Real Estate 2020

Last Updated April 14, 2020


Law and Practice


J. Sagar Associates is a national law firm in India with more than 320 professionals operating out of seven offices located in Ahmedabad, Bengaluru, Chennai, Gurugram, Hyderabad, Mumbai and New Delhi. JSA has a dedicated team with expertise in the extensive real estate practice across all offices. Clients include Indian and international institutional and private entities, including developers, real estate advisers, banks, non-banking finance companies, offshore and domestic real estate funds, real estate investment trusts, high net worth investors, governments, major retailers, and hotel owners and operators. JSA is involved in legal and regulatory issues for various types of real estate projects, including in relation to the construction and development of hotels, malls, residential and commercial complexes, warehouses, information technology and industrial parks, and special economic zones.

The legal system in India comprises civil law, customary and religious law, and common law. Real estate transactions are subject to Central and State legislation, personal/religious laws and judicial precedents. There is also subordinate legislation, such as rules, regulations and by-laws made by local authorities like municipal corporations, gram panchayats and other local administrative bodies. Laws relating to real estate in India can be categorised as follows:

  • laws applicable to the acquisition, transfer and registration of immovable properties, such as the Transfer of Property Act, 1882 (TOPA), the Registration Act, 1908 (Registration Act), the Real Estate (Regulation and Development) Act, 2016 (RERA) and stamp duty legislation enacted by various States;
  • exchange control regulations for foreign investors, such as the Foreign Exchange Management Act, 1999 and the rules and regulations framed thereunder (FEMA), including in particular the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (Non-Debt Rules) and the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (Debt Regulations);
  • corporate laws such as the Companies Act, 2013 (Companies Act), where any party to the transaction is a company, and the Limited Liability Partnership Act, 2008 (LLP Act), where a limited liability partnership firm (LLP) is involved; and
  • personal/religious laws that determine title acquired through inheritance or succession.

The real estate sector has seen a significant increase in investments in equity instruments, while investments from non-banking financial companies (typically in debt instruments) have reduced.

Legislative trends show continued emphasis on liberalising the Indian economy, with renewed focus on the development of real estate in a transparent manner. Some significant developments are as follows:

  • SEBI (Real Estate Investment Trust) Regulations 2014 (REIT Regulations), dealing with real estate investment trusts (“REIT”), allow individual investors to enjoy the benefits of owning an interest in the securitised real estate market;
  • RERA, welcomed by purchasers, was framed to regulate and promote transparency, credibility and accountability in the real estate sector in India;
  • the goods and services tax (GST) has subsumed Central taxes like central sales tax and service tax, as well as State-level taxes such as value added tax and entry tax, eliminating the multiplicity of taxes and their cascading effects;
  • the foreign investment environment, including in the real estate sector, has been liberalised; and
  • the Benami Transactions (Prohibition) Amendment Act, 2016 empowers competent authorities to attach and confiscate "benami" properties (ie, property held by or transferred to or for the benefit of a person, the consideration for which has been provided or paid by another person), and aims to curb issues of black money and money laundering in India.

In terms of significant transactions, there have been many investments into India, including various investments made by sovereign wealth funds. Large investments have been made into commercial real estate with the intention of moving the interest in real estate assets owned by large developers into REITs.

The documents for leasing arrangements have become significantly more sophisticated and, in several transactions, facilities in excess of 1,000,000 sq. ft. have been taken on lease.

Impact of COVID-19 Pandemic

While we have covered the extant lex loci, it should be noted that due to the prevailing COVID-19 pandemic, several temporary changes across various laws have been introduced, including FDI restrictions, extensions and relaxations for compliance requirements, introduction of moratoria for limitation and application of force majeure clauses in contracts. These affect the real estate sector as well, and should be kept in mind when dealing with specific transactions.

Real estate has been revolutionised by tremendous evolution in information technology in the past decade. Two such technologies are Blockchain and Proptech. Blockchain facilitates an entire real estate transaction (buying, selling or renting) online, without the presence of a middleman, attempting to make this industry transparent and efficient. Proptech streamlines and connects processes for participants in all stages of real estate transactions, including buyers, sellers, brokers, lenders and landlords.

Blockchain and Proptech are set to revolutionise the real estate industry. Blockchain in particular will fast-track the entire process and make it more transparent. It does not require the use of old-time systems like registers and forms, as everything will exist online and will be included within the smart contract.

The State Government of Andhra Pradesh has partnered with a Swedish start-up to build its blockchain-based solution. In 2018, NITI Aayog highlighted its efforts towards IndiaChain, a blockchain infrastructure for managing public records and building social applications, which will also be used for maintaining land records. Many State Governments (Maharashtra, Telangana, Andhra Pradesh and West Bengal) are exploring opportunities to integrate blockchain-based ledgers in the digital land record system.

Despite the introduction of these disruptive technologies in India, there may not be any significant impact on the real estate market over the next year as the Indian government is not currently capable of integrating such technologies.

The government has taken steps to ease the regulations governing foreign direct investment (FDI) in single brand retail trading. While there are no significant indications from the government at this point in time, foreign investors are hopeful that the next progressive step would be in the multi-brand retail trading sphere. Most recently, the government has announced various initiatives to increase investments in warehousing and logistics sectors, and it is expected that this would result in growth in the real estate sector as well. In light of several large investment plans for data centres in 2019, the Finance Minister has recently proposed formulating a policy for setting up data centre parks.

The categories of property rights are freehold rights, tenancy (lease) rights, and licences and easements.

Freehold Rights

A person acquires absolute right, title and interest (including undivided interest) in a property and becomes the sole owner of the property, with unfettered freedom and the right to deal with the property in the manner deemed fit by the owner.

Tenancy (Lease) Rights

A person acquires limited interest and rights in relation to a property, with the right to occupy and deal with the property in the manner contractually agreed between parties. Indian law also recognises the concept of statutory tenants, who are protected under the applicable rent control statute and can be evicted only on limited grounds. Most modern developments leased to corporates are, however, not affected by rent control legislation as corporates do not generally derive protection under such.

In India, tenancy matters are governed by state-specific statutes/law, and matters not covered by state legislation are governed by TOPA, which is a Central legislation.

In 2019, the Government of India released the draft Model Tenancy Act, 2019, which aims to establish a Rent Authority to: (i) regulate the renting of premises in an efficient and transparent manner, (ii) balance the interests of owners and tenants by establishing adjudicating mechanisms for speedy dispute redressal, and (iii) establish Rent Courts and Rent Tribunals. Each state is required to implement its tenancy act on the lines of the draft Model Tenancy Act, 2019.

Licences and Easements

Licences are governed under the Indian Easements Act, 1882 (Easement Act); easements are also recognised separately in Indian law. An easement is a right that the owner of a property has to compel the owner of another property to allow something to be done or to refrain from doing something on the servient element for the benefit of the dominant tenement. A licensee acquires the permission of the owner to use the property, and use is restricted to contractual terms without de jure possession being granted to the licensee.

Generally speaking, a person can acquire title to immovable property by:

  • an act of parties, including sale, gift, exchange or lease, governed by TOPA and RERA;
  • laws relating to succession; and
  • allotment by government organisations/agencies.

Certain states prohibit companies/firms from purchasing/leasing agricultural land, and prohibit people with income above a threshold or who are not already agriculturalists from purchasing agricultural land. Certain states also have land ceiling laws that restrict the acquisition of land beyond specified limits.

