India’s foreign investment policy prohibits any sort of foreign investment in real estate business. “Real estate” business means dealing in land and immovable property with a view to earning profit or income. However, “township business”, including the development of townships and the construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships, is specifically excluded from real estate business.
By press note 10/2014, notified on 8 December 2014, the foreign investment policy with respect to township business was intended to be relaxed. The Indian company is now required to bring in a minimum of US$5 million in foreign investment (previously US$10 million) within six months of commencement of the project.
Investors consider the revised limit still to be high. Further, while the earlier regime provided an exit after a minimum lock-in period of three years, now a foreign investor is permitted to exit on completion of the project or after development of trunk infrastructure, which will be determined by government departments, resulting in uncertainty.
The government is also empowered to permit repatriation of investment or transfer of stake by one non-resident investor to another non-resident investor before the completion of the project on case-to-case basis, resulting in more uncertainty.
Feasible route for funds
The Reserve Bank of India (RBI) has granted general permission to foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (SEBI) to invest in India under the portfolio investment scheme (PIS) route. SEBI registration also operates as approval under the Foreign Exchange Management Act, 1999 (FEMA), to invest in India.
Inflows by way of PIS, as opposed to foreign direct investment (FDI), are liquid in nature and are motivated by international portfolio diversification benefits. Where capitalization requirements and other uncertain conditions make it difficult for foreign investors to use the FDI route, an IPO of a township business company (or another company) may allow foreign money by way of PIS. If it does, then with the declaration made in the 2015-16 budget that the caps for the FDI and PIS routes will be replaced with composite caps, more foreign funds may come in via the PIS route.
PIS in an IPO
Foreign investment is primarily governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20), and circulars issued by the RBI, in addition to the consolidated FDI policy issued by the Department of Industrial Policy and Promotion. To simplify foreign portfolio investments, the SEBI (Foreign Portfolio Investors) Regulations, 2014, notified on 7 January 2014, merged FIIs and qualified institutional investors (QFIs) into one category called foreign portfolio investor (FPI).
In terms of FEMA 20, a FPI is permitted to purchase shares and convertible debentures of an Indian company through a public offer or private placement, subject to the prescribed ceiling, and an Indian company is permitted to issue such shares provided that in the case of a public offer, the price of the shares to be issued is not less than the price at which shares are issued to residents. Therefore, an FII/FPI may invest in the capital of an Indian company under the PIS route, which limits the individual holding of an FII/FPI to below 10% of the capital of the company and the aggregate limit for FII/FPI/QFI investment to 24% of the capital of the company.
This aggregate limit can be increased to the sectoral cap or statutory ceiling, as applicable, by an Indian company through a resolution passed by its board of directors followed by a special resolution passed by its general body and subject to prior intimation to the RBI. The aggregate FII/FPI/QFI investment, via FDI and PIS, must be within the above caps.
In view of FEMA 20, which defines FDI as investment by a non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of FEMA 20, PIS investment is distinct from investment under the FDI route. Thus, the investment made via the PIS route in an IPO of a township business company need not adhere to the capitalization norms and related conditions which apply only to FDI investment.
An Indian company involved in township business may find it feasible to raise funds through PIS in an IPO, subject to caps applicable to FII/FPI/QFI investment under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. With the announcement of composite caps for PIS and FDI, we may see an influx of more foreign funds through the IPO-PIS route, not just in township business companies but also in others.
Yogesh Chande is an associate partner and Bhavin Gada is a senior associate at Economic Laws Practice. Manendra Singh, associate, helped with the research. This article is intended for informational purposes and does not constitute a legal opinion or advice.