may
range between 3 to 14 percent.

II. Specific Tax Considerations for


PE Investments
A. Availability of Treaty Relief
Benefits under a DTAA are available to residents of
one or both of the contracting states that are liable
to tax in the relevant jurisdiction. However, some
fiscally transparent entities such as limited liabilities
companies, partnerships, limited partnerships,
etc. may find it difficult to claim treaty benefits.
For instance, Swiss partnerships have been denied
treaty benefits under the India-Switzerland DTAA.
However, treaty benefits have been allowed to
fiscally transparent entities such as partnerships,
LLCs and trusts under the US and UK DTAAs, insofar
as the entire income of the entity is liable to be taxed
in the contracting state; or if all the beneficiaries
are present in the contracting state being the
jurisdiction of the entity. On the other hand, Swiss
partnerships have been denied treaty benefits under
the India-Switzerland.
Benefits under the DTAA may also be denied on the

B. Permanent Establishment and


Business Connection

i. The mere existence of an Indian subsidiary or


mere access to an Indian location (including a
place of management, branch, office, factory,
etc.) does not automatically trigger a permanent
establishment risk. A fixed base permanent
establishment risk is triggered only when the
offshore entity has the right to use a location in
India (such as an Indian subsidiarys facilities);
and carries out activities at that location on a
regular basis.
ii. Unless the agent is authorized to and has
habitually exercised the authority to conclude
contracts, a dependent agent permanent
establishment risk may not be triggered. Merely

54. Excluding currently applicable education cess of 3 percent on service tax


55. TS-63-HC-2014 (DEL); MANU/DE/0373/2014

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Legal Framework Key Developments


Provided upon request only

assigning or sub-contracting services to the


Indian subsidiary does not create a permanent
establishment in India.
iii. An otherwise independent agent may, however,
become a permanent establishment if the agents
activities are both wholly or mostly wholly
on behalf of foreign enterprise and that the
transactions between the two are not made under
arms length conditions.
Where treaty benefits are not available, the concept
of business connection, which is the Indian
domestic tax law equivalent of the concept of
permanent establishment, but which is much wider
and has been defined inclusively under the ITA,
would apply to non-resident companies deriving
profits from India.

C. Indirect Transfer of shares in India


No explanation has been given under the ITA as
to when such securities may be considered to have
derived value substantially from assets located
in India. However, such transfers may be subject
to relief available under the relevant DTAA. As
discussed, these provisions should not impact
p-notes or ODI holders.
As mentioned earlier, substantial has not been
defined under ITA, based on the recommendation of
high level government committee, draft DTC 2013,
provides for a threshold of 20% or more assets are
situated in India. However, given the ambiguity of
the provisions governing indirect transfer of shares
in India, the impact of these provisions have to be
examined on a case-by-case basis and necessary risk
mitigation strategies have to be adopted to address
the concerns of buyers or sellers. Please refer to
Annexure III for a detailed analysis.

D. General Anti-Avoidance Rule


India has introduced general anti-avoidance rules
(GAAR) which provide broad powers to tax
authorities to deny a tax benefit in the context of
impermissible avoidance agreements, i.e., structures
(set up subsequent to August 30, 2010) which are
not considered to be bona fide or lack commercial
substance. GAAR will come into effect from April
1, 2015 and would override DTAAs signed by India.
Therefore, the transfer of any investment made
subsequent to August 30, 2010 shall be subject to the
GAAR from April 1, 2015. The applicability of the
GAAR is subject to a de minimis threshold of INR 3
24

crore. GAAR is not attracted in the case of a foreign


institutional investor which is not claiming benefits
under the DTAA and has invested in in listed or
unlisted securities in compliance with the law. The
option of obtaining an advance ruling is available
even in the context of GAAR structures. Care has
to be taken while developing and implementing
structures to address GAAR and in this context, it is
important to document the business and strategic
rationale for each step in a structure.

E. Transfer Pricing Regulations


Under the Indian transfer pricing regulations, any
income arising from an international transaction is
required to be computed having regard to the arms
length price. There has been litigation in relation
to the mark-up charged by the Indian advisory
company in relation to services provided to the
offshore fund / manager. In recent years, income
tax authorities have also initiated transfer pricing
proceedings to tax foreign direct investment in
India. In some cases, the subscription of shares of a
subsidiary company by a parent company was made
subject to transfer pricing regulations, and taxed in
the hands of the Indian company to the extent of
the difference in subscription price and fair market
value.

F. Withholding Obligations
Tax would have to be withheld at the applicable
rate on all payments made to a non-resident, which
are taxable in India. The obligation to withhold
tax applies to both residents and non-residents.
Withholding tax obligations also arise with respect
to specific payments made to residents. Failure to
withhold tax could result in tax, interest and penal
consequences. Therefore, often in a cross-border the
purchasers structure their exits cautiously and rely
on different kinds of safeguards such as contractual
representations, tax indemnities, tax escrow, nil
withholding certificates, advance rulings, tax
insurance and legal opinions. Such safeguards have
been described in further detail under Annexure V.

G. Structuring Through Intermediate


Jurisdictions
Investments into India are often structured through
holding companies in various jurisdictions for
number of strategic and tax reasons. For instance,
US investors directly investing into India may face
Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

difficulties in claiming credit of Indian capital gains


tax on securities against US taxes, due to the conflict
in source rules between the US and India. In such
a case, the risk of double taxation may be avoided
by investing through an intermediary holding
company.
While choosing a holding company jurisdiction it
is necessary to consider a range of factors including
political and economic stability, investment
protection, corporate and legal system, availability
of high quality administrative and legal support,
banking facilities, tax treaty network, reputation and
costs.
India has entered into several BITs and other
investment agreements with various jurisdictions,
most notably, Mauritius. It is important to take
advantage of structuring investment into India,
may be the best way to protect a foreign investors
interest. Indian BITs are very widely worded and
HEAD OF TAXATION

MAURITIUS

are severally seen as investor friendly treaties.


Indian BITs have a broad definition of the terms
investment and investor. This makes it possible
to seek treaty protection easily through corporate
structuring. BITs can also be used by the investors to
justify the choice of jurisdiction when questioned for
GAAR.
Over the years, a major bulk of investments into
India has come from countries such as Mauritius,
Singapore and Netherlands, which are developed
and established financial centers that have favorable
tax treaties with India. Cyprus was also a popular
investment holding jurisdiction, but due to a recent
blacklisting by India due to issues relating to
exchange of information, investments from Cyprus
could result in additional taxes and disclosure
till this position changes. The following table
summarizes some of the key advantages of investing
from Mauritius, Singapore and Netherlands:

SINGAPORE

NETHERLANDS

Capital gains tax on sale of Mauritius residents not


taxed. No local tax in
Indian securities
Mauritius on capital gains.

Singapore residents not


taxed. Exemption subject
to satisfaction of certain
substance criteria and
expenditure test by the
resident in Singapore.
No local tax in Singapore
on capital gains (unless
characterized as business
income).

Dutch residents not taxed if


sale made to non-resident.
Exemption for sale made
to resident only if Dutch
shareholder holds lesser
than 10% shareholding in
Indian company. Local Dutch
participation exemption
available in certain
circumstances.

Tax on dividends

Indian company subject to


DDT at the rate of 15%.

Indian company subject to


DDT at the rate of 15%.

Indian company subject to


DDT at the rate of 15%.

Withholding tax on
outbound interest

No relief. Taxed as per Indian 15%


domestic law.

10%

Withholding tax on
15% (for royalties). FTS 56
outbound royalties and fees may be potentially exempt in
for technical services
India.

10%

10%

Other comments

There are specific limitations


under Singapore corporate
law (e.g. with respect to
buyback of securities).

To consider anti-abuse rules


introduced in connection
with certain passive holding
structures.

Mauritius treaty in
the process of being
renegotiated. Possible
addition of substance rules.

56. Fees for Technical Services

Nishith Desai Associates 2015

25

Provided upon request only

5. Exit Options / Issues


One of the largest issues faced by private equity
investors investing in real estate under the FDI route
is exit. Following are some of the commonly used
exit options in India, along with attendant issues /
challenges:

I. Put Options
Put options in favour of a non-resident requiring an
Indian resident to purchase the shares held by the
non-resident under the FDI regime were hitherto
considered non-compliant with the FDI Policy by
the RBI. RBI has legitimized option arrangements57
through an amendment in the TISPRO Regulations.
The TISPRO Regulations now permit equity shares,
CCPS and CCDs containing an optionality clause to
be issued as eligible instruments to foreign investors.
However, the amendment specifies that such an
instrument cannot contain an option / right to exit at
an assured price.
The amendment, for the first time, provides for a
written policy on put options, and in doing that sets
out the following conditions for exercise of options
by a non-resident:
i. Shares/debentures with an optionality clause
can be issued to foreign investors, provided that
they do not contain an option/right to exit at an
assured price;
ii. Such instruments shall be subject to a minimum
lock-in period of one year;
iii. The exit price should be as follows:
a. In case of listed company, at the market price
determined on the floor of the recognized stock
exchanges;
b. In case of unlisted equity shares, at a price
not exceeding that arrived on the basis of
internationally accepted pricing methodologies
c. In case of preference shares or debentures, at a
price determined by a Chartered Accountant
or a SEBI registered merchant banker per any
internationally accepted methodology.

II. Buy-Back
In this exit option, shares held by the foreign
investor, are bought back by the investee company.
Buy-back of securities is subject to certain
conditionalities as stipulated under Section 68 of
CA 2013. A company can only utilize the following
funds for undertaking the buy-back (a) free reserves
(b) securities premium account, or (c) proceeds of
any shares or other specified securities. However,
buy-back of any kind of shares or other specified
securities is not allowed to be made out of the
proceeds of an earlier issue of the same kind of shares
or same kind of other securities.
Further, a buy back normally requires a special
resolution58 passed by the shareholders of the
company unless the buyback is for 10% or less of
the total paid-up equity capital and free reserves
of the company. Additionally, a buy back cannot
exceed 25% of the total paid up capital and free
reserves of the company in one financial year, and
post buy-back, the debt equity ratio of the company
should not be more than 2:1. Under CA 1956, it was
possible to conduct two buy-backs in a calendar year,
i.e., one in the financial year ending March 31 and a
subsequent offer in the financial year commencing
on April 1. However, in order to counter this
practice, the CA 2013 now requires a cooling off
period of one year between two successive offers for
buy-back of securities by a company.
From a tax perspective, traditionally, the income
from buyback of shares has been considered as
capital gains in the hands of the recipient and
accordingly the investor, if from a favourable treaty
jurisdiction, could avail the treaty benefits. However,
in a calculated move by the Government to undo this
current practice of companies resorting to buying
back of shares instead of making dividend payments,
the government, vide Budget 2013-2014 levied a tax
of 20%59 on domestic unlisted companies, when
such companies make distributions pursuant to a
share repurchase or buy back.
The said tax at the rate of 20% is imposed on a
domestic company on consideration paid by it which
is above the amount received by the company at the

57. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8682&Mode=0
58. Under CA 2013, a Special Resolution is one where the votes cast in favor of the resolution (by members who, being entitled to do so, vote in person
or by proxy, or by postal ballot) is not less than three times the number of the votes cast against the resolution by members so entitled and voting.
(The position was the same under CA 1956).
59. Exclusive of surcharge and cess.

26

Nishith Desai Associates 2015

Legal Framework Key Developments

time of issuing of shares. Accordingly, gains that


may have arisen as a result of secondary sales that
may have occurred prior to the buy-back will also be
subject to tax now.
The proposed provisions would have a significant
adverse impact on offshore realty funds and foreign
investors who have made investments from
countries such as Mauritius, Singapore, United States
of America and Netherlands etc. where buy-back of
shares would not have been taxable in India due to
availability of tax treaty benefits. Further, being in
the nature of additional income tax payable by the
Indian company, foreign investors may not even be
entitled to a foreign tax credit of such tax.
Additionally, in the context of the domestic investor,
even the benefit of indexation would effectively
be denied to such investor and issues relating to
proportional disallowance of expenditure under
Section 14A of the ITA (Expenditure incurred in
relation to income not includible in total income)
may also arise. This may therefore result in the buyback of shares being even less tax efficient than the
distribution of dividends.
As an alternative to buy-back, the investor could
approach the courts for reduction of capital under
the provisions of section 66 of CA 2013; however,
the applications for such reduction of capital need
to be adequately justified to the court. From a tax
perspective, the distributions by the company to
its shareholders, for reduction of capital, would be
regarded as a dividend to the extent to which the
company possesses accumulated profits and will be
taxable in the hands of the company at the rate of
15% 60 computed on a grossed up basis, distribution
over and above the accumulated profits (after
reducing the cost of shares) would be taxable as
capital gains.61

III. Redemption
In recent times, NCDs have dominated the market.
NCDs can be structured as pure debt or instruments
delivering equity upside. The returns on the NCDs
can be structured either as redemption premium or
as coupon, the tax consequences of the same is set
out earlier in this paper. The redemption premium
in certain structured equity deals can be pegged to
the cash flows or any commercially agreed variable,
enabling such debentures to assume the character
of payable when able kind of bonds. A large amount

Private Equity and Debt in Real Estate

of foreign investment into real estate has been


structured through this route. However, not much
data is available on how many such bonds have been
redeemed and at what IRRs. The instances of default
are few and it does seem that in most cases such
debentures are indeed providing returns and exits to
the investors as contemplated.