Documents governing rights/transfers of immovable property are registered before the jurisdictional Sub-Registrar of Assurances. Registrations are mandatory for instruments evidencing a transfer of interest in immovable property of a value more than INR100. Once registered, documents become a part of the public record and can be accessed by anyone. Such transfers also require the payment of duties (such as stamp duty, registration fee and other cess applicable to each state) and are recorded by the revenue departments, which maintain a separate set of documents for each property.

Where transfer is effected through succession, revenue records are updated to reflect the inheritance; these become publicly available once recorded.

Insurance companies in India have started to provide title insurance, though establishing title is often very complicated. Measures are being taken to simplify the manner in which title can be verified, and governments are taking steps to make such records electronic, although it will take some time for all the relevant documents to be sorted methodically and made available in electronic form.

Tracing title to property is often complicated, as records are not centrally located and are maintained by different governmental departments. Antecedent documents in each state are often in vernacular languages.

When conducting due diligence, one may not discover all litigation, mortgages by deposit of title deeds and unregistered contracts (which do not require registration under the Registration Act) that have a bearing on the title of the property, so it is important to take detailed representations and warranties. In some States, litigation cases are required to be registered with the Sub-Registrar in order to become binding or be considered as constructive notice to a person buying immovable property subject to litigation.

Taking possession of original title deeds at the time of sale is also very important as they can be used to mortgage/encumber a property. Where the original title deeds are not available, great care needs to be taken to ensure there has been no mortgage/encumbrance by deposit of title deeds by the seller or his predecessor-in-interest.

Due diligence also sometimes requires the issuing of public notices in local papers inviting claims in respect of the property and taking searches before the court offices, also referred to as negative searches. If any claim is made or litigation is discovered, the purchaser then takes a call on whether or not he should still go ahead with the transaction.

Representations and warranties vary depending on the nature of the transaction. In most transactions, representations and warranties are very comprehensive, except where a transfer is on an "as is, where is" basis, and the liability of the seller is limited to the purchase price or a portion thereof. It is common to back representations and warranties by indemnities and, very often, there is no limitation of liability. That said, in India, only direct damages are awarded (ie, damages that naturally arose in the usual course of things from a breach, or which parties knew, when they made the contract, were likely to result from the breach of it). Indian courts do not award indirect, consequential, special, exemplary or punitive damages to plaintiffs for breach of contract.

The important areas of law include:

  • laws applicable to the acquisition, transfer and registration of immovable property;
  • laws for foreign investors – Indian exchange control laws;
  • corporate laws where the transferor/borrower/licensor is a company; and
  • personal laws to determine title acquired through inheritance.

The buyer will not be responsible for soil pollution or environmental contamination of a property if they can prove that they were not responsible for such an act. Typically, the buyer is indemnified against any action initiated by the government department for contamination of a property prior to its purchase. However, proceedings for environmental contamination are few and far between, although this may change as environmental issues are attracting more recognition.

The buyer can ascertain the permitted uses of a property based on zoning regulations formulated under relevant town and country planning statutes. To aid development of strategic areas, government entities may also enter into agreements with developers whereunder they allot land with certain obligations imposed on its development.

The Constitution of India no longer recognises the right to hold property as a fundamental right. However, Article 300 (A) was included in the Constitution of India to affirm that no person would be deprived of his property except by authority of law.

State Governments are authorised to acquire lands for public purposes. The current land acquisition statute prescribes the following:

  • payment of compensation of up to four times the market value in rural areas and twice the market value in urban areas;
  • safeguards for tribal communities and other disadvantaged groups, compensation for lost livelihood, and caps on acquisition of multi-crop and agricultural land;
  • the return of unutilised land to landowners; and
  • a requirement to obtain consent from the affected parties in relation to the acquisition of land for companies, except where the acquired land is controlled by the Government.

Land parcels acquired by the State Governments vest with the State Governments free of all encumbrances and any title defects. As such, the complexity of conducting due diligence reduces as no documents prior to acquisition need to be reviewed.

Any transfer of property requires the payment of duties levied by the government, such as stamp duty and cess (which differ from state to state), and registration fees. Where the asset is under construction and not ready for use, GST is also required to be paid by the seller. However, GST is an indirect tax, so can be recovered from the buyer. In an asset deal, the duties are generally paid by the buyer, unless they are otherwise agreed to be shared between the buyer and the seller. Most stamp acts provide that, where there is no agreement to the contrary, on a sale the stamp duty will be paid by the purchaser, while it will be paid by the lessee on a lease.

For transactions involving the transfer of shares in physical form, stamp duty at 0.25% of the value of consideration for the shares is also payable upon transfer. Where shares/securities are in a dematerialised form, there is no stamp duty payable on the transfer of shares, although there may be some transaction charges (which would in any event be significantly lower than the stamp duty).

Stamp duty under the head of conveyance need not be paid if property is contributed into a partnership firm. However, any exit from the partnership by the original contributor will attract the payment of stamp duty as if it is a conveyance. The rate of stamp duty will vary from state to state.

Exemptions on the payment of stamp duty and certain tax benefits are available to entities operating out of free trade zones known as "special economic zones".

A person who is resident outside India can acquire property or invest in real estate in India only in accordance with FEMA, which prescribes limited circumstances for such matters.

While foreign investment into real estate construction and development has been liberalised significantly, certain restrictions remain. An important restriction is that the investment has to be locked in for three years, calculated with reference to each tranche of investment, except in cases where the construction of "trunk infrastructure" is completed. The aforesaid lock-in is also not applicable to the construction of hotels and tourist resorts, hospitals, special economic zones, educational institutions and old-age homes.

In respect of completed projects, FDI is specifically permitted in certain projects, such as the operation and management of townships, malls/shopping complexes and business centres, with a lock-in of three years (calculated with reference to each tranche of investment) being applicable to investments in such completed projects. Furthermore, earnings of rent/income on the lease of a property, not amounting to a transfer, will not amount to real estate business. This provision enables FDI in completed projects if the building is leased and units are not sold.

Typical fund-raising means for companies engaged in the real estate sector include FDI, REITs, alternative investment funds (AIFs), debt financing and external commercial borrowing (ECBs).


While FDI in real estate business is prohibited in India, it is permitted in construction development projects and the development of industrial parks. "Real estate business" is defined as dealing in land and immovable property with a view to earning profit therefrom but does not include the development of townships, the construction of residential/commercial premises, roads or bridges and REITs registered and regulated under the REIT Regulations. Furthermore, earnings of rent/income on the lease of property, not amounting to a transfer, will not amount to real estate business. Accordingly, FDI of up to 100% is permitted under the automatic route for companies engaged in these sectors, subject to certain limited conditions.

Entities engaged in real estate broking services are also permitted to receive up to 100% FDI under the automatic route.

FDI may be through subscription to equity shares and instruments that are compulsorily convertible into equity and are required to comply with pricing guidelines prescribed by the Reserve Bank of India (RBI).

Each phase of a construction development project would be considered as a separate project, so an investor can potentially exit before the completion of an entire project, subject to a lock-in period of three years, as mentioned earlier.


This is a relatively new mode of fund-raising, with only one REIT having been set up so far, although several developers and investors are looking into REITs as an attractive means of fund-raising or (in case of investors) liquidating investments and exiting. REITs in India are private trusts set up under the Indian Trusts Act, 1882 and compulsorily registered with SEBI. The set-up of REITs would include the sponsor (who sets up the REIT), the manager (who manages the REIT’s assets, investment and operations) and the trustee (a SEBI-registered debenture trustee who is not an associate of the sponsor or manager, and who holds the REIT assets in trust for the benefit of the unitholders/investors). Furthermore, the REIT Regulations have been modified to permit, inter alia, REITs to issue debt securities for raising funds.

