Foreign Direct Investment in Real Estate in India: Challenges and Implications

Abstract

India is evolving as one of the most favored destination for FDI in Asia and the Pacific (APAC). It has displaced US as the second-most favored destination for foreign direct investment (FDI) in the world after China and vantage of FDI in real estate for Indian economy can be extracted by the fact that it is the second largest employer next only to agriculture and its size is close to US $12 billion and grows at about 30% per annum. Five per cent of the country's GDP is contributed by the housing sector. In the next three or four or five years this contribution to the GDP is expected to rise to 6%.

There is no clear cut definition of private purpose and public purpose is provided regarding land acquisition by the state due to that recently two land acquisition notifications have been set aside. The Punjab and Haryana High Court (HC) has quashed a Haryana government's 2002 notification for inappropriately releasing land to private developers. Similarly, the Allahabad High Court has repealed a UP government's notification under which land was acquired for a private project in 2005. However, these rulings highlight the three most problematic aspects of the land acquisition under eminent domain: namely, excessive misuse of compulsorily acquisition laws by states to serve private interests; inadequacy of compensation provided to the owners; and violent protests against compulsory acquisitions.

This article intends to explore the complex terrain of the policy relating to foreign investment (FDI in particular) in real estate, the problems associated with the policy and demonstrates hypotheses or possibility in which the loopholes in the policy may be plugged. The article is divided into three parts. First part of the article spell out the entry routes for investment, Liberalization of Real-Estate Sector in 2005 and subsequent growth of the Indian real estate market.

The second part forms the nucleus of this article, as it canvasses or analyses in-depth, the primary Indian real estate laws before focusing on the key aspects of FDI in the Indian real estate and key out affiliated problems. A discussion of the challenges faced by foreign investors, in particular transparency and establishing legal title to property, will then follow. The third part stress on certain possible improvements and amendments in the existing FDI norms as well as local laws so that the object of opening up the real estate sector to foreign investors is fulfilled. The article concludes by summarizing the observations made in the article and the way ahead for the real estate sector in terms of foreign investments.

Keywords: Public Purpose, Private Purpose, FDI, Real Estate, Land Aquisition