Owning an Indian company is how the rules attach, not an exemption from them.

A foreign fund cannot hold Indian land directly, and the way in is an Indian company: the fund subscribes for the company's shares, the company buys the land, obtains the consents, builds and sells, and the fund's exposure is its shares. Managers describe the company as the vehicle that makes the investment possible, and it does; what it also does is attach every rule on foreign capital to the investment at one point. The construction-development rules apply to the foreign capital in the company: what the company may do with it, how long it must stay, at what price it may leave and through which channel. The lock-in runs on each tranche of foreign capital from the date it came in. The pricing rules govern every transfer of the company's shares between a resident and a non-resident. The repatriation of sale proceeds is tested by the authorised dealer bank against how the capital came in and what the company did with it. A wholly foreign-owned Indian company is an Indian company carrying foreign capital, and every rule on foreign capital reads through it. Owning it is not an exemption from the rules; it is the address at which they are served.

This note sets out why the company is the way in, the rules that attach at the company and what each does, the permitted and the prohibited categories, the entry and the reporting, the lock-in as the company's clock, the pricing rules as the company's price, the repatriation as the company's exit channel, the company's own tax and the holder's treaty, the company's governance and the residence question, the Indian regulator of the project, the lender's reading, the Gulf holder's position above the company, a comparison, a worked entry as a type, cases, what each party holds, the sequence, questions, terms and what to read.

Why the company is the way in

India's exchange-control regime permits foreign investment in Indian entities under sectoral conditions, and the construction-development sector is one in which foreign capital may invest through an Indian company, subject to conditions the regime fixes: the activity, the minimum stay, the pricing, the repatriation, the reporting. A foreign person holding Indian immovable property directly is a different and narrower question, not open to a foreign fund for a development programme. The company is the form the regime contemplates, and the regime's conditions are written for it. The fund's choice is not whether to use a company but how to hold it, from where, and with what capital, because each of those choices is a rule the regime applies.

The rules that attach

Activity: the company may carry on construction-development, which the regime defines, and may not carry on real estate business, which it prohibits. Stay: each tranche of foreign capital is locked in for a period from its receipt, with exceptions the regime names. Price: every issue and transfer of the company's shares between a resident and a non-resident is at a price the regime's pricing guidelines fix by reference to a certified valuation. Channel: the capital comes in and goes out through an authorised dealer bank that tests each movement against the rules. Reporting: the issue and the transfer are reported to the central bank through the bank within periods. Each rule reads the company's records: its share register, its capital account, its bank's filings and its activity, and the company is the file.

Why managers read the company as an exemption

The company is read as an exemption because it solves the first problem, that a foreign person cannot hold the land, and a solved first problem feels like a solved structure. The memorandum of association is drafted, the shares are issued, the land is bought, and the manager's attention moves to the programme. But the regime's conditions were never about holding the land; they are about foreign capital in an Indian entity, and the company is the Indian entity. The regime attaches where the capital is, and the capital is in the company. The reading that corrects the instinct is that the company is the regime's counterparty, and the fund's compliance is the company's file.

The memorandum and the activity

The company's memorandum of association states its objects, and a memorandum drafted wide, to permit any real estate activity, is a memorandum the bank and the regulator read as permitting the prohibited category. The memorandum is drafted to the permitted activity, construction-development as the regime defines it, with the prohibited activity excluded in terms, and the company's board resolutions and its conduct match it. A memorandum that permits dealing and a company that does not deal is a company whose conduct is read against a document that would have permitted the breach, and the bank reads both.

The share register as the rules' index

The company's share register shows each holder, each share, its date of issue and the consideration, and it is the document every rule reads: the lock-in by the tranche's date, the pricing by the consideration, the repatriation by the holder's status and the entry's record. A register maintained by the company's secretary in India with the bank's filings cross-referenced is the fund's evidence at exit that each share's clock has run and each share's entry was compliant; a register that shows shares without tranche dates is a register the bank reconstructs from its own filings, which takes a season. The administrator of the fund keeps a mirror of the register with the tranches, and the two are reconciled quarterly.

The permitted and the prohibited categories

Construction-development covers townships, housing, built-up infrastructure and construction of the kinds the regime lists, with the company acquiring land to develop it. Real estate business is dealing in land and immovable property with a view to earning profit from the dealing, and it is prohibited to foreign capital. The line is drawn by activity: a company that buys, builds and sells is permitted; one that buys and sells without building is in the prohibited category whatever its memorandum says; and a company that holds completed buildings for rent is in a third position the regime addresses separately. The exposure statement of the fund above the company says which activity the company will carry on, and the company's conduct is read against it by the bank and the regulator.