Alternative Investment Funds (AIFs)

AIFs are privately pooled investment vehicles that collect funds from investors (Indian or foreign) for making investments, and are regulated by the SEBI (Alternative Investment Funds) Regulations, 2012. AIFs have to be compulsorily registered with the SEBI. AIFs may invest as private equity or debt funds, or both. There are, however, certain restrictions with which AIFs have to comply.

Recently, one INR25,000 Crores Category II AIF has been formed under the Special Window for Affordable and Mid-Income Housing. The fund aims to provide last-mile financing to enable the completion of the construction of stalled housing projects. This scheme was approved by the cabinet on 2 November 2019. The AIF will likely be investing in real estate companies through non-convertible debentures (NCDs).

Debt Financing

The most common means of fund-raising for real estate developers is by the issuance of NCDs to non-banking finance companies, banks, financial institutions and other private lenders. Debt investments by banks are subject to certain prudential norms relating, inter alia, to the exposure of banks to such investments, as stipulated by the RBI. While this has motivated several developers to seek investments from non-banking finance companies, financial institutions and other private lenders, which can provide typical loans as well as other structured lending solutions, market conditions have affected investments by non-banking finance companies in recent times.

External Commercial Borrowings (ECBs)

The RBI has recently eased the definition of beneficiaries eligible for ECBs to include all entities that can receive FDI. Funds borrowed under ECB cannot generally be used, inter alia, for real estate activities, except when used for (i) the construction/development of industrial parks/integrated townships/special economic zones, (ii) purchase/long term leasing of industrial land as part of a new project/modernisation of expansion of existing units, and (iii) any activity under the "infrastructure sector" definition. Restrictions on ECBs for funding real estate transactions broadly remain similar under the new framework. In lieu of the existing sector-wise limits, all eligible borrowers are now permitted to raise up to USD750 million or equivalent per financial year under the automatic route.

Typical security includes:

  • mortgages;
  • hypothecation or escrow of project receivables and cash flows (subject to compliance with RERA);
  • a pledge of shares of the company engaged in the development of the project, its parent, and/or associate entities; and
  • the provision of corporate and personal guarantees, which is typically created in favour of a security/debenture trustee acting for the benefit of the lender.

Where security is in the form of a mortgage, the mortgage deed would have to be registered with the jurisdictional Sub-Registrar of Assurances. Where an equitable mortgage is created by the deposit of title deeds, the recording of said deeds may need to be registered in certain states in India. Secured lenders are required to register their security interest created on such assets (whether tangible or intangible) with the Registrar of Companies (ROC) and the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), which is a central database for all security interests created, established for the purpose of checking and identifying fraudulent activity when loans are advanced against security interests in assets.

FDI in Indian companies cannot be secured and must be treated as equity investments wherein investors take risks typical to equity investments. Accordingly, foreign investors investing under the FDI route are not permitted to have assured returns at the time of exit by the RBI. However, where investments are made in NCDs, the NCDs can be (and typically are) secured, including where the NCDs are issued to permitted foreign investors. Security in such cases is typically created in favour of a security/debenture trustee. In the case of an ECB, a pledge over shares of an Indian company in favour of a foreign lender requires compliance with ECB guidelines and approval of the authorised dealer bank (AD Bank). The creation of a charge over assets situated in India in favour of a foreign lender will be subject to compliance with Non-Debt Rules and Debt Regulations, and approval from the AD Bank.

As far as is known, the reach of the Committee on Foreign Investment in the United States (CFIUS) pursuant to the Foreign Investment Risk Review Modernisation Act of 2018 (FIRRMA) has not had an impact on real estate finance in India.

Stamp duty is payable on all documents. Insufficiently stamped documents may be impounded and may not be admissible as evidence in Indian courts. Some documents need to be registered under the Registration Act, with payment of the applicable registration fees. Certain documents, such as powers of attorney, are also required to be notarised and are subject to notarisation fees.

Necessary corporate authorisations are required under the Companies Act, such as board resolutions and shareholder resolutions. Any charge is required to be filed with the ROC and, in case of non-compliance, such security interest would be held as void against the liquidator and the other creditors of the company in the event of a winding-up of the company, although the obligation for repayment of money secured by the charge will continue to subsist.

Under RERA, there are some restrictions on the ability of companies and real estate developers to secure their borrowings (for instance, on the ability to hypothecate project receivables).

Where the borrower in default is solvent, it is not particularly difficult for a lender to seek to enforce its security.

Where a borrower is insolvent or unable to repay its dues, provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) are applicable.

Separately, banks and financial institutions that have lent monies to a borrower are entitled to enforce their security interest without the intervention of a court/tribunal, subject to strict compliance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). However, it should be noted that action under IBC and SARFAESI cannot be taken simultaneously, since a moratorium is declared upon the admission of an insolvency application under the IBC by a National Company Law Tribunal.

As a general rule, where the priority of security is not contractually agreed between the parties involved, security created earlier in time will rank in priority to security that is created subsequently. A first ranking charge will have priority over a second ranking charge at the time of the enforcement of security. However, it is possible for existing secured debts to become subordinated to new debts when an intercreditor agreement setting out the ranking of debt or a subordination agreement is signed.

Typically, in Indian lending transactions, shareholder/promoter loans are unsecured and subordinated.

Lenders will not ordinarily incur liability under Indian environmental laws simply by holding a security interest. If a lender takes over management and control of the borrower after the enforcement of security, such lender may incur liability as the person in possession of the polluting premises, or as a person responsible for the conduct of the borrower’s business.

The optimum outcome of an insolvency application under the IBC is a successful corporate insolvency resolution process (CIRP). However, when a CIRP fails, liquidation follows. There are also provisions for voluntary liquidation. Where a borrower goes into liquidation, the IBC provides the manner in which secured debt will be discharged. Typically, workmen’s dues are prioritised over dues to lenders who have relinquished their security interest to the liquidation process. Similarly, wages and dues owing to employees (other than workmen) are ranked pari passu with such lenders who have relinquished their security to the liquidation estate.

The exposure of the real estate industry in India to foreign currency borrowings per se has been negligible because of RBI restrictions, and the expiry of the London Interbank Offered Rate (LIBOR) index in 2021 would have limited impact. However, going forward, this topic may need to be analysed, given the recent liberalisation of the ECB regime in India, and alternative interbank interest rates should be used, such as Euro Interbank Offered Rate (EURIBOR). The extant ECB guidelines use the words “LIBOR or any other 6 months interbank interest rate applicable to the currency of borrowing such as EURIBOR”.

Planning authorities are constituted for the implementation and governing of zoning regulations for orderly development of a state. Considering the changing dynamics of a city, every state facilitates the updating and revising of an existing master plan at least once every ten years, by carrying out a fresh survey of the area within its jurisdiction with a view to revising the existing master plan and indicating the manner in which the development and improvement of the entire planning area is proposed.

Certain states facilitate the acquisition of lands by government organisations or agencies for industrial and residential developments. The developments in such areas are mainly governed by the rules and regulations framed by such government organisations/agencies.

Any change in the zoning regulations will require prior consent of the State Government, the process of which is time consuming and does not always result in consent being given.

The construction of new buildings and refurbishments in any state is governed by the National Building Code, the applicable town and country planning statute, and the applicable municipal law, including the building by-laws framed by the respective planning authorities. The building regulations bear out that various approvals are required to be obtained from different authorities for the construction or refurbishment of buildings.