IV. Initial Public Offering


Another form of exit right which an investor may
have is in the form of an Initial Public Offering
(IPO). However, looking at the number of real
estate companies which have listed in the previous
decade in India, this may not be one of viable exit
options. The reason why real estate companies do
not wish to go public in India is manifold.
For instance, real estate companies are usually selfliquidating by nature. Thus, unless the flagship or
the holding company goes public, there may not
be enough public demand for and interest in such
project level SPVs. There is also some reluctance
in going for an IPO due to the stringent eligibility
criteria (for instance 3 year profitability track record
etc.) and the level of regulatory supervision that the
companies (usually closely held) will be subjected to
post listing.

V. Third Party Sale


In this option, the investor sells its stake to a third
party. If the sale is to another non-resident, the lockin of 3 years would start afresh and be applicable
to such new investor. Also, since FDI in completed
assets is not permitted, the sale to a non-resident
can only be of an under-construction project.
In a third party sale in real estate sector, it may
also be important to negotiate certain contractual
rights such as drag along rights. For instance, if
the sale is pursuant to an event of default, and the
investor intends to sell the shares to a developer, it
is likely that the new developer may insist on full
control over the project, than to enter a project with
an already existing developer. In such cases, if the
investor has the drag along rights, he may be able to
force the developer to sell its stake along with the
investors stake.

60. Exclusive of surcharge and cess


61. CIT v G. Narasimhan, (1999)1SCC510

Nishith Desai Associates 2015

27

Exit Options / Issues


Provided upon request only

VI. GP Interest Sale62


A private equity fund is generally in the form of a
limited partnership and comprises two parties,
the General Partner (GP) and the Limited Partner
(LP). The GP of a fund is generally organized as a
limited partnership controlled by the fund manager
and makes all investment decisions of the fund. In
a GP interest sale, the fund manager sells its interest
in the limited partnership (GP Interest) to another
fund manager or strategic buyer. While technically
sale of GP Interest does not provide exits to the LPs as
they continue in the fund with a new fund manager,
it provides an effective exit to fund managers
who wish to monetize their interests in the fund
management business.

VII. Offshore Listing


The Ministry of Finance (MoF) by a notification63
has permitted Indian unlisted companies to list
their ADRs, GDRs or FCCBs abroad on a pilot basis
for two years without a listing requirement in
India. In pursuance to this, the Central Government
amended64 the Foreign Currency Convertible Bonds
and Ordinary Shares (Through Depositary Receipt
Mechanism) Scheme, 1993 (FCCB Scheme). RBI
also directed65 the authorized dealers towards the
amendment to the FCCB Scheme.
Regulation 3(1)(B) of the FCCB Scheme, prior to the
amendment restricted unlisted Indian companies
from issuing GDRs/FCCBs abroad as they were
required to simultaneously list in Indian stock
exchanges.
The notification amended the regulation 3(1)(B) to
permit Indian unlisted companies to issue GDRs/
FCCBs to raise capital abroad without having to
fulfill the requirement of a simultaneous domestic
listing.
But it is subject to following conditions:
The companies will be permitted to list
on exchanges in IOSCO/FATF compliant
jurisdictions or those jurisdictions with which
SEBI has signed bilateral agreements (which are
yet to be notified).

The raising of capital abroad shall be in


accordance with the extant foreign FDI Policy,
including the sectoral caps, entry route,
minimum capitalization norms and pricing
norms;
The number of underlying equity shares offered
for issuance of ADRs/GDRs to be kept with the
local custodian shall be determined upfront and
ratio of ADRs/GDRs to equity shares shall be
decided upfront based on applicable FDI pricing
norms of equity shares of unlisted company;
The funds raised may be used for paying off
overseas debt or for operations abroad, including
for the funding of acquisitions;
In case the money raised in the offshore listing
is not utilized overseas as described, it shall
be remitted back to India within 15 days for
domestic use and parked in AD category banks.
The Central Government has recently prescribed
that SEBI shall not mandate any disclosures, unless
the company lists in India.

VIII. Flips
Another mode of exit could be by way of rolling
the real estate assets into an offshore REIT by
flipping the ownership of the real estate company
to an offshore company that could then be listed.
Examples of such offshore listings were seen around
2008, when the Hiranandani Group set up its
offshore arm Hirco PLC building on the legacy of
the Hiranandani Groups mixed use township model.
Hirco was listed on the London Stock Exchanges
AIM sub-market. At the time of its admission
to trading, Hirco was the largest ever real estate
investment company IPO on AIM and the largest
AIM IPO in 2006. Another example is Indiabulls
Real Estate that flipped some of its stabilized and
developing assets into the fold of a Singapore
Business Trust (SBT) that got listed on the
Singapore Exchange (SGX). However, both Hirco
and Indiabulls have not been particularly inspiring
stories and to some extent disappointed investor
sentiment. Based on analysis of the listings, it is clear
that there may not be a market for developing assets
on offshore bourses, but stabilized assets may receive

62. Reaping the Returns: Decoding Private Equity Real Estate Exits in India, available at http://www.joneslanglasalle.co.in/ResearchLevel1/Reaping_
the_Returns_Decoding_Private_Equity_Real_Estate_Exits_in_India.pdf
63. The Press Release is available on:http://finmin.nic.in/press_room/2013/lisitIndianComp_abroad27092013.pdf
64. Notification no. GSR 684(E) [F.NO.4/13/2012-ECB], dated 11-10-2013
65. RBI A.P. (Dir Series) Circular No. 69 of November 8, 2013

28

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

good interest if packaged well and have the brand


of a reputed Indian developer. Hence, stabilized
assets such as educational institutions, hospitals,
hotels, SEZs, industrial parks et al may find a market
offshore.
Please refer to Annexure IV for a detailed note on
exit by rolling assets to offshore REITs.

IX. Domestic REITs


Recently, SEBI introduced the REIT Regulations.
REITs would serve as an asset-backed investment
mechanism where an Indian trust is set up for the
holding of real estate assets as investments, either
directly or through an Indian company set up as a
Special Purpose Vehicle (SPV). However, there was
no clarity on the proposed tax regime, which is a key
element for enabling a successful REIT regime.
The Finance Act, 2014 has made certain amendments
to the Income Tax Act, 1961 (ITA) to clarify the
income tax treatment of REITs and InvITs. These
provisions have been incorporated depending on the
stream of income that the REIT would be earning
and distributing. The Finance Act, 2014 introduced
the definition of business trust in the Income Tax

Nishith Desai Associates 2015

Act, 1961 which includes REITs. REITs will have


a tax pass through status for income received by
way of interest or receivable from the SPV as per s.
10 (23FC), 10 (23FD) and 115UA of the Income Tax
Act, 1961. Long term capital gains on sale of units as
well as dividends received by REITs and distributed
to the investor shall be tax exempt. Interest income
received by the REIT is tax exempt and foreign
investors shall be subject to a low withholding tax
of 5% on interest payouts. Thanks to clarity in tax
treatment, global investors can soon participate in
core real estate assets in India. The regime for InvITs
would provide a massive boost to infrastructure
growth and development in India.
Even though the REITs Regulations have been
released, so far the regime has not taken off on
account of non-tax and tax issues.
Please refer to Annexure V for our article published
in Live Mint on the tax and non-tax issues that make
the Indian REIT unattractive.

29

Provided upon request only

6. Domestic Pooling
Domestic pools of capital may be structured
primarily in two ways:

I. AIF
In 2012, SEBI notified the (Alternative Investment
Funds) Regulations, 2012 (AIF Regulations) to
regulate the setting up and operations of alternate
investment funds in India. As provided in the AIF
Regulations, it replaces and succeeds the erstwhile
SEBI (Venture Capital Funds) Regulations, 1996.
The AIF Regulations further provide that from
commencement of such regulations, no entity or
Person shall act as an AIF unless it has obtained a
certificate of registration from the SEBI. The AIF
Regulations define Alternative Investment Funds
as any fund established or incorporated in India
in the form of trust, company, a limited liability
partnership or a body corporate which is a privately
pooled investment vehicle which collects funds from
investors, whether Indian or foreign, for investing
in accordance with a defined investment policy for
the benefit of investors, and is not covered under the
SEBI regulations to regulate fund management.
The real estate funds shall be registered with SEBI as
a Category II Alternate Investment Fund and shall be
governed by the provisions of the AIF Regulations.
The AIF Regulations prescribe that the raising of
commitments should be done strictly on a private
placement basis and the minimum investment
that can be accepted by a fund from an investor
is INR 1,00,00,000 (Rupees One Crore Only). The
AIF Regulations also prescribe that a placement
memorandum detailing the strategy for investments,
fees and expenses proposed to be charged, conditions
and limits on redemption, risk management tools
and parameters employed, duration of the life cycle
of the AIF should also be issued prior to raising
commitments and be filed with the SEBI prior to
launching of a fund. Further, the AIF Regulations
also prescribe that the manager or a sponsor of an
AIF shall have a continuing interest in the AIF of
not less than 2.5% of the corpus or INR 5,00,00,000
(Rupees Five Crore Only), whichever is lower, in the
form of investment in the AIF and such interest shall
not be through the waiver of management fees.
The AIF Regulations provide that a close ended
AIF may be listed only after the final closing of the
fund or scheme on a stock exchange subject to a

30

minimum tradable lot of INR 1,00,00,000 (Rupees


One Crore Only). Accordingly, the Fund will not be
in a position to list its securities without complying
with the above conditions. The AIF Regulations lay
down several investment restrictions on category II
AIFs. These restrictions are as follows:
i. A Category II AIF cannot invest more than
25 percent of its corpus in any one investee
company.
ii. A Category II AIF may invest in units of Category
I and II AIFs but not in the units of fund of funds.
iii. An AIF may not invest in its Associates except
with the approval of 75% of the investors by
value of their investments in the AIF. For this
purpose Associates means a company or a
limited liability partnership or a body corporate
in which a director or trustee or partner or
sponsor or manager of the AIF or a director or
partner of the manager or sponsor holds, either
individually or collectively, more than 15% of
its paid-up equity share capital or partnership
interest, as the case may be.
An investee company has been defined to mean
any company, special purpose vehicle or limited
liability partnership or body corporate in which
an AIF makes an investment. A registered AIF will
be subject to investigation/inspection of its affairs
by an officer appointed by SEBI, and in certain
circumstances the SEBI has the power to direct the
AIF to divest its assets, to stop launching any new
schemes, to restrain the AIF from disposing any of
its assets, to refund monies or assets to Investors
and also to stop operating in, accessing the, capital
market for a specified period.
However, a Category II AIF is not permitted to
receive foreign investment under the extant
exchange control regulations without prior approval
of the FIPB. Though in a few cases, such approval
has been granted in cases where the investment was
required for the purposes of making the sponsor
commitment, no approval has thus far been granted
for LPs willing to invest in the AIF. Based on reports,
SEBI is in discussions with the RBI and FIPB to allow
foreign investment beyond sponsor commitment
in AIFs, but as we understand the RBI and the FIPB
are not yet comfortable with such permissions on a
policy level.

