Real estate business is the prohibited category, and the line is drawn by what the company does.

India's foreign investment rules permit foreign capital in construction-development and prohibit it in real estate business, and the two are defined by what the company does. Construction-development is the development of townships, housing, built-up infrastructure and construction projects: the company acquires land to build on it and sells or holds what it built. Real estate business is dealing in land and immovable property with a view to earning profit from the dealing: buying to sell, without the building between. A company that buys a parcel, obtains consents, builds and sells units is in the permitted category. A company that buys a parcel and sells it entitled, without building, is in the prohibited one, whatever its memorandum of association says and whatever it intended on the day it bought. A company that holds completed buildings and earns rent is in a third position, which the rules address separately and which a real estate investment trust is built for. The line is drawn by activity, it is tested afterward by the bank and the regulator on the company's conduct, and a manager's exposure statement for an Indian platform has to say which side the platform is on, because the foreign capital's legality depends on it.

This note sets out the two categories and the third, why the line is drawn by activity, where the line is tested and by whom, the entitled-parcel sale as the common crossing, the held asset and the investment trust, the exposure statement's Indian activity, the company's objects and its conduct, the change of plan and what the regime permits, the separation of activities across companies, the consequences of crossing, the lender's reading, the Gulf platform's reading across two regimes, a comparison, a worked programme as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The two categories and the third

The permitted category is development: the company's capital goes into land and construction and comes out as the sale of what was built, or as the rent of what it holds after building. The prohibited category is dealing: the company's capital goes into land and comes out as the sale of the land, with the gain being the land's movement and not the building's. The third position is the holding of completed income-producing property, which the rules permit foreign capital to do under conditions and for which the real estate investment trust regime provides a listed form; a development company that holds what it built for rent is in the permitted category's own provision for that, and a company formed to buy completed buildings for rent is in the third position's rules. The regime names each, and a company is read as being in one.

Why the line is drawn by activity

The regime's purpose is that foreign capital should build, and the regime cannot read intentions; it reads what the capital did. A company that intended to build and did not, because the market moved or the consent failed, has done what a dealer does, and the regime's reading is the same. The line is drawn by activity because activity is what the bank can see in the company's accounts, what the reporting describes, and what the tax authority characterises. A manager that argues the company's intention was development argues to a regime that asks what it sold.

Where the line is tested

By the authorised dealer bank at repatriation, which asks what the company did with the capital before it releases the proceeds, and which reads the company's accounts and the sale documents for a building between the purchase and the sale. By the reporting the rules require on every foreign investment and every transfer, which describes the company's activity and is read by the central bank. By the tax authority, which characterises the company's income for its own purposes, as business income from development or as gain on the sale of a capital asset, and whose characterisation is compared with the reporting's description. And by the regulator on inspection, which reads all three. The line is tested late, at the exit, when the company's conduct is a fact.

Why intention does not save the company

Managers argue intention because intention is what they had: the company was formed to build, the business plan said so, the capital was raised for it. The regime reads the argument and asks for the building, because every dealer intended to build at some point, or says so, and a regime that accepted intention would have no line. The company's file carries the intention as evidence of one thing only: that the company held to develop, which is permitted while it holds. The moment it sells the land, the holding ends and the sale is what the regime reads, and an intention that did not produce a building is an intention the regime treats as a plan that changed into dealing. The structure's answer to intention is conduct, and conduct is what the file shows.

The plotted development provision

The regime permits, within construction-development, the development of serviced plots: the company acquires land, builds the trunk infrastructure, the roads, water, drainage and the rest as the regime lists, and sells the serviced plots to purchasers who build on them. The sale of a serviced plot is a sale of developed land and is within the permitted category because the infrastructure is the building. The provision is the route for a platform whose programme is land development rather than vertical construction, and it is a route with conditions: the infrastructure must be built as the regime defines it and certified by the municipal authority, and a sale of plots before the infrastructure is a sale of entitled land. The provision is read with counsel against each programme, and it is the difference between a township developer and a dealer.

The reporting's description

Every foreign investment and every transfer is reported through the bank with a description of the company's activity, and the description is the regime's record of what the company said it was doing. A description at entry of construction-development and a transfer at exit whose documents show a sale of land is a contradiction the central bank's reading finds. The descriptions are drafted by Indian counsel to the regime's categories and to the company's conduct, consistently from entry to exit, and a change in the company's activity between the two is a change the reporting must carry and the regime must permit.