Development is also required to be in compliance with the zoning regulations and building by-laws. Zoning regulations sometimes have provisions for the protection and preservation of properties that are identified as heritage properties. Consents from the pollution control board, the environmental department, the fire department, the airport authority, the water supply and sewerage board and the electricity board are also required.

There is no single regulatory authority or statute to govern the entire real estate sector, so the relevant authorities have been covered separately.

An application is required to be submitted to the jurisdictional planning authority along with all relevant title documents, plans/designs/drawings of the development, and in-principle approvals from the relevant authorities.

Once the planning authority is satisfied that the building, when constructed, would comply with the building by-laws, it provides its consent.

A certificate is also often issued by the planning authority after the pillars are constructed, confirming that the construction has commenced in compliance with the sanctioned plan.

Pursuant to completion of the development, the planning authority also issues a certificate confirming that the building is fit to be occupied. Although minor deviations are compounded by collecting a fee, any major deviations in the development may result in the project not being issued a completion certificate.

The applicable town and country planning/municipal statutes prescribe timelines within which the planning authorities are required to grant approval or reject plans for the development of buildings.

Where a plan submitted for approval to the authority has been rejected or not expressly approved, the applicant may prefer an appeal to a higher authority, which is required to grant or reject the application within a prescribed time period. Where no response is received, the plan is often deemed to have been approved.

In the event of any arbitrary action initiated by a planning authority, the aggrieved party can approach a High Court, invoking its high prerogative writ jurisdiction.

Government entities enable parties to procure land for the development of strategic projects/areas – whether industrial, commercial or residential – by entering into:

  • concession agreements;
  • development agreements whereunder the developer is required to develop the property and is entitled to lease/sell built-up spaces in favour of third parties; and
  • lease-cum-sale agreements.

The property is conveyed in favour of the allottee only upon compliance with the conditions in the agreements.

Where land is allotted by the government, the process of obtaining approvals for the implementation of the project is generally faster. In some large projects, the developer may be required to lease/relinquish a small portion of the property in favour of the electricity supply company for the setting up of a sub-station to supply power to the development.

For enforcement, parties are given sufficient notice and an opportunity to be heard prior to initiating any action against the developer or the development. The affected parties will have the right to approach a High Court, invoking its high prerogative writ jurisdiction, in the event of any arbitrary action initiated by the planning authority.

Real estate assets can be owned/held by private limited companies, public limited companies, LLPs and partnerships. In addition, REITs are increasingly being considered by investors.

Private and public limited companies are required to be incorporated under the Companies Act and to adopt articles of association and a memorandum of association, which would set out the objects and regulate the operations of the entity.

LLPs are incorporated under the LLP Act. Foreign investment into LLPs engaged in construction development activities requires regulatory approval.

Partnerships can also hold land, but foreign investment requires regulatory approval.

REITs are set up and operated in accordance with the REIT Regulations.

Typically, foreign investors prefer private limited companies, while domestic investors prefer partnerships and LLPs for smaller holdings.

There are no minimum capital requirements for public limited companies, private limited companies, LLPs or partnerships. REITs are required to comply with regulations relating to asset size and minimum offer.

Private limited companies are required to have at least two directors on their board, while public limited companies need at least three directors. Public companies also need to comply with additional requirements, such as having independent directors on their board.

LLPs and partnerships are required to have at least two partners.

Separately, every listed company and certain other unlisted companies that have paid-up capital over a prescribed threshold are also required to appoint a company secretary.

The costs for entity maintenance vary based on the type of entity involved. Annual compliance costs for a private limited company would typically be around GBP10,000, and similar or lower costs can be anticipated for compliance by LLPs.

The law recognises the concepts of leases and licences that permit a person, company or other organisation to occupy and use real estate for a limited period without acquiring the absolute title to said real estate.

The simple difference between a lease (under TOPA) and a licence (under the Easement Act) is that a lease is the transfer of a right to enjoy the premises for a limited time, while a licence is a privilege to do something on the premises which would otherwise be unlawful without permission. The transaction is a lease if it grants an interest in the premises; it is a licence if it gives a right to a permissive user with no interest in the premises.

The law does not differentiate between different types of commercial leases. Most commercial leases are based on a fixed rental and fixed term concept. There are triple net leases where the tenant bears the cost of the property tax, the insurance of real estate and maintenance charges, and profit-sharing leases where the rent is based on a percentage of the lessee’s revenue, but these are not as common.

Other than a few states in India where some properties are regulated by rent control statutes and where there are statutory tenants, rent or lease terms are freely negotiable in contracts entered into between parties. The rent and the lease terms largely depend on the city, the location of the building and the present market rents payable for similar buildings.

Length of Lease Term

The initial term of a lease is generally between three and five years. There are also cases where the tenant opts for a longer lease of ten years. It is common to have an agreement to lease for a longer period (paying nominal stamp duty) and to execute lease deeds thereunder where such arrangements result in a lower stamp duty payment.

Maintenance and Repair of the Real Estate Actually Occupied by the Tenant

Maintenance and repair of the actual premises occupied by the tenant are generally the tenant’s responsibility. In most cases, major or structural repairs (that are not attributable to the tenant) are excluded from the tenant’s scope of responsibility.

Frequency of Rent Payments

In most commercial leases, rents are payable on a monthly basis in advance. For retail leases, malls, hotels, and so on, the lease rent or a portion thereof can be based on the turnover of the lessee’s revenue at the establishment. Where a furnished space is provided, rent may be payable on the furniture and fittings only until the cost of such furniture and fittings has been fully depreciated.

In a typical commercial lease in India, the rent will escalate every three years; the rate of escalation is generally between 10% and 15%.

The concept of a rent review and escalation of rent based on market rent is not common in Indian leases. Where a rent review is agreed to in a long-term lease, the prevailing market rent is determined by an independent expert. The determination of rent is typically subject to certain exclusions, including disregarding (i) any goodwill attached to the premises by reason of the tenant’s business or occupation of the premises, and (ii) the effect of any improvements made by the tenant at the premises.

VAT has been subsumed by GST, which is payable on leases of property/asset for commercial use, and is borne by the tenant. The tenant can claim input tax credit, subject to conditions in law, of such tax paid to the landlord. Also, tax on the lease rent is deducted at source in terms of the Income Tax Act, 1961 (IT Act) by the tenant prior to paying rent to the landlord.

In most commercial leases in India, a tenant is required to pay the landlord an interest-free refundable security deposit, also known as a premium, which is held by the landlord as security for the tenant’s obligations during the lease term. The quantum of the deposit is commercially agreed but the practice differs from state to state and can start at three months’ rent and go up to 12 months’ rent.

In addition to rent, tenants usually pay maintenance charges and a fixed parking fee based on the number of parking spaces exclusively provided to the tenant. The landlord (or a third party nominated by the landlord) generally takes responsibility for the maintenance and repair of the common areas, the cost of which is charged back to the tenants on a fixed-cost basis (with an agreed escalation) or on an actual cost-plus basis, with the landlord receiving a management fee of 15% to 20% of the cost incurred in providing the services.

All such payments (other than municipal taxes borne by the tenant) made to the landlord for use of the property are subject to withholding tax as well as GST. Any non-refundable deposit is subject to the deduction of tax at source as rent.

Utilities (including power, back-up power, water, etc) are paid by each tenant of the building based on the quantities actually consumed.

The policy obtained is, in most instances, a fire and perils policy covering loss of property. The cost of insurance is at times charged back to the tenants as part of the maintenance charges.

The usage of a project/building is dependent on the zoning of the land and any conditions running with the land. At times, land is allotted to a landlord for a determined purpose, like for biotechnology or IT-related uses, and accordingly the landlord would impose the same restrictions on the tenants under the lease. Non-compliance with the usage provision could result in a termination of the lease.