The entry and the reporting

The fund subscribes for shares at a price not below the certified fair value, pays through the authorised dealer bank from abroad, and the company issues the shares within the regime's period and reports the issue through the bank to the central bank within the period that follows. The reporting creates the record the later rules read: the tranche's date for the lock-in, the price for the pricing rules, the source for the repatriation. A subscription reported late, or at a price the bank's certificate does not support, is a subscription the regime treats as non-compliant, with compounding and the bank's refusal to process the later movements until it is regularised. The entry is the company's first file, and every later movement reads it.

The lock-in as the company's clock

Each tranche of foreign capital stays for the regime's period from its receipt, and the company's share register and capital account show which shares each tranche funded. A fund that capitalises the company in four drawdowns has four clocks, and the shares it may sell at any date are the shares whose clock has run. The regime's exceptions, completion of the project or the development of its trunk infrastructure, are tested at the company: the project is complete when the regime's definition is met, on the company's records and the regulator's certificate, and a fund that relies on the exception relies on the company's evidence. The lock-in is the company's clock because the tranches came into the company and the shares are the company's.

The pricing rules as the company's price

Every transfer of the company's shares between a resident and a non-resident is priced by reference to a valuation certified under the regime's methodology by a person the regime recognises: a non-resident buying from a resident pays not less than it, a non-resident selling to a resident receives not more than it. The company's shares are the thing priced, and the company's accounts, its land, its consents and its programme are the valuation's inputs. The fund's entry price, its exit price to a resident buyer and the promote beneath the company are each read against the certified value, and a negotiated price outside the range is a price the bank will not process. The pricing rule is the company's because the shares are.

The repatriation as the company's exit channel

The fund exits by selling the company's shares, to a non-resident, where the pricing rule does not apply between non-residents, or to a resident, where it caps the price; or by the company selling its project and distributing. The proceeds leave India through the authorised dealer bank, which tests the remittance against the entry's record: the tranche's date against the lock-in, the price against the certificate, the tax against the clearance, the activity against the permitted category. A remittance that fails a test waits until it passes or is regularised, and the fund's distribution to its holders waits with it. The channel is the company's bank, and the bank reads the company's file.

The resident partner

An Indian company with a resident partner, a developer or a landowner holding shares beside the fund, has the pricing rule at every transfer between the two: the fund's subscription alongside the partner's, the partner's later sale to the fund, the fund's exit to the partner, each at or around the certified value. A promote to the resident partner, paid as a share transfer at a discount, is a transfer the pricing rule does not permit in that form, and the promote is structured as a distribution preference or a contractual payment the regime's rules on such payments allow. The partner's presence does not change the company's rules; it adds transactions to which the rules apply, and the joint venture agreement is drafted to each.

The company's own tax and the holder's treaty

The company is an Indian resident taxed in India on its income and gains, and its distributions to the fund are taxed as the Indian regime provides. The fund's own position, its treaty with India if its jurisdiction has one, its eligibility for the treaty under India's rules on substance and principal purpose, and the characterisation of its exit gain as capital gain on Indian shares, is read above the company by tax counsel in both jurisdictions. The company's tax is the company's; the fund's is the fund's; and the structure paper's chain room carries both, because the fund's net return is the company's after-tax result after the fund's own treatment.

The company's governance and the residence question

The company's board sits in India, because the company is Indian and its management is there; the question is whether the fund above it is managed from India, through the same people, which would make the fund Indian resident under the place of effective management test. The company's directors decide the company's matters in India; the fund's board decides the fund's matters abroad on recommendations the Indian advisers prepare; and the minutes of each show each. The company is the place where India's residence reading and the fund's meet, and the governance is drafted so that they do not merge.

The Indian regulator of the project

A residential project in India is registered with the state's real estate regulator before it is marketed, with the promoter's particulars, the project's approvals, the escrow of buyers' money and the completion date, and the company is the promoter. The regulator's regime is the project's regime, as the Gulf escrow regimes are, and the company's compliance with it is a condition of the project's sale and of the fund's exit with a register of buyers. The fund reads the regulator's requirements through the company because the company is the registered promoter.