The entitled-parcel sale

The common crossing is the sale of a parcel after entitlement and before construction. The company buys land, obtains the consents, the master plan approval, the change of land use, the building permissions, and the parcel's value rises by the entitlement. A developer offers to buy it entitled. The sale is profitable, quick and clean, and it is a sale of land without a building between, which is dealing. The regime's reading does not depend on how much was spent on the entitlement, because entitlement is not construction; it depends on whether the company built. A company that sells entitled has crossed, and the bank at the remittance reads the sale documents for a building.

The held asset and the investment trust

A company that builds and then holds for rent is in the permitted category's provision for holding what it built, with the rent as its income and the building's eventual sale as its exit. A company formed to buy completed income-producing buildings is in the third position, and the rules permit foreign capital in it on conditions and provide the listed investment trust as the form for a portfolio of such assets. A platform that wants both, to develop and to hold, and to acquire completed assets as well, has two or three activities, and they are separated into companies with capital the regime treats accordingly, because a company in the permitted category that also buys completed buildings to hold has mixed its activities in one file.

The tax authority's characterisation and the regime's

The tax authority characterises the company's income as business income from development, taxed as such, or as capital gain on the sale of land, taxed as such, and its characterisation is made on the same facts the bank reads: what was bought, what was done, what was sold. A company whose tax return characterises a sale as capital gain on land has told the tax authority it dealt, and the bank that reads the return against the reporting's description of development reads a contradiction. The two characterisations are made consistently, by counsel and the tax adviser together, because the regime's reading and the tax's are of one set of facts and a company cannot be a developer for one and a dealer for the other.

The exposure statement's Indian activity

The exposure statement for an Indian platform names the activity: development for sale, development for hold, or the holding of completed assets, and for each the regime's conditions apply. A statement that names development and a platform that sells entitled parcels has a statement the platform breached and a regime the company breached, and the two breaches are read together. The statement is the investor's bargain and the regime's evidence of intention, and it is written so that the company's conduct within it is conduct within the regime.

The company's objects and its conduct

The memorandum of association states the company's objects, and they are drafted to construction-development as the regime defines it, with dealing excluded in terms. The objects are the company's declared activity and the bank reads them at entry; the conduct is the company's actual activity and the bank reads it at exit. A memorandum drafted wide, to permit any real estate activity, declares an activity the regime prohibits and invites the bank to read the conduct for it; a memorandum drafted narrow and conduct that matches are a company whose file answers the question before it is asked.

The change of plan

Markets move and consents fail, and a company that intended to build finds that selling the parcel is the better outcome. The regime's position is that the sale is dealing, and the structure's answer is not to argue but to find the route the regime permits: to build something, so that the sale is of a developed property, where the programme and the market allow; to sell the company's shares to a resident developer rather than the parcel, which is a transfer of shares priced under the pricing rules and tested by the bank for the company's activity to date, which was holding to develop; or to hold until a development is possible. Each route is read with Indian counsel on the facts, and the route that sells the parcel as a parcel is read as crossing.

The separation of activities

A platform that develops for sale, develops for hold and acquires completed assets holds each activity in its own Indian company with its own capital, its own objects and its own file, so that the bank reads each company's activity as one thing. The platform's exposure statement names each company's activity, and the holding structure above keeps the capital separate. A single company with three activities is a company whose file shows dealing if any of the three looks like it, and the separation is the platform's protection against the reading of the whole by its weakest part.

The consequences of crossing

A company found in the prohibited category has received foreign capital in breach of the regime's sectoral conditions, and the regime's consequences apply: the bank refuses to remit the proceeds until the breach is compounded, the compounding process with the central bank takes its time and its penalty, and the regulator's record carries the breach against the company and the manager. The fund's exit waits, its holders' distribution waits, and the manager's standing with the bank, which it needs for every later movement, is reduced. The consequences are not the loss of the gain; they are the delay, the penalty and the record, and for a manager with a second Indian programme the record is the cost.