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

II. NBFC
In light of the challenges that the FDI and the FPI
route are subjected to, there has been a keen interest
in offshore realty funds to explore the idea of setting
up their own NBFC to lend or invest to real estate.
An NBFC is defined in terms of Section 45I(c) of the
RBI Act, 1934, as a company engaged in granting
loans/advances or in the acquisition of shares/
securities, etc. or hire purchase finance or insurance
business or chit fund activities or lending in any
manner provided the principal business of such
a company does not constitute any non-financial
activities such as (a) agricultural operations (b)
industrial activity (c) trading in goods (other than
securities) (d) providing services (e) purchase,
construction or sale of immovable property. Every
NBFC is required to be registered with the RBI, unless
specifically exempted.
Following are some of the latest changes with
respect to NBFC:

A. Transfer of Shares from Resident to


Non-resident 66
Earlier there was only a requirement of giving 30
thirty days written notice67 prior to effecting a
change of control of non-deposit NBFC (the term
control has the same meaning as defined in the SEBI
Takeover Code), and a separate approval was not
required; and unless the RBI restricted the transfer of
shares or the change of control, the change of control
became effective from the expiry of thirty days from
the date of publication of the public notice.
However, recently, the RBI vide its circular dated
May 26, 201468, has prescribed that in order to
ensure that the fit and proper69 character of the
management of NBFCs is continuously maintained
for both, deposit accepting and non-deposit
accepting NBFCs, its prior written permission has to
be obtained for any takeover or acquisition of control
of an NBFC, whether by acquisition of shares or

otherwise. This RBI circular requires prior approval


in the following situations also:
i. any merger/amalgamation of an NBFC with
another entity or any merger/amalgamation of an
entity with an NBFC that would give the acquirer
/ another entity control of the NBFC;
ii. any merger/amalgamation of an NBFC with
another entity or any merger/amalgamation of
an entity with an NBFC which would result in
acquisition/transfer of shareholding in excess of
10 percent of the paid up capital of the NBFC;
iii. for approaching a court or tribunal under Section
391-394 of CA 1956 or Section 230-233 of CA 2013
seeking order for mergers or amalgamations with
other companies or NBFCs.
The abovementioned RBI approval is sought from
the DNBS (Department of Non-Banking Supervision)
division of the RBI.
Separately, earlier, any transfer of shares of a
financial services company from a resident to a
non-resident required prior approval of the Foreign
Exchange Department of the Reserve Bank of India
(FED), which took anywhere in the region of 2 4
months. In a welcome move, as per a recent RBI
circular dated November 11, 2013, the requirement
to procure such an approval was removed if:

i. any fit and proper/ due diligence requirement


as regards the non-resident investor as stipulated
by the respective financial sector regulator shall
have to be complied with; and
ii. The FDI policy and FEMA regulations in terms of
sectoral caps, conditionalities (such as minimum
capitalization, etc.), reporting requirements,
documentation etc., are complied with.

B. Only Secured Debenture can be


Issued 70
NBFCs can only issue whether by way of private
placement of public issue fully secured debentures.

66. http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8561&Mode=0
67. The public notice had be published in one English and one vernacular language newspaper, copies of which were required to be submitted to the
RBI.
68. DNBS (PD) CC.No.376/03.10.001/2013-14
69. Under the Master Circular on Corporate Governance dated July 1, 2013, RBI had emphasized the importance of persons in management who fulfil
the fit and proper criteria. The Master Circular provides as follows:

it is necessary to ensure that the general character of the management or the proposed management of the non-banking financial company shall not
be prejudicial to the interest of its present and future depositors. In view of the interest evinced by various entities in this segment, it would be desirable that NBFC-D with deposit size of Rs 20 crore and above and NBFC-ND-SI may form a Nomination Committee to ensure fit and proper status of
proposed/existing Directors.
70. RBI/2012-13/560 DNBD(PD) CC No. 330/03.10.001/2012-13 and RBI/2013-14/115 DNBS(PD) CC No.349/03.10.001/2013-14

Nishith Desai Associates 2015

31

Domestic Pooling
Provided upon request only

The security has to be created within a month


from the date of issuance. If the security cover is
inadequate, the proceeds have to be placed in an
escrow account, till the time such security is created.

C. Private Placement 71
As per Section 67(2) of CA 1956, private placement
means invitation to subscribe shares or debenture
from any section of public whether selected as
members or debenture holders of the company
concerned or in any other manner. Section 67(3)
prescribes that shares or debenture under such
offer can be offered to maximum of fifty persons.
However, NBFCs where excluded from Section
67(3). But RBI has now restricted private placement
to not more than 49 investors, in line of the private
companies which are to be identified upfront by the
NBFC.

D. Deployment of Funds and


Miscellaneous
i. NBFCs can issue debentures only for deployment
of the funds on its own balance sheet and
not to facilitate requests of group entities/
parent company/ associates. Core Investment
Companies have been carved out from the
applicability of this restriction.
ii. NBFCs have been restricted from extending
loans against the security of its own debentures,
whether issued by way of private placement or
public issue.
Please refer to Annexure VI72 for detailed investment
note on investment through NBFCs.

71. Ibid
72. http://www.nishithdesai.com/New_Hotline/Realty/Realty%20Check%20-%20Debt%20Funding%20Realty%20in%20India_Jan2012.pdf

32

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

7. The Road Forward


The Indian real estate industry is at a stage where
the private equity players have seen a lot of exits,
with some making excellent multiples while others
burning their fingers deep. However, a larger chunk
of exits are expected to be witnessed in the next 2-3
years when the sector completes its first full cycle,
which is where the key challenge lies. Some of the
challenges that Indian real estate sector faces are as
follows:

I. REITs
The Budget 2014-2015 has put REITs back on the
fast track by proposing to take steps to bring clarity
in tax treatment of REITs, including a partial tax
pass-through regime for REITs. This will result in
the REIT not being subject to any tax in respect of
such interest income, whereas the investors will be
subject to tax on the same.
The much awaited framework for REITs has also
been announced and thanks to the present clarity in
tax treatment, global investors can soon participate
in core real estate assets in India. Long term capital
gains on sale of units as well as dividends received
by the REIT and distributed to the investor shall be
tax exempt. Interest income received by the REIT is
tax exempt and foreign investors shall be subject to a
low withholding tax of 5% on interest payouts.
In spite of the positive proposals brought forward by
the government to establish an investment-friendly
regime, there still remain certain issues with respect
of taxation of REITs. It should be noted that almost
all countries provide for a complete pass through
regime for REITs if the prescribed regulatory criteria
is met and a move towards that will further increase
interest in this space. It is hoped that the Finance
Ministry would address the above issues going
forward and possibly simplify the REIT taxation
regime.
Please refer to Annexure V for our article published
in Live Mint on the tax and non-tax issues that make
the Indian REIT unattractive.

II. Partner Issues


Uncooperative partner has been the largest issue
for private equity players. Promoter - investor
expectation mismatch are now increasingly seen.
Enforceability of tag along rights, drag along rights,
put options or even 3rd party exits clearly hinge on
the cooperation of the local partner.

III. Arbitration / Litigation


Indian courts have been known for their
lackadaisical approach to dispute resolution.
Hitherto, even international arbitration was not
free from the involvement of the Indian courts,
which was a concern for offshore investors. Now,
with the decision of the Supreme Court in the Balco
case, the jury is out that parties in an international
arbitration can agree to exclude the jurisdiction of
the Indian courts. In India, any dispute may be set to
comprise of two stages. The first being the liability
crystallization process, and other being the award
enforcement process. The liability crystallization
that typically took several decades sometimes, can
now be shorted to less than a year as well where
the process is referred to institutional arbitration
under the auspices of LCIA etc. Once an award has
been delivered, the enforcement process is rather
straightforward.

IV. Security Enforcement


Enforcement of security interest is still a challenge in
India. For instance, enforcing a mortgage in India is
a court driven process and can take long sometimes
even extending beyond couple of years. The situation
was better in case of pledge of listed shares which
was considered the most liquid security, as it could
be enforced without court involvement. However,
the court stay on the invocation of pledge of shares
of Unitech73, in spite of a breach of the terms, has
raised questions on this form of security as well.74

73. Court saves promoter pledge, http://www.moneycontrol.com/news/management/court-saves-promoter-pledge_520897.html, last visited on April 8,


2012
74. For the first time, a High Court (highest court of law in a state in India) stayed the invocation of a pledge and that too via an ex-parte (without the
defending party being present or heard) injunction handed out on a Sunday.

Nishith Desai Associates 2015

33

The Road Forward


Provided upon request only

Please see Annexure VII75 for an article on challenges


in invocation of pledge.

V. Offshore listing allowed for


unlisted Indian companies
Hitherto unlisted companies in India were
prohibited from issuing American / Global
Depositary Receipts (ADRs / GDRs) and Foreign
Currency Convertible Bonds (FCCB) without
a simultaneous or prior listing on a domestic
exchange in India. However, RBI and the Central

Government have now removed this requirement


of prior or simultaneous listing on a domestic
exchange, reverting to the position pre-2005, when
the requirement was introduced. Private companies
can now list their ADRs / GDRs / FCCB in an overseas
stock exchange.
The Central Government has recently prescribed
that SEBI shall not mandate any disclosures, unless
the company lists in India.
IV for articles analyzing the reasons why Indian
companies are being driven to list offshore and raise
funds abroad.

75. http://www.livemint.com/Companies/l5mzgtPyZRxqtimiq4CsxH/Concerns-among-PE-firms-over-enforcing-realty-share-pledges.html

34

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

Annexure I
Foreign Investment Norms for Real Estate
Liberalized
Minimum area threshold reduced from 50,000 sq
ft. to 20,000 sq ft.
No minimum area threshold, if 30% project cost
is contributed towards development of affordable
housing.
Are investments in completed yield generating
real estate assets allowed?

meeting dated October 29, 2014 (Press Release),


the Union Cabinet has cleared the further
liberalization of Foreign Direct Investment (FDI)
in construction-development sector, in line with
the announcements in the Finance Ministers budget
speech for 2014.

I. Changes
The changes sought to be made by the Press Release
are set out below.1

In a recent press release issued in relation to its

Provisions

Revised policy pursuant to Press Release

Existing Policy

Minimum Land
Requirements

Minimum area to be developed under each


project would be:

Minimum area to be developed under each project


would be as under:

i. Development of serviced plots: No minimum i. Development of serviced housing plots: Minimum land
land requirement;
area of 10 hectares;
ii. Construction-development projects:
ii. Construction-development projects: Minimum builtup area of 50,000 sq. meters;
Minimum floor area of 20,000 sq. meters;
iii. Combination project: Any of the above two
conditions need to be complied with

iii. Combination project: Any of the above two conditions


need to be complied with.

Minimum
Capitalization
Requirements

Minimum capitalization of USD 5 million.

For wholly owned subsidiary: minimum capitalization of


USD 10 million;

Timing of
investment

The funds would have to be brought in within


6 months of commencement of the project.

The funds would have to be brought in within 6 months


of commencement of business of the Company.

Commencement of the project has been


explained to mean date of approval of the
building plan/ lay out plan by the relevant
statutory authority.

No such concept of 10 years from commencement of


business earlier.

For joint ventures with Indian partners: minimum


capitalization of USD 5 million.

Subsequent tranches can be brought in till


the earlier of:
i. Period of 10 years from the commencement
of the project; or
ii. The completion of the project.

1.

The changes brought in by the Amendment are expected to be formalized in the form of a Press Note or by way of inclusion in the FDI Policy, and till
such time the changes do not have the binding force of law.

Nishith Desai Associates 2015

35

Foreign Investment Norms for Real Estate Liberalized


Provided upon request only

Lock-in

The investor is permitted to exit from the


investment at (i) 3 years from the date of final
installment, subject to development of trunk
infrastructure, or (ii) on the completion of the
project.

The investor is permitted to exit from the investment


at expiry of 3 years from the date of completion of
minimum capitalization.

For investment in tranches: The investor is permitted to


exit from the investment at the later of (a) 3 years from
Trunk infrastructure has not been defined,
the date of receipt of each tranche/ installment of FDI,
but is explained to include roads, water
or (b) at expiry of 3 years from the date of completion of
supply, street lighting, drainage and sewerage. minimum capitalization.
Repatriation of FDI or transfer of stake by a
Prior exit of the investor only with the prior approval of
non-resident investor to another non-resident FIPB
investor would require prior FIPB approval.
Sale of developed Only developed plots are permitted to be sold.
plots only
Developed plots would mean plots where
trunk infrastructure is developed, including
roads, water supply, street lighting, drainage
and sewerage.

Sale of undeveloped plots prohibited. Undeveloped


plots would mean plots where roads, water supply,
street lighting, drainage and sewerage, and other
conveniences, as applicable under prescribed
regulations, have not been made available.

The requirement of completion certificate has The investor was required to provide the completion
been done away with
certificate from the concerned regulatory authority
before disposal of serviced housing plots.
Minimum
development

No requirement of any such minimum


development.

At least 50% of the project must be developed within


a period of 5 years from date of obtaining all statutory
clearances.

Exemption

They are no longer exempt from the sale of


undeveloped plots.

Certain investments were exempt from complying


with the following requirements: (i) minimum land
area; (ii) minimum capitalization, (iii) lock-in, (iv) 50%
development within 5 year requirements and (v) sale of
undeveloped plots.

Affordable
Housing

Projects which allocate 30% of the project


cost for low cost affordable housing are
exempt from the minimum land area, and
minimum capitalization requirements.

No such exemption.

Certificate from
architect

The investee company required to procure


an architect empanelled by any authority
authorized to sanction building plan to
certify that the minimum floor area has been
complied.

No such requirement.