Generally, a tenant is only permitted to perform non-structural alterations at the premises (including fit-outs); structural alterations are only permitted with the prior consent of the landlord. The landlord may impose conditions, such as requiring the landlord’s consent on the contractors to be engaged or the materials to be used. The landlord may also require the tenant to reinstate the premises to the condition prior to the alteration upon the expiry or termination of the lease. Where a tenant takes land on lease for a long period, the tenant would have the right to develop the land as he requires, subject to applicable law. Upon the expiry or termination of the lease, development on the land would revert to the landlord, at no cost or at an agreed cost, based on the contractual understanding. Under Indian law, the owner of the land and the owner of the building constructed thereon can be different people. Gain, if any, on a transfer of development rights in a property is subject to tax as income of the landlord. The transfer of development rights to the tenant for developing the land and for commercial exploitation is subject to GST and is taxable in the hands of the tenant (under the "reverse charge mechanism"). GST payable by the tenant is subject to conditions and calculated in the manner prescribed under law.

Laws relating to leases do not differentiate between residential, industrial, commercial or retail leases, but commercial treatment may differ from market to market.

In most cases, a tenant’s insolvency will result in the termination of the lease as the tenant would not be able to comply with its obligations under the lease.

Payment of a refundable security deposit/premium is the most common security provided to the landlord. At times, the landlord may require the tenant to provide a bank guarantee for securing certain payment obligations.

If contractually agreed, the tenant may have the right to continue to occupy the premises as a monthly tenant after the expiry or termination of the lease or in the specific instance where the landlord does not refund the security deposit paid by the tenant in time. In all other cases, the tenant would have to leave the premises on the date of the expiry or termination of the lease. Where the tenant does not vacate the premises, the landlord would have to approach the court to evict the tenant, who will have the status of a trespasser. The landlord would also have the right to claim mesne profits from the tenant for such unauthorised occupation.

Under Section 108 (j) of TOPA, a lessee may transfer absolutely – or by way of mortgage or sub-lease – the whole or any part of his interest in the property, and any transferee of such interest or part may again transfer it, subject to the lessee not ceasing any of the liabilities attached to the lease and there being no contract to the contrary. In respect of a statutory tenant, state legislation also prescribes restrictions on transfers. Under the Maharashtra Rent Control Act, 1999, for example, a tenant cannot sub-let or assign the interest in the premises without the express consent of the landlord. The sub-lessee has to abide by the lease agreement executed between the lessor and the lessee.

Events of default and termination rights are contractually agreed between parties, including the granting of a cure period following an event of default before the termination rights arise.

Leases of immovable properties from year to year or for any term exceeding 12 months or reserving a yearly rent require mandatory registration at the office of the Sub-Registrar of Assurances that has jurisdiction over the location where the property to be leased is situated. Section 23 of the Registration Act requires the deed to be registered within four months from the date of its execution. An extension of an additional four months may be granted by the Registrar at his discretion, by levying a penalty, provided such non-presentation of the instrument within four months of execution was due to genuine reasons or unavoidable circumstances. After registration, the lease is recorded in the local Registry of Deeds.

Stamp duty is payable on the lease deed before it is registered.

Although licences are not normally required to be registered, certain states require it. For example, under Section 24 of the Maharashtra Rent Control Act, an agreement for leave and licence is compulsorily required to be registered.

Where a tenant has defaulted on the terms of the lease and the landlord initiates eviction proceedings in terms of the lease deed, the process for eviction of the tenant may take between three and seven years. The landlord can seek mesne profits from the tenant for unauthorised occupation. Where termination is during the lock-in period, the landlord may be able to seek lease rent for the balance of the lock-in period.

A third party cannot terminate a lease unless contractually agreed. In the event of a condemnation event by a government body, the lease will stand terminated as the property will vest with the governmental authority concerned. Compensation payable for such acquisition is typically paid to the owner of the property, unless the sharing of compensation is contractually agreed between the owner and the lessee.

Construction industry contracts are typically lump-sum turnkey fixed-price contracts, bill of quantities-based contracts (item-rate contracts) or work package-based contracts.

For projects where a detailed bill of quantities is possible, owners opt for an item-rate contract, which gives them greater control of the contract price. For large infrastructure sector construction projects, lump-sum turnkey construction contracts are common.

In India, fixed-price contracts prove problematic since the prices of raw materials fluctuate quite significantly, being dependent on the rate of inflation (which is in the region of 4% to 7% in India).

Split structure and design and build structures are commonly used for risk allocation and rewards for construction projects. Owners have a right to review and certify the contractor’s compliance. Contractors are often responsible even after completion, and during any agreed defects liability period and latent defects liability period.

In a split structure, owners appoint an architect for design and a contractor for construction. This is prevalent for the construction of real estate or manufacturing units.

For design and build structures, the owner enters into a lump-sum turnkey contract with a qualified entity who is responsible for the entire project, entailing managing, supervising and co-ordinating all other contractors/subcontractors to ensure that work is carried out safely as per the project schedule and to meet the owner’s standards.

The owner may, at the contractor’s cost, have the contract performed through a third party for non-performance by the contractor. This right has been bolstered with the Specific Relief (Amendment) Act, 2018.

Standard indemnity provisions are prevalent in construction contracts, and the limitation of liability usually varies between 50% and 100% of the contract price.

Contractors may be required to provide the owner with a corporate guarantee or a fund-based performance guarantee.

The retention of payments is also common, and such guarantee/retention amount is released after completion of the defect liability period.

Warranties as to workmanship and quality, fit-for-purpose warranties, adherence to technical specifications, and adherence to prudent industry practice are generally undertaken by contractors, subject to industry-specific and technical exceptions.

Lastly, contractors are usually required to obtain and maintain adequate insurance.

It is common to penalise delays in the performance of work by requiring the contractor to pay damages, or by deducting liquidated damages from payments due.

Usually, an "advance payment bank guarantee" (ABG) is required to be furnished by the contractor upon payment of the "mobilisation advance" by the owner. In most cases, the ABG is valid until the completion of construction.

In addition to the ABG, a "performance bank guarantee" (PBG) is also sought by owners to secure the performance of the work/construction commissioned by the contractor. Such a PBG would be required to be furnished on the effective date of the contract along with the ABG, and is usually valid until the expiry of the defect liability period.

Unless contractually agreed, the contractor is not permitted to create a lien on the property.

In most states, a building comprising more than a prescribed number of floors can only be occupied after an occupancy certificate has been obtained from the relevant planning authority.

GST, which subsumes VAT, is applicable on the supply of goods and/or services and is typically payable by the supplier of goods and/or services. GST is payable on the leasing, licensing or transfer of development rights of land (at 18%), and on the transfer of under-construction property. The leasing of residential apartments for residential use is exempt from the levy of GST.

GST on transfers of under-construction property varies for different types of projects. For example, GST on affordable residential apartments is 1%, GST on residential apartments (other than affordable residential apartments) is 5% and GST on commercial apartments can be 5% or 12%, depending on the type of project, with restrictions on the availability of input tax credit. However, GST is not applicable on the sale of constructed property. The burden of such taxes can be passed on to the buyer commercially.

Stamp duty can be reduced by contributing a property to a partnership firm. The partnership firm can thereafter even be converted into a company. By such transfers, the property owned by an individual can ultimately be transferred and owned by a company without the payment of stamp duty and registration fee.

Municipal taxes are generally calculated based on the location, size, age and occupation of the property (self-occupied or tenanted). Sometimes, taxes are based on rents received. There are no exemptions for the payment of property taxes, except for properties used for charitable purposes/religious institutions.