The resident partner's own category

A resident partner in the company is not bound by the foreign capital's sectoral conditions in its own right, and a resident developer deals in land lawfully every day. A joint venture in which the resident partner proposes to sell the entitled parcel proposes a transaction lawful for it and prohibited for the company carrying foreign capital, and the joint venture agreement gives the fund the consent right over any sale of land that would be dealing. A resident partner that does not understand the foreign capital's line is a partner the fund's counsel explains it to at the joint venture's formation, because the partner's instinct and the Gulf manager's are the same, and the company's file carries the consequence for both.

The lender's reading

An Indian lender to the company reads its activity as the borrower's business and its objects as the borrower's capacity, and a lender that financed a development reads a sale of the entitled parcel as a change in its borrower's business and a repayment event. A foreign lender under the external borrowing regime reads the end-use conditions, which permit borrowing for construction and not for dealing, and a company that dealt with borrowed foreign money has breached the borrowing's conditions as well as the equity's.

The Gulf platform's reading across two regimes

A Gulf platform with Indian positions reads the Indian line beside the Gulf regimes' own: in the Gulf, a licensed land company may buy and sell land within its licence, and dealing is a permitted activity for the licensed; in India, the same conduct by a foreign-capitalised company is prohibited. A platform's exposure statement with both markets names the activity per market, and a manager whose Gulf instinct is to sell an entitled parcel when the market offers reads the Indian column before it does so in India. The two regimes are read as two, and the Indian company's file is kept to India's.

By activity · by regime	What the company does	The regime's category	Tested by	The structure's answer
Buy, build, sell	Development for sale	Permitted	The bank at remittance, on the sale documents	The memorandum and the statement name it
Buy, build, hold for rent	Development for hold	Permitted, under its provision	The bank, the tax authority	The same, with the holding provision
Buy, entitle, sell	Dealing	Prohibited	The bank at remittance	Build, sell shares, or hold
Buy completed buildings, hold	The third position	Permitted on conditions; the investment trust form	The bank, the regulator	A separate company or the trust
Buy, hold, sell without building	Dealing	Prohibited	The bank, the tax authority	Not done
Mixed in one company	Read by the weakest part	At risk	All three	Separation into companies

A programme, as a type

A Gulf platform forms two Indian companies: one to develop a township for sale, with objects limited to construction-development, and one to hold the township's commercial component for rent after it is built, under the permitted category's holding provision. The exposure statement names each company's activity and the regime's conditions for each. In year two the market for entitled land rises and a developer offers to buy the first company's entitled parcel; Indian counsel reads the offer as dealing; the platform declines and proceeds to build, phasing the programme to the market. In year four the first phase sells, and the bank reads the sale documents for a building and remits. In year six the commercial component is complete and held by the second company, whose rent is its income. In year eight the platform exits the first company by a sale of its shares to a non-resident buyer, the bank reading the company's activity as development throughout, and the second company's building is sold to a listed investment trust under the third position's rules. Each company's file showed one activity, and each test read it.

The structure paper's page

The structure paper's India page carries the line: the regime's definitions, the activity per company, the memorandum's objects, the plotted development provision and its certification, the reporting's descriptions, the change-of-plan routes, the separation of activities, the bank's test at remittance, and the tax authority's characterisation. The page is written before the first Indian company is formed, and it is the page counsel reads against each parcel and each offer.

The second programme's reading

A manager's second Indian programme is raised on the first's record at the bank and the regulator: whether every remittance was released on the sale documents, whether any compounding ran, whether the reporting's descriptions held from entry to exit. A first programme whose companies stayed on the line is a programme whose second raise the same holders join; one whose entitled-parcel sale ran a year of compounding is a programme whose holders read the record and ask what the second will sell. The line is the regime's, and the manager's record of staying on it is its Indian standing.

Four cases, as types

A company buys a parcel, obtains the consents, and sells it entitled to a developer at a gain. The bank, at the remittance, reads the sale documents, finds no building, refuses to remit, and the compounding process runs for a year with a penalty and a record.

A company's memorandum permits any real estate activity. The company builds and sells as intended, but the bank at entry noted the objects and at exit reads the conduct against them with the care the objects invited, and the remittance waits on the reading.

A single company develops one parcel for sale and buys a completed building for rent. The bank reads the completed building's purchase as the third position's activity in a company whose capital entered under the construction-development conditions, and the company's file shows two regimes in one.

A platform names the activity per company in its statement, drafts each memorandum to it, keeps each company's conduct on its side of the line, and reads every change of plan with Indian counsel. Every remittance passed the bank's reading of what the capital did.