Completed
projects

It has been clarified that 100% FDI permitted


in completed projects for operation and
management of townships, malls/ shopping
complexes and business centers.

No such provision/ clarification

Responsibility
for obtaining
all necessary
approvals

Investee Company.

Investor/ Investee company.

36

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

II. Analysis
Provisions

Revised policy pursuant to Press


Release

Existing Policy

Minimum Land
Requirements

Minimum area to be developed under


each project would be:

Minimum area to be developed under each project would be as


under:

i. Development of serviced plots: No


minimum land requirement;

i. Development of serviced housing plots: Minimum land area


of 10 hectares;

ii. Construction-development projects: ii. Construction-development projects: Minimum built-up area


Minimum floor area of 20,000 sq.
of 50,000 sq. meters;
meters;
iii. Combination project: Any of the above two conditions need
iii. Combination project: Any of the
to be complied with
above two conditions need to be
complied with.

A. Serviced plots and combination


projects
Removal of minimum land requirements for
serviced plots is a substantial relaxation. It appears
that in case of combination projects as well, there
shall be no minimum land requirement. Such
relaxation could attract creative structuring for
foreign investments in smaller areas.

B. Construction- development projects


In case of construction-development projects, the
minimum land requirement has been reduced from

50,000 sq. meters of built-up area to 20,000 sq. meters


of floor area. The introduction of floor area concept,
as against the earlier benchmark of built-up area
may need to be examined. Floor area has been stated
to be defined as per the local laws/ regulations of
the respective state governments / union territories.
Definitions of floor area vary from state to state.
While floor area is defined for some areas, other
areas do not have any definition of the term, such
as the regulations for Greater Mumbai. It is to be
seen whether floor area in these regions would be
equivalent to built-up area or floor space index (FSI),
though in some cases, floor area is close to built-up
area.

Provisions

Revised policy pursuant to Press


Release

Existing Policy

Minimum
Capitalization
Requirements

Minimum capitalization of USD 5 million.

For wholly owned subsidiary: minimum capitalization of


USD 10 million;

In a market largely driven by debt such as listed


non-convertible debentures, a lower minimum
capitalization would be helpful considering
minimum capitalization can only consist of equity

Nishith Desai Associates 2015

For joint ventures with Indian partners: minimum


capitalization of USD 5 million.

and compulsorily convertible instruments. This will


also be helpful in tax structuring and optimization of
returns for investors.

37

Foreign Investment Norms for Real Estate Liberalized


Provided upon request only

Provisions

Revised policy pursuant to Press


Release

Existing Policy

Timing of
investment

The funds would have to be brought in


within 6 months of commencement of the
project.

The funds would have to be brought in within 6 months of


commencement of business of the company.

Commencement of the project has been


explained to mean date of approval of the
building plan/ lay out plan by the relevant
statutory authority.

No such concept of 10 years from commencement of


business earlier.

Subsequent tranches can be brought in till


the earlier of:
i. Period of 10 years from the
commencement of the project; or
ii. The completion of the project.

C. Commencement of business of
company to commencement of
project

the relevant authority. This is a welcome move


since this brings clarity as against dependence on
interpretation of commencement of business.

Commencement of business of the company


had not been defined in the FDI Policy. It was
seen practically that the regulators view was that
the period of 6 months was to be calculated from
the earlier of the date on which the investment
agreement was signed by the investor, or the date
the funds for the first tranche are credited into the
account of the company. However, the criterion
has now been changed to 6 months from the
commencement of the project of the company,
which has been explained to mean the date of
the approval of the building plan/ lay out plan by

D. Period for subsequent tranches


The FDI Policy did not have any restriction on the
maximum period till which the investor could
infuse funds. However, the Amendment states
that subsequent tranches of investment can only
by brought in till a period of 10 years from the
commencement of the project, which seems to
imply that the regulator is reluctant towards real
estate projects which have extremely long gestation
periods.

Provisions

Revised policy pursuant to


Press Release

Existing Policy

Lock-in

The investor is permitted to exit


from the investment at (i) 3 years
from the date of final installment,
subject to development of trunk
infrastructure, or (ii) on the
completion of the project.

The investor is permitted to exit from the investment at expiry of 3


years from the date of completion of minimum capitalization.

Trunk infrastructure has not


been defined, but is explained to
include roads, water supply, street
lighting, drainage and sewerage.

For investment in tranches: The investor is permitted to exit from


the investment at the later of (a) 3 years from the date of receipt of
each tranche/ installment of FDI, or (b) at expiry of 3 years from the
date of completion of minimum capitalization.

Repatriation of FDI or transfer of


stake by a non-resident investor
to another non-resident investor
would require prior FIPB approval.

38

Prior exit of the investor only with the prior approval of FIPB.

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

E. Exit on completion
A welcome change is permitting investors to exit on
the completion of the project. Hitherto, each tranche
of investments were locked-in for a period of 3 years,
even if the project was completed. This posed a major
challenge for last-mile funding for projects, since the
investment was stuck even on the completion of the
project.

last tranche, trunk infrastructure (explained to


include roads, water supply, street lighting and
drainage and sewerage) must be developed. This
requirement did not exist previously, and has been
a recent introduction. This has also removed all
ambiguities in relation to the 50% development
requirement, since this is no longer linked to the
obtaining of statutory clearances.

I. Grandfathering
F. Lock-in of 3 years from final
instalment
The lock-in for ongoing or non-completed projects
for 3 years from the final tranche may need to be
examined. The earlier regulations required any
tranche to be locked in for a period of 3 years from
the date of receipt of such tranche only.

G. 50% in 5 years
Another positive move is the removal of the
minimum development of 50% in 5 years from the
date of obtaining all statutory clearances. Earlier,
there some ambiguity in relation to when the 50%
development requirement would trigger, since it
was unclear what all statutory approvals meant.
To remove this ambiguity, the requirement for the
minimum development of 50% in 5 years has been
removed. However, in spirit, the same has been
introduced by requiring trunk infrastructure to be
developed before any exit.

It is unclear whether existing investment, on the


anvil of exit currently would be required to satisfy
the trunk infrastructure requirements. This may be
a major barrier for investors who have completed
the 3 year period from their investment, and are
seeking exit, although trunk infrastructure has not
been developed. It is also unclear whether existing
tranches of investment would be locked in till the
end of 3 period from any future tranches, if any.
Grandfathering of the existing investments from the
requirements to comply with trunk infrastructure
and the lock-in period would be important for
existing investments.

J. Sale of stake from non-resident to


non-resident
While the exit of a foreign investor earlier required
FIPB approval, transfer of a non-resident investors
stake to another non-resident investor was not
expressly included. The Press Release now confirms
this.

H. Trunk infrastructure
To be eligible to exit at the end of 3 years from the

Provisions

Revised policy pursuant to Press Release Existing Policy

Requirement of
commencement
certificate for
serviced plots

The requirement of commencement


certificate has been done away with.

The investor was required to provide the completion


certificate from the concerned regulatory authority before
disposal of serviced housing plots.

A major relaxation which has now been introduced


is the removal of the completion certificate
requirement. Since these were service plots, a

completion certificate was not forthcoming.


Addressing this concern, this is no longer required as
long as trunk infrastructure is developed.

Nishith Desai Associates 2015

39

Foreign Investment Norms for Real Estate Liberalized


Provided upon request only

Provisions

Revised policy pursuant to Press


Release

Existing Policy

Minimum
development

No requirement of any minimum


development.

At least 50% of the project must be developed within


a period of 5 years from date of obtaining all statutory
clearances.

Earlier, there some ambiguity in relation to when


the 50% development requirement would trigger,
since it was unclear what all statutory approvals
meant. To remove this ambiguity, the requirement

for the minimum development of 50% in 5 years has


been removed. However, in spirit, the same has been
introduced by requiring trunk infrastructure to be
developed before any exit

Provisions

Revised policy pursuant to Press Release Existing Policy

Affordable
Housing

Projects which allocate 30% of the project


cost for low cost affordable housing are
exempt from the minimum land area, and
minimum capitalization requirements.

Affordable housing projects have been defined to


mean projects which allot at least 60% of the FAR/
FSI for dwelling units of carpet area not being more
than 60 sq. meters. Out of the total dwelling units, at
least 35% should be of carpet area 21-27 sq. meters
for economically weaker section category.

No such exemption.

intent clearly is to encourage investment into


affordable housing and housing for the economically
weaker section, the equilibrium between luxury
housing and affordable housing remains to be seen.

This would encourage creative structuring of


investments into affordable housing. While the
Provisions

Revised policy pursuant to


Press Release

Existing Policy

Completed
projects

It has been clarified that 100% FDI No such provision/ clarification


permitted in completed projects
for operation and management
of townships, malls/ shopping
complexes and business centers.

It has been long debated whether FDI should be


permitted in commercial completed real estate.
By their very nature, commercial real estate
assets are stable yield generating assets as against
residential real estate assets, which are also seen as
an investment product on the back of the robust
capital appreciation that Indian real estate offers.
To that extent, if a company engages in operating
and managing completed real estate assets like a
shopping mall, the intent of the investment should
be seen to generate revenues from the successful
operation and management of the asset (just like a
hotel or a warehouse) as against holding it as a mere
investment product (as is the case in residential
real estate). The apprehension of creation of a
real estate bubble on the back of speculative land
trading is to that naturally accentuated in context of
40

residential real estate. To that extent, operation and


management of a completed yield generating asset
is investing in the risk of the business and should be
in the same light as investment in hotels, hospitals
or any asset heavy asset class which is seen as
investment in the business and not in the underlying
real estate. Even for REITs, the government was
favorable to carve out an exception for units of a
REI from the definition of real estate business on
the back of such understanding, since REITs would
invest in completed yield general real estate assets.
The Press Release probably aims to follow the
direction and open the door for foreign investment
in completed real assets, however the language is not
entirely the way it should have been and does seem
to indicate that foreign investment is allowed only in
entities that are operating an managing completed
Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

assets as mere service providers and not necessarily


real estate. While it may seem that FDI has now
been permitted into completed commercial real

estate sector, the Press Release leaves the question


unanswered whether these companies operating and
managing the assets may own the assets as well.

Provisions

Revised policy pursuant to Press


Release

Existing Policy

Responsibility for
obtaining all necessary
approvals

Investee Company.

Investor/ Investee company.

K. Analysis
The obligation to obtain all necessary approvals,
including the business plans has now been clarified
to be that of the investee company in India, doing
away with the unnecessary hassles around this for
investor

was inadequate for such investment to be made in


Tier-II cities, where minimum land requirements
could be met. Reducing or removal of minimum
land requirements, along with removal of the
requirement to obtain a completion certificate
for sale of such plots would encourage foreign
investment into this space.

III. Conclusion

While the final press note is still awaited to clarify


certain aspects, this seems to be a positive move by
the government to attract further investment.

The changes introduced by way of the Press Release


are along expected lines after the Budget Speech
earlier this year. The minimum land requirement
was an impediment for foreign investment,
since it was difficult to find large tracts of land
for development to satisfy the minimum land
requirements in Tier-I cities. Further, the demand

Nishith Desai Associates 2015

Abhinav Harlalka &


Ruchir Sinha
You can direct your queries or comments to the
authors

41

Provided upon request only

Annexure II
Foreign Investment Norms in Real Estate
Changed
i. Analysis
3 year lock-in restriction removed
Criteria for affordable housing projects relaxed
Whether investments are now possible in
brownfield real estate projects?

In line with the announcements in the Finance


Ministers budget speech for 2014, the Union
Cabinet in a recent press release issued pursuant to
its meeting dated October 29, 2014 (Press Release),
proposed certain relaxations for Foreign Direct
Investment (FDI) in construction-development
sector. This was followed by press note 10 of 2014
(Press Note) on December 3rd, 2014 and an RBI
circular dated January 22, 2015 to formally notify
the relaxations. Though most of the changes
proposed in the Press Release have substantially
been incorporated in the Press Note, there are certain
differences in the Press Note as against Press Release.
For a detailed analysis of the Press Release, please
refer to our previous hotline Foreign investment
norms for real estate liberalized. In this hotline, we
are covering only the differences in the Press Note as
against the Press Release.

I. Changes

a). No minimum lock-in period


As per the earlier FDI Policy, each tranche of
investment was locked in for a period of 3 years.
Though this was intended to provide some long term
commitment to the project by a foreign investor,
even if the project was completed, some later
tranches of foreign investment, especially the last
mile funding could still be locked-in. By removing
the 3 year (three) lock-in now, the government has
encouraged foreign investments in shorter projects
(also applicable as the minimum area requirements
have now been relaxed), and removed deterrence for
a foreign investor to provide subsequent funding in
case of longer projects.

b). Ambiguity in exit from multi-phase projects


Previously if a project was developing in phases, a
foreign investor could exit from the project upon
completion of the initial phase, provided the 3
(three) year lock-in period had expired. However
now, since the exit is linked to either project
completion or development of trunk infrastructure,
it is unclear whether a foreign investor can exit
(whether partly or completely) upon completion
of any phase of the project, when the trunk
infrastructure for later phases is not developed.