Any income of a non-resident from property situated in India is subject to tax in India, and withholding tax applies. Payment of consideration for the purchase of a property from a person resident in India is also subject to withholding tax at the rate of 1%, subject to certain thresholds. The income of a foreign company is usually taxed at a rate of 40%. However, gain on the sale of real estate held as an investment is taxed at a rate of 20% or 40%, depending on the period of holding. If the property was purchased by bringing foreign currency into India, gains on disposal are computed so as to adjust for changes in the rate of currency.

Where consideration received on the transfer of an immovable property (whether held as a capital asset or as a business asset) is less than 95% of the value of the property for the purpose of the payment of stamp duty as per local laws, the value of the property for the payment of stamp duty is deemed as consideration received for the levy of income tax under the IT Act. Similarly, where the consideration paid for the acquisition of an immovable property is less than 95% of the value of the property for the purpose of payment of stamp duty as per local laws, the difference between the value of the property for the payment of stamp duty and the consideration discharged is taxed as income of the purchaser, at applicable rates. Both these thresholds of 95% are proposed to be revised to 90% with effect from 1 April 2020.

Tax on non-resident taxpayers may, however, be reduced if favourable tax treaty provisions apply.

Rental income also qualifies for the following deductions/rebates:

  • a deduction equal to 30% of rental income (for allowance towards repairs and maintenance);
  • property taxes paid to the local authority; and
  • interest paid on loans used to purchase the property.

Loss incurred by renting out residential property is allowed to be set-off, up to a sum of INR200,000 per annum. Balance loss is allowed to be carried forward and set-off in the eight ensuing years.

It is mandatory for parties entering into a purchase or sale of immovable property for a value exceeding INR1 million to obtain and quote their Permanent Account Number (PAN) allotted by Indian tax authorities on the conveyance document.

Depreciation and other business expenses may be claimed as deductions only if the taxpayer is in the business of commercially letting out properties, or where plant and machinery that are inseparable from the property are let out together with the property.

J. Sagar Associates

Level 3, Prestige Obelisk
No. 3, Kasturba Road
Bangalore – 560 001

+91 80 435 03600

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Trends and Developments


Trilegal is one of the leading full-service law firms in the country with a well-established real estate practice that has a pan-India presence and a team of 40 lawyers focusing on real estate across its offices in Mumbai, New Delhi, Gurgaon and Bangalore. The firm has clients across the entire spectrum of the real estate sector, including international and Indian developers, funds and investors. Traditionally, the firm has always had a strong capability in advising funds investing in the real estate sector; however, the client base has now been expanded to include renowned international developers, such as Fosun Property Holdings Limited, Country Garden group, China Fortune Land Development, as well as traditional Indian developers like Ascendas Firstspace Development, Godrej Properties, House of Hiranandani and Swastik Group. The firm would like to thank Paayal Desai, Namesha Singh and Gazzal Bishnoi (associates) for their contribution to the guide.

Recent Trends and Developments in the Real Estate Sector

India – real estate overview

India is one of the fastest-growing major economies in the world and continues to be a land of great investment opportunities. The real estate sector has been one of the key drivers and has witnessed exponential growth in the last decade contributing between 6% to 8% to India’s GDP.

In recent years, India has witnessed a significant increase in real estate investments, as the Indian market now offers a wider platform with diverse opportunities for foreign investors to invest in various kinds of real estate developments, including IT parks, logistics parks, hospitality projects, commercial and shared spaces, special economic zones (SEZs) and residential projects, thereby making the Indian real estate sector one of the most diverse investment options across the globe.

The development opportunities vary from city to city, depending on various demographic factors such as the general economic conditions, the age of the populace, business opportunities and connectivity to the international trade routes. Broadly, the Indian real estate market can be categorised into three categories – Tier 1 cities, which include the metro cities of Mumbai Metropolitan Region, Delhi NCR, Chennai, Bangalore, Hyderabad and Pune; Tier 2 cities, which include the upcoming cities of Ahmedabad, Jaipur, Mysore, Chandigarh, Kochi and Trivandrum; and Tier 3 cities, which include smaller developing cities like Varanasi, Ranchi, Nagpur, Raipur and Dehradun.

Historically, Tier 1 cities were the epicentre of large real estate development and attracted sizeable foreign investment. However, the rapid development of infrastructure in Tier 2 and Tier 3 cities and an improvement in the purchasing capacity of the populace have brought these cities into the investment spotlight.

Intent and structure of the article

In this article are discussed two specific landmark regulatory reforms, ie, the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Insolvency and Bankruptcy Code, 2016 (IBC), which have revolutionised the landscape of the real estate sector in India. Attention is also drawn to key implementational issues concerning these legislations and highlight some of the most important considerations that should have a bearing on the decision to invest in this sector.

Real Estate (Regulation and Development) Act, 2016

In the pre-RERA (Real Estate Regulatory Authority) regime, the real estate sector in India lacked transparency and accountability. The absence of a mechanism to monitor the end use of the funds received by a developer led to the siphoning off of funds by the developer for other projects/activities, thereby delaying project completion. Additionally, the real estate sector suffered on account of several other factors, such as incomplete projects, delay in handover of projects, and the absence of proper and adequate policy support and regulations.

The proportion of end users buying real estate in India compared to investors was skewed towards investors and most transactions involved a significant cash component. Real estate was one of the prime sectors for money laundering and parking unaccounted-for cash. The lack of an organised grievance redressal mechanism and fragmented legal recourses added to the hurdles faced by stakeholders, compelling them to knock on the doors of multiple forums, which procedure was prolonged, time-consuming and heavy on the pocket.

The aforesaid shortcomings had a domino effect on investor sentiment, as the real estate sector was not projected to be a viable investment option.

With this backdrop, the legislature enacted the RERA (with effect from 1 May 2017). The implementation of the RERA has aided the formalisation of the sector and boosted confidence amongst investors. Stringent rules and guidelines laid down by the RERA have ensured the existence of only reputable and credible developers. Some of the key features of the RERA are:

Establishment of an exclusive sectoral regulator: the RERA mandates the setting up of an independent regulatory authority and appellate tribunal dedicated to each state and union territory, within stipulated timelines. With the advent of the RERA, the real estate sector received its much-needed sectoral regulator.

Mandatory registration: the RERA requires mandatory registration of all real estate projects (residential and commercial) with the respective authority prescribed thereunder, subject to certain exceptions. Under-construction projects cannot be advertised, booked or sold in any form, prior to such registration.

Detailed disclosures: in order to curb the lack of transparency in the real estate sector, the RERA mandated making public disclosures concerning the background of the developer, project details, project completion timelines, subsisting encumbrances and litigations, along with certain ongoing disclosures and reporting requirements. Such disclosures are to be made available online by the developer on the project registration website, which is accessible in the public domain.

Ring-fencing of project receivables: in order to ensure sufficiency of funds for project completion and curbing diversion of funds by the developer, the RERA now requires developers mandatorily to deposit 70% of the sales collections in a separate account (specifically maintained for that project). The developer is entitled to draw down monies (subject to complying with certain procedural requirements) from that account only towards specific permitted end use related to the same project and depending upon the progress of the construction.

Project certainty: in order to curb the rampant creation of third-party rights and interest in a real estate project and numerous amendments to the building plans, the RERA now prescribes an approval requirement of at least  two thirds of the allottees, coupled with a prior written approval from the authority prescribed under the RERA (where applicable) for making any amendments to building plans and/or transfer of the project.