The lender's reading

A lender to the company, Indian or foreign under the external borrowing rules, lends to an Indian company and reads its activity, its capital's lock-in, its pricing constraints on any equity exit and its repatriation channel as the borrower's own constraints. A foreign lender's loan to the company is itself foreign capital under the external borrowing regime, with its own conditions on end-use, tenor and cost, and a construction programme financed by foreign debt is a programme under two sets of conditions. The lender's security over the company's land is Indian security enforced in India, and a foreign lender's enforcement is read under the regime's rules on foreign holders of Indian immovable property.

The Gulf holder's position above the company

A Gulf fund holding the Indian company holds it from a jurisdiction with or without a treaty with India, with substance the treaty's anti-avoidance rules test, through an intermediate holding company or not, and with holders whose own status, institutional, family, non-resident Indian, each changes the rules that attach. A non-resident Indian holder investing on a non-repatriation basis holds domestic capital outside the sectoral conditions, and a fund whose holders are such persons is structured to preserve that character; an institutional holder's capital is foreign and the company's rules attach in full. The company is the same; the rules that attach depend on who is above it, and the structure paper's India page carries each holder's position.

By rule · by point of attachment	What it governs	Where it reads	What the fund controls
Activity	Permitted construction-development, prohibited real estate business	The company's conduct and its memorandum	The exposure statement and the company's programme
Lock-in	Each tranche's stay	The share register and the capital account	The drawdown schedule
Pricing	Every resident-to-non-resident transfer	The certified valuation	The timing and the counterparty of the exit
Repatriation	The exit channel	The bank's tests against the entry record	The compliance of the entry
Reporting	The issue and the transfer	The bank's filings	The administrator's calendar
Tax	The company's income and the fund's gain	India and the fund's jurisdiction	The holding structure and its substance
Project registration	The sale of the project	The state regulator	The company as promoter

An entry, as a type

A Gulf fund forms an Indian company for a residential development, with a memorandum limited to construction-development, and subscribes for shares in three tranches at prices the certified valuations support, each reported through the authorised dealer bank within the period. The company's share register records which shares each tranche funded. The company buys the land, registers the project with the state regulator as promoter, opens the buyers' escrow, builds and sells. The fund's board abroad decides on the Indian advisers' recommendations with material consideration minuted; the company's board decides in India. In year five the project is complete on the regulator's certificate and the first two tranches' clocks have run; the fund sells its shares to a non-resident buyer at a negotiated price, outside the pricing cap, and the bank tests the remittance against the entry record, the lock-in, the tax clearance and the activity, and releases. The third tranche's shares follow a year later. The rules attached at the company and were satisfied there.

The structure paper's India page

The structure paper carries an India page: the regime's conditions, the company's memorandum, the drawdown schedule with the clocks, the pricing procedure and the valuer, the reporting calendar, the project's registration, the holding structure above the company with each holder's position, the governance separation and its minutes, the tax in both places and the treaty's tests, the external borrowing regime if debt is used, and the exit's sequence through the bank. The page is written before the company is formed, and it is the page the bank's relationship manager and the fund's administrator each work from.

The second fund's reading

A manager's second fund with Indian positions is raised on the first fund's Indian file: whether the exits remitted without compounding, whether the clocks were planned, whether the activity held, whether the bank's tests were passed at each movement. A first fund whose company was the regime's file, kept and answered, is a fund whose second raise the same holders join for India; one whose exit waited on compounding is a fund whose holders ask whether the second will have an Indian position at all. The company is where the first fund's competence on India is recorded, in the bank's filings and the register, and the second fund's anchor reads them.

Four cases, as types

A fund's Indian company buys a parcel, obtains the consents and sells the entitled parcel without building, because the market moved. The bank, at the remittance, reads the activity as real estate business, refuses to process the proceeds, and the regime's compounding process begins on a company the fund described as its vehicle.

A fund subscribes in four tranches and plans its exit from the first tranche's date. At the sale the bank reads the share register, finds two tranches within the lock-in, and releases the proceeds of two tranches' shares; the buyer holds half of what it agreed to buy and the price is renegotiated.

A fund's entry subscription was reported late and the bank's filing carries the irregularity. At exit the bank will not process the remittance until the late reporting is compounded, which takes a season the buyer does not wait.

A fund structures the company's memorandum, its drawdown schedule, its reporting calendar, its governance and its exit to the rules that attach at the company, and the bank reads a file that passes every test. The company was the address, and the rules were served and answered.

What each party holds

The fund holds the exposure statement's activity, the drawdown schedule and the holding structure above the company.

The company holds its memorandum, its share register, its capital account, its bank's filings and its project registration.