B. Affordable housing project


A. Lock-in restriction
The Press Release proposed that a foreign investor
can exit from its investment only on (i) the
completion of the project, or (ii) completion of three
years from the date of final investment, subject to the
development of the trunk infrastructure, i.e., roads,
water supply, street lighting, drainage and sewerage.
The Press Note has done away with the requirement
of 3 (three) years from the date of final investment,
and hence, an investor can now exit from the project
once it is completed or after the development of the
trunk infrastructure.
42

The Press Note has relaxed the criteria for


determining affordable housing projects than
as proposed in the Press Release. As per the Press
Release, affordable housing projects were defined
to mean projects which allot at least 60% of the
floor area ratio (FAR) / floor space index (FSI) for
dwelling units of carpet area not being more than 60
sq. meters, and out of the total dwelling units, at least
35% should be of carpet area 21-27 sq. meters for
economically weaker section category.
Press Note defines affordable housing projects as

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

projects where at least 40% of the FAR / FSI is for


dwelling unit of floor area of not more than 140 sq.
meters, and out of the total FAR / FSI reserved for
affordable housing, at least 1/4th (one-fourth) should
be for houses of floor area of not more than 60 sq.
meters

i. Analysis
This relaxation is a welcome move, since projects
which qualify for affordable housing will not be
required to comply with certain conditionalities
like minimum area requirements and minimum
investment requirements. Having said the above,
since the area requirements is relaxed to as high as
140 sq. meters (approx. 1510 sq. feet), and only 1/4th
of the affordable housing portion needs to be 60 sq.
meters (approx. 645 sq. feet), whether the purpose
for which this relaxation is introduced will be met or
not is not clear.

C. Combination project
The Press Release retained the provision that in case
of combination projects (mix of serviced plots and
construction development), either of the condition
for minimum area requirement can be satisfied.
However, since now the minimum area restriction
(being 25 acres) for serviced plots has been removed,
to avoid any misuse, the concept of combination
projects has been removed in the Press Note.

D. Grandfathering
The Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident outside India)
(Sixteenth Amendment) Regulations, 2014, dated
December 8, 2014 (Amendment Regulations)
which amends the Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2000 to include the
changes introduced by the Press Note, provides that
(i) the Amendment Regulations shall be deemed to
have come into force from December 3, 2014, and (ii)
no person will be adversely affected as a result of the
retrospective effect being given to the Amendment
Regulations.

II. Conclusion

estate sector. The relaxations in the minimum land


area requirements will bring a lot of projects under
the FDI compliant fold, especially in Tier I cities,
where project sizes are typically small. Having said
the above, there are two issues which may cause a
concern:
i. as now it has been clarified that the minimum
investment will have to be infused within 6
months of commencement of the project i.e.,
the date of approval of building plan / lay out
plan by the relevant statutory authority, and not
6 (six) months of commencement of business,
which was understood to mean the date of
investment agreement with the investor or the
date of first infusion by the investor, it appears
that investment in brownfield projects may be
a challenge, which could be a major dampener.
This may also hinder investments in under
construction projects which are stalled due to
funding requirements; and
ii. though, the government has relaxed the
capital account restrictions in real estate sector
over the last few years, certain changes have
created hindrance in exits for existing foreign
investments; for instance, press note 2 of 2005
permitted a foreign investor to exit upon
completion of 3 (three) years from the date of
investment, which was then later extended to
3 (three) years from the date of each tranche of
investment. So, if an investor made a subsequent
investment in the 4th (fourth) year from the
date of initial investment, its 4th (fourth) year
investment got suddenly locked in for another
3 (three) years, which the investor had not
contemplated at the time of making investment.
Also now, the Press Note prescribes that an
investor can exit only on completion of the
entire project or development of the trunk
infrastructure. To that extent, in the absence
of grandfathering, existing investors who had
completed 3 (three) years and could have exited,
are now left high and dry. It remains to be seen
if they will now be given approvals for exit
prior to completion or development of trunk
infrastructure.
Dipanshu Singhal,
Deepak Jodhani &
Nishchal Joshipura
You can direct your queries or comments to the
authors

The changes introduced by the Press Note are


expected to provide a much need fillip to the real

Nishith Desai Associates 2015

43

Provided upon request only

Annexure III
Specific Tax Risk Mitigation Safeguards for
Private Equity Investments
In order to mitigate tax risks associated with
provisions such as those taxing an indirect transfer
of securities in India, buy-back of shares, etc., parties
to M&A transactions may consider or more of the
following safeguards. These safeguards assume
increasing importance, especially with the GAAR
coming into force from April 1, 2015 which could
potentially override treaty relief with respect to tax
structures put in place post August 30, 2010, which
may be considered to be impermissible avoidance
arrangements or lacking in commercial substance.

I. Nil Withholding Certificate


Parties could approach the income tax authorities
for a nil withholding certificate. There is no statutory
time period prescribed with respect to disposal of
applications thereof, which could remain pending
for long without any clarity on the time period for
disposal. In the last few years, there have not been
many instances of such applications that have
been responded to by the tax authorities. However,
recently, in January 2014, an internal departmental
instruction was issued requiring such applications
to be decided upon within one month. The extent to
which the instruction is adhered to remains yet to be
seen.

II. Advance Ruling


Advance rulings obtained from the Authority
for Advance Rulings (AAR) are binding on the
taxpayer and the Government. An advance ruling
may be obtained even in GAAR cases. The AAR is
statutorily mandated to issue a ruling within six
months of the filing of the application, however due
to backlog of matters, it is taking about 8-10 months
to obtain the same. However, it must be noted that
an advance ruling may be potentially challenged in
the High Court and finally at the Supreme Court.
There have been proposals in the 2014-15 Budget
to strengthen the number of benches of the AAR to
relieve this burden.

44

III. Contractual Representations


Parties may include clear representations with
respect to various facts which may be relevant to any
potential claim raised by the tax authorities in the
share purchase agreement or such other agreement
as may be entered into between the parties.

IV. Escrow
Parties may withhold the disputed amount of tax
and potential interest and penalties and credit such
amount to an escrow instead of depositing the same
with the tax authorities. However, while considering
this approach, parties should be mindful of the
opportunity costs that may arise because of the funds
getting blocked in the escrow account.

V Tax insurance
A number of insurers offer coverage against tax
liabilities arising from private equity investments.
The premium charged by such investors may vary
depending on the insurers comfort regarding the
degree of risk of potential tax liability. The tax
insurance obtained can also address solvency issues.
It is a superior alternative to the use of an escrow
account.

VI. Legal Opinion


Parties may be required to obtain a clear and
comprehensive opinion from their counsel
confirming the tax liability of the parties to the
transaction. Relying on a legal opinion may be useful
to the extent that it helps in establishing the bona
fides of the parties to the transaction and may even
be a useful protection against penalties associated
with the potential tax claim if they do arise.

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

VII. Tax indemnity


Tax indemnity is a standard safeguard used in most
M&A transactions. The purchasers typically seek
a comprehensive indemnity from the sellers for
any tax claim or notice that may be raised against
the purchaser whether in relation to recovery of
withholding tax or as a representative assessee. The
following key issues may be considered by parties
while structuring tax indemnities:

A. Scope
The indemnity clause typically covers potential
capital gains tax on the transaction, interest and
penalty costs as well as costs of legal advice and
representation for addressing any future tax claim.

B. Period
Indemnity clauses may be applicable for very long
periods. Although a limitation period of seven years
has been prescribed for reopening earlier tax cases,
the ITA does not expressly impose any limitation
period on proceedings relating to withholding tax
liability. An indemnity may also be linked to an
advance ruling.

C. Ability to indemnify
The continued ability and existence of the party
providing the indemnity cover is a consideration
to be mindful of while structuring any indemnity.

Nishith Desai Associates 2015

As a matter of precaution, provision may be


made to ensure that the indemnifying party or
its representatives maintain sufficient financial
solvency to defray all obligations under the
indemnity. In this regard, the shareholder/s
of the indemnifying party may be required to
infuse necessary capital into the indemnifying
party to maintain solvency. Sometimes back-toback obligations with the parent entities of the
indemnifying parties may also be entered into in
order to secure the interest of the indemnified party.

D. Conduct of proceedings
The indemnity clauses often contain detailed
provisions on the manner in which the tax
proceedings associated with any claim arising under
the indemnity clause may be conducted.

E. Dispute Resolution Clause


Given that several issues may arise with respect
to the interpretation of an indemnity clause, it
is important that the dispute resolution clause
governing such indemnity clause has been
structured appropriately and covers all important
aspects including the choice of law, courts
of jurisdiction and/or seat of arbitration. The
dispute resolution mechanism should take into
consideration urgent reliefs and enforcement
mechanisms, keeping in mind the objective of the
parties negotiating the master agreement and the
indemnity.

45

Provided upon request only

Annexure IV
Flips and Offshore REITs
One of the means of exit for shareholders of a real
estate company and also a way of accessing global
public capital is by way of flipping the assets of the
real estate company into the fold of an offshore REIT
vehicle.

adopted for flipping the assets into REIT vehicle


structured as a Singapore business trust that could be
listed on the Singapore stock exchange.

Herein below, is a typical structure that may be


Investors

Investors

Offshore
Units in the
trust

SBT

Investors

Trust Management
Company
Singapore SPV
Singapore

100% owner

India

Promoter
Real Estate
Company

100% Equity /
Listed NCDs

Indian SPV

Real Estate Project

In this structure the promoter flips its interest in the


real estate asset in India offshore which can then be
utilized to raise global capital offshore or to give an
exit to offshore investors.

ii. SBT in turn sets up an SPV in Singapore to invest


in India. This is because a trust is not eligible to
treaty benefits under the Indian Singapore tax
treaty.
iii. The SPV then sets up the Indian SPV.

I. In this Structure
i. The individual shareholders of the Promoter
entity acquires an interest in the management
company in Singapore under the liberalized
remittance scheme (LRS) which sets up the
Singapore business trust (SBT). LRS permits
an Indian resident individual to remit upto USD
125,000 in any financial year for most capital /
current account transactions.
46

iv. The Indian SPV can then either purchase the real
estate project on a slump sale basis on deferred
consideration.
v. SBT can then raise monies by way of private
placement or through listing of its units on the
Singapore stock exchange. These monies can
then be utilized to settle the deferred purchase
consideration or purchase the real estate project.
vi. The proceeds from the sale of the real estate
Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

project may then be utilized to provide an exit


to the shareholders in India, in particular the
foreign investor in the real estate company.

II. Key Considerations


Some of the key considerations that may be
considered while flipping assets into an offshore
entity are as follows
i. Jurisdiction of the offshore entity and
amenability to public markets
ii. Choice of Yield generating stabilized assets vs.
developing assets as most offshore markets favor
yield generating assets
iii. Need for on the ground presence and domestic
sponsor and track record

overseas) and the overseas financial services


regulator. However, based on our experience, such
approval from the Indian regulator may be difficult
to come through if the purpose of the overseas
investment is to reinvest the proceeds in India, or
manage a trust that is entrusted with investing
India. Accordingly, whilst an Indian real estate
company will find it impossible to invest in the
asset management company overseas (referring
to the trustee-manager), even if the investment
were through an affiliated Indian NBFC, regulatory
approval may be challenging.
Accordingly, the promoters of the Indian Promoter
entity may subscribe to units of the trustee manager
under the LRS, which permits an Indian resident
individual to remit upto USD 125,000 in any
financial year to acquire shareholding in the trusteemanager. In our experience, Sponsor brand name
typically is necessary for marketing the SBT.

iv. Appetite for Indian assets


v. Tax Challenges
vi. Regulatory Challenges

III. Tax and Regulatory


Challenges
A. FDI Policy
A foreign company or a subsidiary of a foreign
company is not permitted under the FDI Policy to
acquire completed real estate assets, and can only
invest in developmental assets as set out earlier in
this paper. To that extent, either the SBT can acquire
under construction real estate assets or other FDI
Compliant assets such as SEZs, industrial parks,
hospital etc. as provided in the FDI Policy and set out
above. Also, other restrictions of FDI in real estate as
set out earlier such as 3 year lock-in, DCF valuation
and other issues as set out earlier in this paper also
become applicable.