Obtaining insurances: the RERA requires a developer to obtain certain insurances (as may be notified from time to time), including insurances relating to title of the land/building, and construction of the real estate project, thereby providing a cover for any unforeseen and contingent claims and liabilities.

Time-bound legal recourse: the RERA provides for an exclusive authority and an appellate tribunal for adjudication of disputes concerning real estate projects in a time-bound manner. Further, the RERA provides for the refund of amounts paid by purchasers (along with interest and compensation) for a developer’s failure, inter alia, to hand over possession of the apartment in accordance with the pre-agreed timelines.

Stringent penalties: the RERA has notified rigorous monetary penalties, fines and imprisonment provisions in the case of violation and/or breach by the developer, thereby acting as a deterrent to flouting the provisions of the RERA.

Redressal authority: the RERA legislates for the much-required sectoral dispute-redressal forum to address disputes concerning under construction projects. The legislation empowers the regulatory authority and the appellate tribunal to act as exclusive dispute redressal authorities for adjudicating on disputes concerning real estate projects. The formation of these redressal bodies has provided significant comfort and confidence to various investors and home-buyers.

The RERA has acted as a catalyst in creating sustainable developer brands which are strong on quality and thrive on timely project completions. Moreover, strict punishment for errant developers and a faster redressal of grievances of investors and home-buyers have, to a large extent, mitigated the shortcomings which were rampantly prevalent in the pre-RERA regime.

Banks and financial institutions, as well as investors, have derived immense confidence while lending and making investments, as they have higher visibility on the timely servicing of debts on account of the ring-fencing of sale proceeds and monitoring of the end use of funds.

As the RERA is a fairly new legislation, its implementation is plagued with certain inconsistencies and loopholes. However, the advantages that the RERA has brought about cannot be overlooked and it is safe to conclude that its implementation has served the purpose of a watchdog for curbing frauds and acting as a stimulus in boosting real estate investments in India.

The level playing field between developers and buyers achieved by the RERA has bridged the gap in terms of the trust deficit between the two most important stakeholders forming part of the real estate framework.

Insolvency and Bankruptcy Code, 2016

Prior to the introduction of the IBC, India had various laws relating to insolvency and bankruptcy, such as the Sick Industrial Companies (Special Provision) Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Companies Act, 2013. However, these legislations were ineffective as they failed effectively to safeguard the interest of all the stakeholders and involved unduly long processes. Moreover, the scattered legislations resulted in overlaps and conflicts, which made the process complicated and far more time-consuming.

In order to address these issues, the IBC was enacted to streamline the insolvency resolution and liquidation process, while making it time-bound. The primary objectives of introducing the IBC, inter alia, were to consolidate and amend all existing insolvency laws in India, protect the interests of creditors and other stakeholders, revive stressed companies in a time-bound manner and ensure maximisation of value for all stakeholders. Therefore, the IBC, at first, focuses on implementing a resolution plan, and only if a resolution plan cannot be finalised is liquidation ordered.

Since the regime primarily focuses on reviving stressed companies and ensuring value maximisation, the IBC also presents an attractive opportunity for the investors to invest in the stressed assets market and derive high returns for their capital.

Specifically, for investors considering investment in the real estate sector in India, entities undergoing an insolvency-resolution process present interesting opportunities to acquire prime real estate assets at a highly discounted price. These assets are often properties with a good potential for development and have been admitted for an insolvency process, mainly on account of mismanagement by the existing promoters.

To appreciate this opportunity further, it is relevant to understand, broadly, the insolvency process under the IBC.

Initiation of insolvency resolution process: the process of insolvency resolution commences when a creditor makes an application to initiate the corporate insolvency-resolution process (CIRP) to the National Company Law Tribunal (NCLT). The NCLT is required either to admit the application or reject it, within a period of 14 days from the receipt of that application. Where the application is admitted, the NCLT by an order declares a moratorium to prohibit the institution of new litigation, continuation of an ongoing litigation, transfer or encumbrance of assets and enforcement of any security interests created by the corporate debtor. The NCLT also immediately appoints an interim resolution professional (IRP). From the date of appointment of the IRP, the IRP becomes responsible for the management of the corporate debtor, and its affairs and assets, as a going concern.

Constitution of a committee of creditors: the IRP also sets up the committee of creditors (CoC). Thereafter, the CoC is tasked with nominating a resolution professional to replace and assume the duties of the IRP and to decide the future of the outstanding debt owed to the creditors.

Resolution plan: the CoC may choose either to revive the debt owed to the creditors by finalising a resolution plan or to sell (liquidate) the business and assets of the corporate debtor in order to realise the debts. For the approval of a resolution plan, 66% of the CoC must vote in favour thereof and upon acceptance, it must be sent to the NCLT for its approval. The CIRP is required to be completed within a period of 180 days from the date of admission, which can be extended to a maximum of 330 days.

From the creditors' and other stakeholders’ perspective, it is imperative that a stressed company be revived rather than liquidated; the IBC, (which is a creditor-controlled regime) focuses entirely on achieving this end goal while ensuring that time is of the essence.

In order to invest through this avenue, foreign investors will have to participate in the CIRP process by submitting a resolution plan. A resolution plan from an investor’s perspective will focus, inter alia, on the infusion of further capital in a distressed company, repaying the debt after applying a significant haircut and taking over the management or purchasing individual assets of the corporate debtor and developing them independently.

Separately, in the case of insolvency of construction and development companies, resolution plans could also focus on completing construction of the projects that are under construction and that have stalled. There have been instances in the recent past, where, as a part of the CIRP process, the courts have allowed third-party investors to take control of the management of the corporate debtor and resume the construction of stalled projects. Recent noteworthy cases of the Amrapali Group and Jaypee Infratech are examples of such instances.

Amrapali case: in the Amrapali Group case, the NCLT had admitted insolvency proceedings filed by the Bank of Baroda against one of the Amrapali group companies. Apprehending that the insolvency process would result in disposal of their flats that are under construction and non-recovery of moneys paid by them, home-buyers filed several writ petitions in the Supreme Court. They alleged the commission of fraud by the Amrapali group and sought protection of their interest. Considering this, the Supreme Court ordered that the construction of the stalled projects be completed by NBCC (India) Limited, a state-owned realty firm. The Supreme Court went on to state that the lenders would have no right to sell the property of the home-buyers and any recovery of dues must be made solely from the sale of other attached properties of the Amrapali Group.

Jaypee Infratech case: similarly, in the Jaypee Infratech case, the lenders had initiated the CIRP in the NCLT against the company for non-payment of outstanding dues. However, since the lenders were unable to finalise any resolution plan within the stipulated period, Jaypee Infratech was on the verge of being liquidated. As this would have resulted in the home-buyers neither receiving their constructed flats nor recovering any money, the aggrieved home-buyers moved to the Supreme Court, seeking that their interests be safeguarded. Considering the interest of the home-buyers, the Supreme Court ordered the CIRP to be undertaken afresh. This also paved the way for potential bidders such as NBCC (India) Ltd and Suraksha Realty to participate in the resolution process. As per the information available in the public domain, the resolution plans proposed by these developers include a commitment to complete the construction of the stalled projects.

These judgments have been much welcomed by the Indian markets, especially by the home-buyers.

In order to appreciate the pivotal role being played by the IBC, it is relevant to note that, as per the recent Economic Survey Report (2018-19) published by the Insolvency and Bankruptcy Board of India, the resolution process under the IBC has facilitated a recovery of approximately INR1,830 billion until April 2019. This is an average recovery rate of 43% in comparison to 23% under the mechanisms prevalent prior to the IBC.