The authorised dealer bank holds the entry record and the tests at every movement.

Indian counsel holds the regime's conditions, the pricing certificate and the reporting.

Tax counsel in both jurisdictions holds the company's tax and the fund's treaty position.

The state regulator holds the project's registration with the company as promoter.

Where it surfaces

It surfaces at the memorandum's drafting, in the objects clause. It surfaces at the first subscription's reporting, when the period is missed. It surfaces at the second drawdown, when the manager realises the clock restarts. It surfaces at the market's turn, when selling the entitled parcel would be profitable and is prohibited. It surfaces at the exit's pricing, when a resident buyer offers more than the certificate allows. It surfaces at the bank, at every remittance. And it surfaces at the fund's own residence, when the Indian advisers' emails are read by the Indian authority.

The cost of getting it wrong

A company in the prohibited category costs the fund its proceeds' remittance and the regime's compounding; a late report costs the exit a season; a drawdown schedule planned without the clocks costs the exit half its shares; a negotiated price outside the certificate costs the transaction; a fund managed from India costs the fund its residence and its treaty. Each is a rule served at the company, and the cost of answering each in advance is Indian counsel's column and the company's file kept as the regime's index.

The committee's reading

The committee reads the Indian company's file quarterly: the share register with the tranches and clocks, the bank's filings, the activity against the exposure statement, the project's registration status, the pricing certificate at each issue or transfer, and the tax clearances obtained. It reads the fund's own governance minutes for material consideration of the Indian advisers' recommendations. And it reads each exit plan for the clocks, the pricing rule and the bank's tests. A committee that reads the company as the regime's file reads the fund's Indian compliance in an hour.

A timeline, as a type

At design, Indian counsel writes the column and the company's memorandum is drafted to the permitted activity. In month one the company is formed and the first tranche is subscribed at the certified value, reported within the period, and registered with its date. In month six the land is bought and the second tranche follows, reported. In year one the project is registered with the state regulator as promoter. In year two the third tranche funds construction. In year four the project completes on the regulator's certificate. In year five the fund sells its shares to a non-resident buyer at a negotiated price; the bank reads the register, the filings, the activity, the tax clearance and the certificate, and remits the proceeds of the first two tranches' shares; the third follows when its clock runs. The fund's board minutes, throughout, show decisions abroad on recommendations from India.

The sequence

1. The company is formed with a memorandum limited to the permitted activity, and the exposure statement says so.
2. Each subscription is priced at or above the certified value, paid through the bank, and reported within the periods; the share register records the tranches.
3. The drawdown schedule is planned with the lock-in clocks and the exit in view.
4. The project is registered with the state regulator with the company as promoter.
5. The fund's governance abroad and the company's in India are kept separate and minuted.
6. The exit is timed to the clocks, priced under the rules, cleared for tax, and remitted through the bank against the entry record.

Questions a manager asks

Is a wholly foreign-owned company treated differently from a joint venture with a resident. The rules attach to the foreign capital in either; a resident partner adds the pricing rule at every transfer between the two.

Can the company hold land for later development. Holding to develop is permitted; holding to sell is not, and the company's conduct over time is the evidence.

What counts as completion for the lock-in exception. The regime's definition on the regulator's certificate and the company's records; counsel reads it per project.

Can the company borrow from the fund. Under the external borrowing regime's conditions, which are their own set; equity is the usual form and debt is read separately.

Who values for the pricing rule. A person the regime recognises, on its methodology, with a certificate the bank accepts; the fund's own valuer for the net asset value is a different appointment.

Does a Gulf treaty help. If the fund's jurisdiction has one with India and the fund meets India's substance and principal purpose tests; tax counsel reads it, and the company's tax is unaffected.

Terms used

Construction-development: the permitted activity for foreign capital in Indian real estate, as the regime defines it.

Real estate business: dealing in land and property for the profit of dealing, prohibited to foreign capital.

Tranche: each receipt of foreign capital by the company, with its own lock-in clock.

Pricing guidelines: the regime's rule that resident-to-non-resident share transfers are at or around a certified fair value.

Authorised dealer bank: the bank through which foreign capital enters and leaves, testing each movement.

Promoter: the company's role under the state real estate regulator's regime for the project.

What to read

India's foreign investment rules for the construction-development sector; the pricing guidelines and the valuation methodology; the reporting requirements for issues and transfers; the external borrowing regime; the state real estate regulator's requirements; tax counsel's reading of the company's tax and the fund's treaty position. On this site, the development structures, India and lexicon rooms.