B. Holding of the Trustee Manager


Under the extant Indian exchange control
regulations, only an Indian financial services
company can invest in another financial services
only with prior approval of the Indian financial
services regulator (department of non-banking
financial services in case of an NBFC investing

Nishith Desai Associates 2015

C. Need for Indian SPV


Typically, any fundraise initiative by the SBT may
not be received well by the investors unless the SBT
has the real estate project in its fold. Since the SBT
may not have adequate funds to purchase the real
estate project initially, it may like to purchase the
real estate project on a deferred consideration basis.
However, since purchase of Indian securities on a
deferred consideration is not permitted, the SPV may
setup the Indian SPV, which could purchase the real
estate project on deferred consideration basis, which
shall be discharged in manner set out above.

D. Transfer Taxes on Flips


Any transfer of immoveable property is subject to
stamp duty to be paid to state government where
the property is located. The extent of stamp duty
varies from state to state usually ranging from 5 - 8%
on the market value of property or the actual sale
consideration whichever is higher. To determine the
market value, the local authorities have prescribed
the reckoner / circle rates for each area which are
generally revised on an annual basis.
In addition to the stamp duty, the Seller is obligated
to pay tax on the capital gains received by it from
the sale of the immovable property. If however, the
sale consideration is lower than the reckoner rate,
per Section 50C of the ITA the reckoner rate shall
be deemed to be the consideration for the transfer
of immovable property and the seller shall be taxed

47

Flips and Offshore REITs


Provided upon request only

accordingly. Having said that, Section 50C is not


applicable to immovable property which is held
as stock-in-trade and not capital asset however, the
Finance Bill, 2013-14 has inserted section 43CA
(Special provision for full value of consideration
for transfer of assets other than capital assets in
certain cases) in the ITA which is a provision similar
to Section 50C but applicable for assets other than
capital assets, and since most developers record the
real estate project as stock-in-trade, to that extent
also unlike before, the seller would now be taxed
on the value adopted/assessed/assessable by any
authority of a state Government for the purpose
of payment of stamp duty on such transfer, thus
denying the tax advantage of allowing the sale of the
immoveable property at book value.

the limited asset classes that can be rolled into an


offshore REIT (being only FDI Compliant assets), SBT
may consider investing in the Indian SPV by way of
acquiring listed NCDs of the Indian SPV or the real
estate company under the FPI route as set out earlier
in this paper.
In addition to the above, NCDs may also be issued
where the investors are offered assured regular
returns and exit. This is because, the interest on
compulsorily convertible debentures may be capped
at SBI PLR + 300 basis points and any returns beyond
that may have to be structured by way of buy-back or
dividends which entails a higher tax rate.

E. Structured Debt Instruments


Considering the restrictions of FDI in real estate
(minimum area requirement, lock - in etc.) and

48

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

Annexure V
REITs: Tax Issues and Beyond
APART FROM THE TAX CHALLENGES, THERE ARE NON-TAX ISSUES ALSO THAT MAKE
THE INDIAN REIT UNATTRACTIVE
The Securities and Exchange Board of India (Sebi)
recently introduced the final regulations for real
estate investment trusts (REITs) and infrastructure
investment trusts (InvITs). These regulations come
on the back of recent tax initiatives introduced in
the budget this year. While the initiative is indeed a
positive step, the tax measures governing REITs or
business trusts (as they are referred to in the Incometax Act) do not offer much encouragement, neither
to the sponsor nor the unit holders.

be by way of infusion of debt into the SPV by a REIT.


In such a situation, interest from the SPV to the
REIT will be a deductible for the SPV, thus allaying
both distribution taxes and corporate taxes. Interest
from the SPV would be tax exempt at the REIT
level and only a 5% withholding will be applicable
on distributions by the REITs to the foreign unitholders. This should help neutralize REIT taxation at
India level, considering that the 5% withholding tax
paid in India should also be creditable offshore.

From a sponsors perspective, capital gains tax


benefit has been given only in cases where shares of
the special purpose vehicle (SPV) holding the real
estate are transferred to a REIT against units of a
REIT, and not when real estate is directly transferred
to a REIT. By doing so, there is an unnecessary
corporate layer imposed between the REIT and the
real estate asset, which could result in a tax leakage
of about 45% (corporate taxes of 30% at the SPV
level and distribution tax of 15% on dividends,
exclusive of surcharge and cess). To the sponsor,
there is no tax benefit (but mere deferral) because
she gets taxed when the REIT units are ultimately
sold on the floor at a much more appreciated value,
even though the units of a REIT would be listed and
exempt from capital gains tax if held by other unit
holders for more than three years.

The critical question that would then come up is


how the SPV would use this debt. The debt can either
be used to retire existing debt, or be structured to
retire promoter equity in the SPV. If the debt is used
for retiring equity, the risk of deemed dividend
characterization would need to be carefully
considered. Though other creative structures may
be devised to minimize tax exposure for the sponsor,
it will be critical to dress up the SPV appropriately
with the right amount of debt and equity, before the
SPV is transferred to the REIT.

While capital gains tax incidence may still be


avoided by relying on principles of trust taxation,
there will still be no respite from minimum alternate
tax (MAT), which could become applicable on
transfer of shares to the REIT. Considering that
sponsors would like to transfer the shares at higher
than book value to ensure commensurate fund
raising for the REIT, the issue of MAT seems to be
most critical.
From a REIT taxation perspective, although a passthrough of tax liability to investors for REIT income
was promised, since the SPV is required to pay full
corporate and dividend distribution taxes, where
is the pass-through? What is even worse is that no
foreign tax credit may be available for such taxes
paid in India.
The only way to achieve tax optimization seems to

Nishith Desai Associates 2015

Apart from the tax challenges set out above, there are
also several non-tax issues that make the Indian REIT
story unattractive. The requirement for a sponsor to
have a real estate track record is likely to rule out a
substantial portion of yield generating assets. This
eliminates the possibility of non-real estate players
such as hotels, hospitals, banks and others (such as
Air India) becoming sponsors of REITs.
Most importantly, the marketability of Indian REITs
compared with other fixed-income products remains
weak since the expected yield on REITs may not
exceed 5-6% compared with an around-8% yield
offered by government securities. Though REITs
may offer a higher return considering the capital
appreciation, offshore investors seem reluctant to
buy the cap rate story attached to a REIT.
Having said that, REITs are likely to offer
monetization opportunities to private equity funds
and developers, which have till now been unable to
find institutional buyers for completed real estate
assets. As the appetite for developmental projects
has reduced, REITs will offer opportunities to foreign
investors to invest in rent generating assets, an asset

49

REITs: Tax Issues and Beyond


Provided upon request only

class otherwise prohibited for foreign investments.


It, however, remains to be seen how the Indian REIT
story matches up to the Singapore REIT structure
for Indian assets, or the more trending lease-rentaldiscounting structure, or the even more innovative
commercial mortgage-backed security structure,
which seem to be more appealing to potential
sponsors.
This article was published in Livemint dated October
21, 2014. The same can be accessed from the link

50

http://www.nishithdesai.com/information/researchand-articles/nda-hotline/nda-hotline-single-view/
article/reits-tax-issues-and-beyond-1.html?no_cache=
1&cHash=a54570354bb5bc1969d720fba3cad33a
Sriram Govind &
Ruchir Sinha
You can direct your queries or comments to the
authors

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

Annexure VI
NBFC Structure for Debt Funding
In light of the challenges that the FDI and the FPI
route are subjected to, there has been a keen interest
in offshore funds to explore the idea of setting
up their own NBFC to lend or invest in Indian
companies.
An NBFC is defined in terms of Section 45I(c) of the
RBI Act, 1934 (RBI Act) as a company engaged
in granting loans/advances or in the acquisition
of shares/securities, etc. or hire purchase finance
or insurance business or chit fund activities or
lending in any manner provided the principal
business of such a company does not constitute
any non-financial activities such as (a) agricultural
operations, (b) industrial activity, (c) trading in
goods (other than securities), (d) providing services,
(e) purchase, construction or sale of immovable
property. Every NBFC is required to be registered
with the RBI, unless specifically exempted.
The Act has however remained silent on the
definition of principal business and has thereby
conferred on the regulator, the discretion to
determine what is the principal business of
a company for the purposes of regulation.
Accordingly, the test applied by RBI to determine
what is the principal business of a company was
articulated in the Press Release 99/1269 dated April
8, 1999 issued by RBI. As per the said press release, a

company is treated as an NBFC if its financial assets


are more than 50 per cent of its total assets (netted
off by intangible assets) and income from these
financial assets is more than 50 per cent of its gross
income. Both these tests (50% Tests) are required
to be satisfied in order for the principal business of a
company to be determined as being financial for the
purpose of RBI regulation.

Recommendation of the Working Group on the


Issues and Concerns in the NBFC Sector chaired
by Usha Thorat has been issued by RBI in the form
of Draft Guidelines (Draft Guidelines). Draft
Guidelines1 provide that the twin criteria of assets
and income for determining the principal business
of a company need not be changed. However, the
minimum percentage threshold of assets and income
should be increased to 75 per cent. Accordingly, the
financial assets of an NBFC should be 75 per cent or
more (as against more than 50 per cent) of total assets
and income from these financial assets should be 75
per cent or more (as against more than 50 percent) of
total income.

The NBFC could be structured as follows.

Structure diagram

Off-shore Fund
Off-shore
India

Non-Banking Financial Company

Indian Company

1.

The Working Group report was published by the RBI in the form of Draft Guidelines on its website 12th December 2012

Nishith Desai Associates 2015

51

NBFC Structure for Debt Funding


Provided upon request only

The Offshore Fund sets up an NBFC as a loan


company, which then lends to Indian companies.
The NBFC may either lend by way of loan or through
structured instruments such as NCDs which have a
protected downside, and pegged to the equity upside
of the company by way of redemption premium or
coupons.

I. Advantages of the NBFC Route


A. Assured Returns
The funding provided through NBFCs is in the form
of domestic loans or NCDs, without being subjected
to interest rate caps as in the case of CCDs. These
NCDs can be structured to provide the requisite
distribution waterfall or assured investors rate of
return (IRR) to the offshore fund.

B. Regulatory Uncertainty
The greatest apprehension for funds has been
the fluid regulatory approach towards foreign
investment, for instance put options. The NBFC
being a domestic lending entity is relatively immune
from such regulatory uncertainty

C. Security Creation
Creation of security interest in favour of nonresidents on shares and immoveable property is
not permitted without prior regulatory approval.
However, since the NBFC is a domestic entity,
security interest could be created in favour of
the NBFC. Enforceability of security interests,
however, remains a challenge in the Indian context.
Enforcement of security interests over immovable
property, in the Indian context, is usually a time
consuming and court driven process. Unlike banks,
NBFCs are not entitled to their security interests
under the provisions of the Securitization and
Reconstruction of Financial Assets and Enforcement
of Security Interest (SARFAESI) Act.

D. Repatriation Comfort
Even though repatriation of returns by the NBFC to
its offshore shareholders will still be subject to the
restrictions imposed by the FDI Policy (such as the
pricing restrictions, limits on interest payments etc.),
52

but since the NBFC will be owned by the foreign


investor itself, the foreign investor is no longer
dependent on the Indian company as would have
been the case if the investment was made directly
into the Indian entity.

E. Tax Benefits to the Investee


Company
As against dividend payment in case of shares, any
interest paid to the NBFC will reduce the taxable
income of the investee company. However, an NBFC
may itself be subjected to tax to the extent of interest
income so received, subject of course to deductions
that the NBFC may be eligible for in respect of
interest pay-outs made by the NBFC to its offshore
parent.

II. Challenges Involved in the


NBFC Route
A. Setting up
The first challenge in opting for the NBFC route is
the setting up of the NBFC. Obtaining a certificate
of registration from the RBI for an NBFC is a time
consuming process. This process used to take
anywhere in the region of 12 14 months earlier,
which wait period has now significantly reduced,
but it may still take as much as 6 months, or in some
cases, even longer.

Draft Guidelines provide that NBFCs with asset size


below Rs. 1000 crore and not accessing any public
funds shall be exempted from registration. NBFCs,
with asset sizes of Rs.1000 crore and above, need to
be registered and regulated, even if they have no
access to public funds.
Draft Guidelines also provide that small nondeposit taking NBFCs with asset of Rs. 50 crores or
less should be exempt from the requirement of RBI
registration. Not being deposit taking NBFCs and
being small in size, no serious threat perception is
perceived to emanate from them.