Despite the positive steps taken by the Government and the Indian courts, in terms of preserving the intent of IBC and offering a time-bound redressal mechanism for reviving stressed companies, the legislation does suffer from a set of teething problems - specifically, in the real estate sector.

From a practical standpoint, owing to the peculiarities of the real estate sector, the stakeholders are finding it hard to agree on an effective and workable resolution plan. Since the primary assets of real estate companies include incomplete projects, under-construction buildings, real assets, etc, liquidation of such assets is not viable as it does not fetch any real value.

Having said that, the IBC has started delivering the positive results that were intended by legislators. The belief is that, with the constant support of the judiciary and the executive, this legislation will only continue to succeed in its objective, irrespective of the market or sector involved.

Considerations for investors

While investments in the Indian real estate market offer good returns, investors should consider the following practical hurdles while deciding to invest in this sector.

Interests of homebuyers in the CIRP

In order to safeguard the interests of the home-buyers, the Government of India, by way of an amendment to the IBC in 2018, classified the home-buyers as financial creditors for the purposes of the IBC. Consequently, home-buyers get to be a part of the CoC and have a considerable say in the resolution plan that would be approved, thereby, making them key stakeholders in the CIRP.

Additionally, in the case of construction and development companies with stalled projects undergoing CIRP, home-buyers would continue to be entitled to interest payments as a result of a delay to the hand-over of possession of the flats that was committed by the erstwhile developer, in accordance with the provisions of the RERA. Any person taking over the management of the erstwhile developer under the IBC would have to ensure that it assumes all obligations of that erstwhile developer under applicable law, including the obligations flowing from the agreements executed with the home-buyers.

In order to avoid the continuing interest payment obligation, the investor should in the resolution plan provide for revised extended hand-over dates for flats. By virtue of approval of the investor’s resolution plan by the CoC and the NCLT, the hand-over dates will, in supersession of the prior agreement with the home-buyers, stand revised to the date specified in the resolution plan. However, these revised handover dates will be effective subject to ratification by the relevant authority under the RERA.

Exposure to liabilities under the RERA

Under the RERA, a "promoter" (that is, the developer responsible for undertaking development and completion of a real estate project) is required to undertake various obligations and ongoing compliances for completion of a real estate project and is subject to stringent penalties. The criteria specified under the RERA for the qualification of any person as a "promoter" are very wide and include any person who undertakes, or causes to undertake, the development of a real estate project. Accordingly, an investor that has controlling rights over a real estate project, or derives an upfront share out of the sale proceeds or a share in the developed premises of the project may be construed as a "promoter" under the RERA. This qualification would, in turn, expose the investor to various liabilities in terms of obligations and compliances under the RERA, despite not actively undertaking the real estate development.

Accordingly, depending on the specific rules framed by the states, investors should particularly pay attention on the role and scope of investors under the transaction documents vis-à-vis project implementation, in order to safeguard any unforeseen RERA liability.

Drawdown restrictions and cashflow limitations

While the introduction of a dedicated 70% project-specific account required to be maintained by the developer under the RERA may serve to curb malpractices such as diversion of funds by the developer, an investor, while investing in any real estate project in India, should bear in mind the restrictions that apply to the drawdown of monies from that account. Accordingly, investors should take into account that a large portion of revenue generated in the real estate project will potentially be locked in until completion of the real estate project and the drawdown therefrom will be restricted, subject to compliance with other procedural conditions.

In this regard, it may be pertinent to note that the restrictions encompassing any such drawdown may vary from state to state. For example, while the state of Maharashtra permits the drawdown of sums towards servicing the principal and interest payment under financing obtained for project construction from the 70% account, the state of Haryana expressly bars any such drawdown. Moreover, certain states like Maharashtra have restricted the creation of a lien over this account.

Accordingly, it is of paramount importance for an investor to verify and conduct a thorough assessment of the prevalent regulations to obtain clarity on the projected cashflows that may be freely available for servicing debts under the investment route and to verify timelines concerning project completion.

Transfer of project – a cumbersome affair

As previously discussed, the RERA has a specific provision which requires the developer to obtain the consent of at least two thirds of the allottees, as well as the regulatory authority, in the case of the transfer of majority rights in its project in favour of any other third party. While such a restriction provides project certainty and developer’s accountability, that restriction (varying under each state) may create a hurdle in the event of a developer’s default to service debt and enforcement of security interest over the project by the investor by way of step-in rights or project-transfer.

Property title and marketability

Land ownership in India is neither established through a single registered legal document nor certified by any governmental authority. Ownership rights in India are established through various documents, such as title deeds, land survey documents, land records, litigation documents, property tax receipts, record of rights, etc.

More often than not, investors face difficulty in ascertaining the title and marketability of an Indian property. In order to reduce risks relating to the title, litigation and encumbrances, the RERA now mandates under-construction projects, registered under this legislation, to have a detailed public disclosure on title, litigation and encumbrances, thereby reducing the risk of any unidentified title-related claims and defects.

Additionally, various Indian states are in the process of digitising land-related records in order to provide better certainty on the title and to make the title verification process easy.

Title insurance

As a revolutionary step, the recent policy reform under the RERA has legislated for the much-required provision of availing title insurance for projects under construction, and for safeguarding the title and marketability aspects of such projects. This provision is likely to be a game-changer in the real estate investment market. However, the title insurance industry in India is in its nascent stage and there is a dearth of sophisticated title insurance offerings to date.

Outstanding taxes and liabilities

Under the IBC, outstanding payments and liabilities due to the tax department or other Governmental authorities fall within the ambit of operational debt, which results in governmental authorities being categorised as operational creditors. Operational creditors are mere spectators in the CIRP process and do not have a say in the CoC, which comprises the financial creditors. However, the IBC clearly mandates that the resolution plan should allow for the payment of debts of operational creditors, and that such payments should not be less than (a) the actual amount paid in the case of liquidation, or (b) the amount that would have been paid to creditors in accordance with the distribution waterfall prescribed under the IBC, whichever is higher. Therefore, the investor will have to make a provision for such payments while presenting a resolution plan.


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Law and Practice


J. Sagar Associates is a national law firm in India with more than 320 professionals operating out of seven offices located in Ahmedabad, Bengaluru, Chennai, Gurugram, Hyderabad, Mumbai and New Delhi. JSA has a dedicated team with expertise in the extensive real estate practice across all offices. Clients include Indian and international institutional and private entities, including developers, real estate advisers, banks, non-banking finance companies, offshore and domestic real estate funds, real estate investment trusts, high net worth investors, governments, major retailers, and hotel owners and operators. JSA is involved in legal and regulatory issues for various types of real estate projects, including in relation to the construction and development of hotels, malls, residential and commercial complexes, warehouses, information technology and industrial parks, and special economic zones.

Trends and Development


Trilegal is one of the leading full-service law firms in the country with a well-established real estate practice that has a pan-India presence and a team of 40 lawyers focusing on real estate across its offices in Mumbai, New Delhi, Gurgaon and Bangalore. The firm has clients across the entire spectrum of the real estate sector, including international and Indian developers, funds and investors. Traditionally, the firm has always had a strong capability in advising funds investing in the real estate sector; however, the client base has now been expanded to include renowned international developers, such as Fosun Property Holdings Limited, Country Garden group, China Fortune Land Development, as well as traditional Indian developers like Ascendas Firstspace Development, Godrej Properties, House of Hiranandani and Swastik Group. The firm would like to thank Paayal Desai, Namesha Singh and Gazzal Bishnoi (associates) for their contribution to the guide.

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