What each party holds

The platform holds the exposure statement's Indian activity per company and the discipline of the change of plan.

Each company holds its objects, its conduct and its file.

Indian counsel holds the line's reading on each parcel and each change of plan.

The authorised dealer bank holds the test at remittance.

The tax authority holds its characterisation of the income.

The lender holds its reading of the borrower's business and the end-use conditions.

Where it surfaces

It surfaces at the memorandum's objects. It surfaces at the developer's offer for the entitled parcel. It surfaces at the committee, when the change of plan is proposed. It surfaces at the bank, at the remittance, in the sale documents. It surfaces at the reporting's description. It surfaces at the tax authority's characterisation. And it surfaces at the second Indian programme, when the bank's record of the first is read.

The cost of getting it wrong

A crossing costs the remittance's delay, the compounding's penalty and time, the regulator's record, the tax characterisation's consequences, the lender's repayment event, and the manager's standing with the bank for every later movement. It does not cost the gain, which is why managers cross; it costs the exit's timing and the manager's Indian record, which is why they should not. The cost of staying on the line is a programme that builds, a memorandum that says so, companies separated by activity, and counsel's reading of each change of plan.

The committee's reading

The committee reads each Indian company's activity against the statement quarterly, each change of plan against counsel's reading of the route, each memorandum against the activity, and each remittance's preparation for the sale documents' evidence of a building. It reads a proposal to sell an entitled parcel as a proposal to change the statement and to cross the regime's line, and it declines or finds the route. A committee that reads the line as a Gulf instinct reads the Indian exit as a surprise.

A timeline, as a type

At design the statement names the activity per Indian company and counsel writes the line's column with the plotted development provision. In year one the first company buys and entitles a township parcel with objects limited to construction-development. In year two a developer offers for the entitled parcel; counsel reads the offer as dealing; the committee declines; the company builds the trunk infrastructure under the plotted development provision. In year three the municipal authority certifies the infrastructure and the company sells serviced plots, each sale's documents showing the infrastructure built. In year four the reporting describes the activity as it was. In year five the fund exits by a sale of the company's shares, the bank reads a file showing development throughout, and the remittance is released on the day.

The sequence

1. The exposure statement names the Indian activity per company: development for sale, development for hold, or the holding of completed assets.
2. Each company's memorandum is drafted to its activity with dealing excluded in terms.
3. Activities are separated into companies with their own capital and files.
4. Each parcel's programme is read with Indian counsel for the line before purchase.
5. Each change of plan is read for the permitted route: build, sell shares, or hold.
6. Each remittance is prepared with the sale documents showing the building between the purchase and the sale.

Questions a manager asks

How much construction is enough. The regime's definitions and counsel's reading per project; a token structure on a parcel sold as land is read as dealing, and the honest test is whether what was sold was a development.

Can the company sell a phase's plots to sub-developers. Plotted development with the trunk infrastructure built is within the permitted category under the regime's provision for it; counsel reads the provision against the programme.

Is selling the company's shares a way around the line. It is a transfer of shares tested by the bank for the company's activity to date; a company that held to develop and did not deal is a company whose shares may be sold, at the pricing rules' price to a resident.

What about land banking for later phases. Holding to develop is permitted and the programme is the evidence; holding without a programme, and selling when the price is right, is dealing.

Does the investment trust regime help a developer. It is the form for completed income-producing assets, and a developer's completed component can be sold to one under the third position's rules.

Who decides when the market moves. The platform, with Indian counsel's reading of the route, and the committee, because a change of activity is a change to the statement the register subscribed to.

Terms used

Construction-development: the permitted category, development of townships, housing, built-up infrastructure and construction projects.

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

The third position: the holding of completed income-producing property, permitted on conditions with the investment trust as the listed form.

Entitled-parcel sale: the sale of land after consents and before construction, the common crossing.

Compounding: the regime's process for regularising a breach of the foreign investment conditions, with its penalty and record.

Separation: the holding of each activity in its own company with its own capital and file.

What to read

India's foreign investment rules for construction-development, their definitions of the permitted activity and the prohibited business, and their provisions on holding what is built and on plotted development; the real estate investment trust regulations for the third position; the compounding process; the external borrowing regime's end-use conditions. On this site, the lexicon, India and sectors rooms under the development estate.