Due to the elaborate time period involved in setting


up the NBFC, one of the common alternatives

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

adopted, especially in case of non-deposit taking


NBFCs was to purchase an existing NBFC. This
was because earlier there was only a requirement
of giving 30 thirty days written notice2 prior to
effecting a change of control of non-deposit NBFC
(the term control has the same meaning as defined
in the SEBI Takeover Code), and a separate approval
was not required; and unless the RBI restricted
the transfer of shares or the change of control, the
change of control became effective from the expiry
of thirty days from the date of publication of the
public notice.
However, recently, the RBI vide its circular dated
May 26, 20143, has prescribed that in order to
ensure that the fit and proper4 character of the
management of NBFCs is continuously maintained
for both, deposit accepting and non-deposit
accepting NBFCs, its prior written permission has to
be obtained for any takeover or acquisition of control
of an NBFC, whether by acquisition of shares or
otherwise. This RBI circular requires prior approval
in the following situations also
i. any merger/amalgamation of an NBFC with
another entity or any merger/amalgamation of an
entity with an NBFC that would give the acquirer
/ another entity control of the NBFC;

Separately, earlier, any transfer of shares of a


financial services company from a resident to a
non-resident required prior approval of the Foreign
Exchange Department of the Reserve Bank of India
(FED), which took anywhere in the region of 2 4
months. In a welcome move, as per a recent RBI
circular dated November 11, 2013, the requirement
to procure such an approval was removed if:

i. any fit and proper/ due diligence requirement


as regards the non-resident investor as stipulated
by the respective financial sector regulator shall
have to be complied with ; and
ii. The FDI policy and FEMA regulations in terms of
sectoral caps, conditionalities (such as minimum
capitalization, etc.), reporting requirements,
documentation etc., are complied with.
Since, the requirement of obtaining RBI approval in
case of change in control even for non-deposit taking
NBFC is relatively very new, only time will tell
how forthcoming RBI is in granting such approvals
and to that extent, how favourable is this option of
purchasing NBFC.

B. Capitalization

ii. any merger/amalgamation of an NBFC with


another entity or any merger/amalgamation of
an entity with an NBFC which would result in
acquisition/transfer of shareholding in excess of
10 percent of the paid up capital of the NBFC;

The NBFC would be subject to minimum


capitalization requirement which is pegged to the
extent of foreign shareholding in the NBFC as set out
in the FDI Policy.

iii. for approaching a court or tribunal under Section


391-394 of the Companies Act, 1956 or Section
230-233 of Companies Act, 2013 seeking order for
mergers or amalgamations with other companies
or NBFCs.

Considering the need for capitalization, it is not


uncommon to see non residents holding less than
75% stake in the NBFC even though a significant
portion of the contribution comes from nonresidents. Premium on securities is considered for
calculating the minimum capitalization.

The abovementioned RBI approval is sought from


the DNBS (Department of Non-Banking Supervision)
division of the RBI.

In addition to the above, every NBFC is required to


have net owned funds5 of INR 20 million (INR 2.5
million provided application for NBFC registration is

2.

The public notice had be published in one English and one vernacular language newspaper, copies of which were required to be submitted to the
RBI

3.

DNBS (PD) CC.No.376/03.10.001/2013-14

4.

Under the Master Circular on Corporate Governance dated July 1, 2013, RBI had emphasized the importance of persons in management who fulfil
the fit and proper criteria. The Master Circular provides as follows:

it is necessary to ensure that the general character of the management or the proposed management of the non-banking financial company shall
not be prejudicial to the interest of its present and future depositors. In view of the interest evinced by various entities in this segment, it would be
desirable that NBFC-D with deposit size of Rs 20 crore and above and NBFC-ND-SI may form a Nomination Committee to ensure fit and proper
status of proposed/existing Directors.

5.

Net Owned Funds has been defined in the RBI Act 1934 as (a) the aggregate of paid up equity capital and free reserves as disclosed in the latest
balance sheet of the company, after deducting there from (i) accumulated balance of loss, (ii) deferred revenue expenditure and (iii) other intangible
asset; and (b) further reduced by the amounts representing (1) investment of such company in shares of (i) its subsidiaries; (ii) companies in the same
group; (iii) all other NBFCs and (2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance)
made to and deposits with (i) subsidiaries of such company and (ii) companies in the same group, to the extent such amounts exceed ten percent of
(a) above

Nishith Desai Associates 2015

53

NBFC Structure for Debt Funding


Provided upon request only

filed on or before April 20,1999).6

C. The Instrument
Before we discuss the choice of an instrument for the
NBFC, lets discuss the instruments that are usually
opted for investment under the FDI route
CCDs essentially offer three important benefits.
Firstly, any coupon paid on CCDs is a deductible
expense for the purpose of income tax. Secondly,

though there is a 40% withholding tax that the nonresident recipient of the coupon may be subject to,
the rate of withholding can be brought to as low as
10% if the CCDs are subscribed to by an entity that
is resident of a favorable treaty jurisdiction. Thirdly,
coupon can be paid by the company, irrespective
of whether there are profits or not in the company.
Lastly, being a loan stock (until it is converted), CCDs
have a liquidation preference over shares. And just
for clarity, investment in CCDs is counted towards
the minimum capitalization.

Percentage of Holding in the Minimum Capitalisation


NBFC
Up to 51% FDI

USD 0.5 million, with entire amount to be brought upfront.

More than 51% FDI

USD 5 million with entire amount to be brought upfront.

More than 75% FDI

USD 50 million, with USD 7.5 million to be brought upfront and the balance in 24 months.

CCDs clearly standout against CCPS on at least the


following counts. Firstly, while any dividend paid
on CCPS is subject to the same dividend entitlement
restriction (300 basis points over and above the
prevailing State Bank of India Prime Lending Rate at
the time of the issue), dividends can only be declared
out of profits. Hence, no tax deduction in respect of
dividends on CCPS is available. To that extent, the
company must pay 30%7 corporate tax before it can
even declare dividends. Secondly, any dividends can
be paid by the company only after the company has
paid 15%8 dividend distribution tax. In addition,
unlike conversion of CCDs into equity, which is
not regarded as a transfer under the provisions of
the Income-tax Act, 1961, conversion of CCPS into
equity may be considered as a taxable event and long
term or short term capital gains may be applicable.
Lastly, CCPS will follow CCDs in terms of liquidation
preference.

assets in excess of INR 1 billion (USD 20 million


approximately)9, the NBFC is referred to as a
systemically important NBFC. Unlike other NBFCs,
a systemically important NBFC is required to
comply with Regulation 15 (Auditors Certificate),
Regulation 16 (Capital Adequacy Ratio) and
Regulation 18 (Concentration of Credit / Investment)
of the Prudential Norms. The choice of instrument
is largely dependent on the capital adequacy ratio
required to be maintained by the NBFC for the
following reason.

However, unlike other companies, a combination


of nominal equity and a large number of CCDs may
not be possible in case of NBFCs. Though all nondeposit accepting NBFCs are subjected to NBFC
(Non-Deposit Accepting or Holding) Companies
Prudential norms (Reserve Bank) Directions (the
Prudential Norms), once such NBFC has total

Tier I Capital = Owned funds10 + Perpetual debt


instruments (upto15% of Tier I Capital of previous
accounting year) -Investment in shares of NBFC
and share/ debenture/bond/ loans / deposits with
subsidiary and Group company (in excess of 10% of
Owned Fund)

Regulation 16 of the Prudential Norms restricts a


systemically important NBFC from having a Tier II
Capital larger than its Tier I Capital.

Tier II Capital = Non-convertible Preference shares

6.

Although the requirement of net owned funds presently stands at INR 20 million, companies that were already in existence before April 21, 1999
are allowed to maintain net owned funds of INR 2.5 million and above. With effect from April 1999, the RBI has not been registering any new NBFC
with net owned funds below INR 20 million.

7.

Exclusive of surcharge and cess.

8.

Exclusive of surcharge and cess.

9.

Note that an NBFC becomes a systemically important NBFC from the moment its total assets exceed INR 100 crores. The threshold of INR 1 billion
need not be reckoned from the date of last audited balance sheet as mentioned in the Prudential Norms.

10. Owned Fund means Equity Capital + CCPS + Free Reserves +Share Premium + Capital Reserves (Accumulated losses + BV of intangible assets +
Deferred Revenue Expenditure)

54

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

/ OCPS + Subordinated debt + General Provision and


loss reserves (subject to conditions) + Perpetual debt
instruments (which is in excess of what qualifies
for Tier I above) + Hybrid debt capital instruments
+ revaluation reserves at discounted rate of fifty five
percent;

Thus, CCDs being hybrid debt instruments which


fall in Tier II cannot be more than Tier I Capital. This
disability in terms of capitalization is very crucial for
the NBFC and its shareholder as it not only impedes
the ability of the NBFC to pay out interests to the
foreign parent in case of inadequate profits, but is
also tax inefficient. There is currently an ambiguity
on whether NCDs are to be included in Tier II
Capital as they do not qualify in any of the heads as
listed above for Tier II Capital.

D. No Ability to Make Investments


Having discussed the funding of the NBFC itself,
lets discuss how the NBFC could fund the investee
companies. Under the FDI Policy, an NBFC with
foreign investment can only engage in certain
permitted activities11 under the automatic route,
and engaging in any financial services activity other
than such activities will require prior approval of
the Foreign Investment Promotion Board (FIPB),
an instrumentality of the Ministry of Finance of the
Government of India.
While lending qualifies as one of the permitted
categories (leasing and finance), investment is
not covered in the list above. Therefore, any FDI in
an NBFC that engages in investments will require
prior approval of the FIPB. Such an approval though
discretionary is usually granted within 3 months
time on a case to case basis. Therefore, an NBFC with
FDI can only engage in lending but not in making
investments.12

instruments to be in the nature of investments


rather than just loan instruments. Once the nature
of the instrument changed, then nature of the NBFC
automatically changed from lending to investment,
and FIPB approval was immediately required in
respect of foreign investment in an NBFC engaged in
investment activity.

Core Investment Companies

A core investment company (CIC) is a company


which satisfies the following conditions as on the
date of the last audited balance sheet (i) it holds
not less than 90% of its net assets in the form of
investment in equity shares, preference shares,
bonds, debentures, debt or loans in group companies;
(ii) its investments in the equity shares (including
instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from
the date of issue) in group companies constitutes not
less than 60% of its net assets ; (iii) it does not trade
in its investments in shares, bonds, debentures, debt
or loans in group companies except through block
sale for the purpose of dilution or disinvestment; and
(iv) it does not carry on any other financial activity
referred to in Section 45 I (c) and 45 I (f) of the
Reserve Bank of India Act, 1934 except for granting
of loans to group companies, issuing of guarantees
on behalf of group companies and investments in
bank deposits, money market instruments etc.
A CIC is not required to register with the RBI,
unless the CIC accepts public funds AND has total
financial assets in excess of INR 1 billion.

Public funds for the purpose of CIC include funds


raised either directly or indirectly through public
deposits, Commercial Papers, debentures, intercorporate deposits and bank finance but excludes
funds raised by issue of instruments compulsorily
convertible into equity shares within a period not
exceeding 10 years from the date of issue.

We are given to understand that in a few cases


where the redemption premium of the NCDs was
linked to the equity upside, RBI qualified such
11. The activities permitted under the automatic route are: (i) Merchant Banking, (ii) Under Writing, (iii) Portfolio Management Services, (iv)
Investment Advisory Services, (v) Financial Consultancy, (vi) Stock Broking, (vii) Asset Management, (viii) Venture Capital, (ix) Custodian Services,
(x) Factoring, (xi) Credit Rating Agencies, (xii) Leasing & Finance, (xiii) Housing Finance, (xiv) Forex Broking, (xv) Credit Card Business, (xvi) Money
Changing Business, (xvii) Micro Credit, (xviii) Rural Credit and (xix) Micro Finance Institutions
12. The FDI Policy however under paragraph 6.2.24.2 (1) provides that: (iv) 100% foreign owned NBFCs with a minimum capitalisation of US$ 50
million can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without
bringing in additional capital.

(v) Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC
activities, subject to the subsidiaries also complying with the applicable minimum capitalisation norms.

Nishith Desai Associates 2015

55

NBFC Structure for Debt Funding


Provided upon request only

E. Deployment of Funds
NBFCs can issue debentures only for deployment
of the funds on its own balance sheet and not to
facilitate requests of group entities/ parent company/
associates. Core Investment Companies have been
carved out from the applicability of this restriction.

F. Credit Concentration Norms


A systemically important NBFC is not permitted to
lend or invest in any single company exceeding 15%
of its owned fund, or single group13 of companies
exceeding 25% of its owned fund. If however the
systemically important NBFC is investing and
lending, then these thresholds stand revised to 25%
and 40% respectively.
Exemption from such concentration norms may
be sought and has been given in the past where
the NBFC qualified the following two conditions
firstly, the NBFC did not access public funds14, and
secondly, the NBFC did not engage in the business
of giving guarantees. Interestingly, public funds
include debentures, and to that extent, if the NBFC
has issued any kind of debentures (including
CCDs), then such relaxation may not be available
to it. In the absence of such exemption, it may be
challenging for loan or investment NBFCs to use the
leverage available to them for the purpose of making
loans or investments.

G. Only Secure Debentures can be


Issued
NBFCs can only issue fully secured debentures
whether by way of private placement or public
issue. The security has to be created within a month
from the date of issuance. If the security cover is
inadequate, the proceeds have to be placed in an
escrow account, till the time such security is created.

H. Enforcing Security Interests


NBFCs, unlike banks, are not entitled to protection
under the SARFAESI Act. This is a major handicap
for NBFCs as they have to undergo through the
elaborate court process to enforce their security

interests, unlike banks which can claim their


security interests under the provisions of SARFAESI
Act without the intervention of the courts.
Representations were made by industry associations
seeking inclusion of NBFCs within the ambit of
SARFAESI Act, especially in the current times when
NBFCs are fairly regulated.
We understand that the then RBI Governor D.
Subbarao responded to the exclusion of NBFCs on
the ground that their inclusion under the SARFAESI
Act would distort the environment for which
Securitisation Companies (SCs)/ Reconstruction
Companies (RCs) were set up by allowing more
players to seek enforcement of security rather than
attempting reconstruction of assets.
Subbarao mentioned that SARFAESI Act was enacted
to enable banks and financial institutions to realise
long-term assets, manage problem of liquidity, asset
liability mis-matches and improve recovery by
exercising powers to take possession of securities,
sell them and reduce nonperforming assets by
adopting measures for recovery or reconstruction,
through the specialised SCs/RCs, which would be
registered with the RBI and purchase the NPAs of the
banks and FIs. According to him, two methodologies
were envisaged - first, the strategy for resolution
of the assets by reconstructing the NPAs and
converting them into performing assets, and second,
to enforce the security by selling the assets and
recovering the loan amounts
Subbarao further mentioned that SARFAESI Act
is not merely a facilitator of security enforcement
without the intervention of Court. It is a
comprehensive approach for restructuring the assets
and make it work and only when it does not work,
the recovery mode was envisaged.
He was apprehensive that since NBFCs have
followed the leasing and hire purchase models
generally for extending credit and they enjoy the
right of repossession, the only benefit SARFAESI Act
would extend to the NBFCs will be for enforcement
of security interest without the intervention of the
court, which may distort the very purpose for which
SCs/RCs were created, namely, reconstruction and
the inclusion would simply add a tool for forceful
recovery through the Act.

13. The term group has not been defined in the Prudential Norms
14. Public funds includes funds raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits
and bank finance.

56

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

Draft Guidelines provide that NBFCs should be given


the benefit under SARFAESI Act, 2002, since there is
an anomaly that unlike banks and public financial
institutions (PFIs), most NBFCs (except those
registered as PFIs under Section 4A of the Companies
Act) do not enjoy the benefits deriving from the
SARFAESI Act even though their clients and/or
borrowers may be the same.

I. Exit
Exit for the foreign investor in an NBFC is the most
crucial aspect of any structuring and needs to be
planned upfront. The exits could either be by way of
liquidation of the NBFC, or buy-back of the shares
of the foreign investor by the NBFC, or a scheme
of capital reduction (where the foreign investor is
selectively bought-back), or the sale of its shares in
the NBFC to another resident or non-resident, or
lastly, by way of listing of the NBFC.15
Unlike most countries, liquidation in the Indian
context is a time consuming and elaborate process in
India, sometimes taking in excess of 10 years.
Buyback of securities is another alternative,
however, CCDs cannot be bought back. CCDs
must be converted into the underlying equity
shares to be bought back. Buy-back of securities is
subjected to certain conditionalities as stipulated
under Section 68 of the Companies Act, 2013. A
buyback of equity shares can happen only out of
free reserves, or proceeds of an earlier issue or out of
share premium.16 In addition to the limited sources
that can be used for buy-back, there are certain other
restrictions as well that restrict the ability to draw
out the capital from the company. For instance, only
up to a maximum of 25% of the total paid up capital
and free reserves of the company can be bought in
one financial year, the debt equity ratio post buyback should not be more than 2:1 etc. Buy-back
being a transfer of securities from a non-resident
to a resident cannot be effected at a price higher
than the price of the shares as determined by the
discounted cash flows method. Although, buy back
from the existing shareholders is supposed to be on

a proportionate basis, there have been certain cases


such as Century Enka where the court approved
a scheme for selective buy-back of 30% of its
shareholding from its non-resident shareholders.
From a tax perspective, traditionally, the income
from buyback of shares has been considered as
capital gains in the hands of the recipient and
accordingly the investor, if from a favourable treaty
jurisdiction, could avail the treaty benefits. However,
in a calculated move by the Government to undo
this practice of companies resorting to buying back
of shares instead of making dividend payments the
Budget 2013- 2014 has now levied a tax of 20%17 on
domestic unlisted companies, when such companies
make distributions pursuant to a share repurchase or
buy back.
The said tax at the rate of 20% is imposed on a
domestic company on consideration paid by it
which is above the amount received by the company
at the time of issuing of shares. Accordingly, gains
that may have arisen as a result of secondary sales
that may have occurred prior to the buy-back will
also be subject to tax now.
The proposed provisions would have a significant
adverse impact on offshore realty funds and foreign
investors who have made investments from
countries such as Mauritius, Singapore, United States
of America and Netherlands etc. where buy-back of
shares would not have been taxable in India due to
availability of tax treaty benefits. Further, being in
the nature of additional income tax payable by the
Indian company, foreign investors may not even be
entitled to a foreign tax credit of such tax.
Additionally, in the context of the domestic investor,
even the benefit of indexation would effectively
be denied to such investor and issues relating to
proportional disallowance of expenditure under
Section 14A of the ITA (Expenditure incurred in
relation to income not includible in total income)
may also arise. This may therefore result in the buyback of shares being even less tax efficient than the
distribution of dividends.
As an alternative to buy-back, the investor could
approach the courts for reduction of capital under
the provisions of section 68 of the Companies Act,
2013; however, the applications for such reduction
of capital need to be adequately justified to the court.

15. The forms of exit discussed here are in addition to the ability of the foreign investor to draw out interest / dividends from the NBFC up to 300 basis
points over and above the State Bank of India prime lending rate.
16. As a structuring consideration, the CCDs are converted into a nominal number of equity shares at a very heavy premium so that the share premium
can then be used for buy-back of the shares.
17. Exclusive of surcharge and cess.

Nishith Desai Associates 2015

57

NBFC Structure for Debt Funding


Provided upon request only

From a tax perspective, the distributions by the


company to its shareholders, for reduction of capital,
would be regarded as a dividend to the extent to
which the company possesses accumulated profits
and will be taxable in the hands of the company at
the rate of 15%.18 Any, distribution over and above
the accumulated profits (after reducing the cost of
shares) would be taxable as capital gains.

Sale of shares of an NBFC or listing of the NBFC


could be another way of allowing an exit to the
foreign investor; however, sale of shares cannot be
effected at a price higher than the price of the shares
determined by the discounted cash flow method.
Listing of NBFCs will be subject to the fulfillment
of the listing criterion and hinges on the market
conditions at that point in time.

18. Exclusive of surcharge and cess

58

Nishith Desai Associates 2015

Private Equity and Debt in Real Estate

Annexure VII
Challenges in Invocation of Pledge of Shares
Promoters of Unitech obtained the injunction due
to the unreasonable notice period given to them, the
company said in an email release. Outstanding loan
amount was repaid in full by the promoters within
a few days of obtaining the injunction and ahead of
the schedule. The pledged shares got released nearly
three months ago.
The pledging of shares is a mechanism through
which an investor or a lender can ensure a company
or a borrower delivers a promised return or repays
a loan within the stipulated period. When the
company defaults on the pledge, the shares are sold.
PE funds that focus on real estate have got such
pledged shares from their portfolio companies.
The Unitech case has raised concerns among PE
investors about the enforceability of the pledge,
said Ruchir Sinha, co-head, real estate investments
practice, at law firm Nishith Desai Associates. Many
funds are looking to enforce the pledge today, but
are concerned if the company can take them to court
and obtain a stay order.
Realty valuations have been declining as some
companies have been facing allegations of
wrongdoing relating to bribes given for loans and the
allocation of telecom spectrum, besides falling home
sales and rising interest rates.
On 30 January, Unitechs promoters approached the
Delhi high court and secured an injunction against a
move by debenture trustee Axis Trustee Services Ltd
to sell pledged shares. The promoters of Unitech had
raised Rs 250 crore from high networth individuals
(HNIs) in 2010 through the issue of non-convertible
debentures and had pledged their shares in the firm
as security to raise these funds.
However, on 28 January, Unitechs stock price
dropped to Rs 51 per share, marking a 38% decline
since November 2009 and triggering the default.
The same day Axis Trustee Services informed the
promoters that it would sell the pledged shares
on the next working day, as per their agreement.
Unitech moved the high court, which said that if
the stay was not granted, the company would suffer
irreparable loss.
Invoking a pledge can be challenging even in a
publicly traded company, since the law requires
that a fund must immediately sell the shares upon
Nishith Desai Associates 2015

invocation; funds are often faced with the dilemma


of whether to invoke the pledge or not, said Sinha.
If they invoke the pledge, then they must ensure
that the shares are sold, which may, apart from
hammering the stock, earn a bad name for the fund,
he said. If they dont, and the share value falls, an
argument can be made that they suffered the loss due
to their failure to exercise their rights on time.
The situation is even worse in a private company as
there is generally no market for such shares, Sinha
said.
Any lender who has pledged shares as collateral
runs the risk of ending up in court, said a fund
manager at one of the large domestic real estate
funds, who declined to be identified as it was a legal
issue.
Ideally, in a case where the lender decides to invoke
the pledge even before the company defaults because
of weak market conditions, the company should
immediately provide for adequate additional security
to avoid legal proceedings, he said.
There are three major forms of security that are
available to lendersmortgages, guarantees and
share pledging. Realty funds are increasingly making
investments through structured debt instruments
and are looking at stringent security mechanisms
and stock pledges are one of the most liquid form of
security.
This is a strong tool being employed by institutional
investors today who are worried about their returns
from their investment, said Amit Goenka, national
director of capital transactions at Knight Frank
(India) Pvt. Ltd.
According to him, what is prompting investors to
enforce pledging of shares is that the risk associated
with real estate has risen and investors dont believe
they can get their returns on time.
There have been 10 investments worth $514 million
(Rs 2,282.16 crore today) in real estate this year,
according to VCCEdge, a financial research platform.
Last year, there were 34 investments worth $1.16
million compared with 28 investments worth $870
million in the year earlier.

59

Challenges in Invocation of Pledge of Shares


Provided upon request only

Some of the big investments in the sector include


$450 million investment in DLF Assets Ltd by
Symphony Capital Partners Ltd, $296 million
invested in Phoenix Mills SPV by MPC Synergy Real
Estate AG and $200 million invested in Indiabulls
Real Estate Ltd by TPG Capital.

If you see all the real estate companies, the extent


to which shares have been pledged is increasing
day by day, he said. In some of those companies,
it has reached the limit and they have nothing else
to leverage. So, there is no other choice for those
lenders, but to invoke the pledge.

Unfortunately, it is true that real estate funds want


to invoke pledges, said the general counsel of a local
PE fund that has raised foreign money. He declined
to be identified considering the sensitivity of the
issue.

However, Sinha of Nishith Desai cautioned that


enforcing a pledge will affect the reputation of the
company as borrowers will become apprehensive of
taking PE money.

60

Nishith Desai Associates 2015

Provided upon request only

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Private Equity and Debt in Real Estate

Research @ NDA
Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering, research
by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him provided the
foundation for our international tax practice. Since then, we have relied upon research to be the cornerstone of
our practice development. Today, research is fully ingrained in the firms culture.
Research has offered us the way to create thought leadership in various areas of law and public policy. Through
research, we discover new thinking, approaches, skills, reflections on jurisprudence, and ultimately deliver
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Over the years, we have produced some outstanding research papers, reports and articles. Almost on a daily
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provide immediate awareness and quick reference, and have been eagerly received. We also provide expanded
commentary on issues through detailed articles for publication in newspapers and periodicals for dissemination
to wider audience. Our NDA Insights dissect and analyze a published, distinctive legal transaction using multiple
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regularly write extensive research papers and disseminate them through our website. Although we invest heavily
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Our research has also contributed to public policy discourse, helped state and central governments in drafting
statutes, and provided regulators with a much needed comparative base for rule making. Our ThinkTank
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As we continue to grow through our research-based approach, we are now in the second phase of establishing a
four-acre, state-of-the-art research center, just a 45-minute ferry ride from Mumbai but in the middle of verdant
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We would love to hear from you about any suggestions you may have on our research reports. Please feel free to
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