This article is written by Khushnum Motafram, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.  Here she discusses “Can Foreign Companies Acquire Properties in India by way of Asset Sale?”.

Introduction

In the modern era of cut-throat competition, it has become imperative for corporate houses to opt for one or the other mode of corporate restructuring in order to operate and expand in the market. Not only does it help in business expansion, but it also plays a major role in the diversification of risk. Corporate restructuring refers to a process of significantly changing a company’s business model, management team or financial structure to address various challenges and increase shareholders value. These corporate houses incline to the phenomenon of corporate restructuring for various reasons viz. reduction of risk, increase in operational efficiency, improved access to the financial market, tax benefits, synergy benefits, revival of the sick company etc.  

Asset Sale is one of the modes of corporate restructuring. In general, asset sale means the itemized sale of assets of one company by the other company based on the individually assigned value to each of such asset. The asset sale is preferred by the majority of companies as it allows such companies to cherry-pick the assets and liabilities they want to transfer to their business. This form of corporate restructuring helps the companies to diversify their business in the desired direction without having to spend an extra bit for the entire load of the other company by allowing them to purchase only those assets and liabilities that would help them built a stronghold in their business sector. One major reason for the companies to opt for asset sale is to clean up their balance sheets encumbered with huge loans. An asset purchase is also known as price meal sale of the assets.   

Given the benefits of corporate restructuring through an asset sale, not only are Indian companies involved in the asset sale transaction, but foreign companies are also showing a keen interest in acquiring immovable properties in India in order to establish their operations here to unfold and exploit the resources and huge potential which our country offers. However, such asset purchase and sale transactions in India by foreign companies are governed and regulated by the strict provisions made under the Foreign Exchange Management Act, 1999. It is only in compliance with the provisions laid down by the Foreign Exchange Management Act, 1999, when a foreign company can purchase and hold immovable properties in India.    

RBI Master Directions

The Reserve Bank of India (“RBI”) is involved in all the cases where foreign entities are involved, be it, Non-resident Indian, Overseas Citizen of India or Person resident outside India. The Foreign Exchange Management Act, 1999, empowers RBI to frame regulations for prohibition, restriction or regulations of acquisition and transfer of immovable property in India by a person resident outside India. In terms of the aforementioned stated powers, RBI has laid down master directions (earlier known as master circulars) along with the notifications and circulars, time and again to regulate the transactions involving foreign currency in India. 

The regulations governing the acquisition and transfer of immovable property situated in India are governed under the following act, direction and notification:

1. Section 6 of the Foreign Management Exchange Act, 1999 (“Act”);
2. Master Direction – Acquisition and Transfer of Immovable Property under Foreign
   Exchange Management Act, 1999 bearing no. RBI/FED/2015-16-7, FED Master Direction No. 12/2015-16 dated January 1, 2016 [last updated as on April 11, 2018] 9(“Master Direction”); and 
3. Notification bearing no. FEMA 21(R)/2018-RB dated March 26, 2018 (“Notification”). 

Foreign Company – Person Resident outside India

As per Section 2(w) of the Act, person resident outside India means a person who is not resident in India.

In order to understand the concept of Person Resident outside India, one needs to understand what “person resident in India” means. As per Section 2(v) of the Act, person resident in India means:

1. a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include –
   1. a person who has gone out of India or who stays outside India, in either case:
      1. for or on taking up employment outside India, or
      2. for carrying on outside India a business or vocation outside India, or
      3. for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
   2. a person who has come to or stays in India, in either case, otherwise than:
      1. for or on taking up employment in India, or
      2. for carrying on in India a business or vocation in India, or
      3. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
2. any person or body corporate registered or incorporated in India;
3. an office, branch or agency in India owned or controlled by a person resident outside India,
4. an office, branch or agency outside India owned or controlled by a person resident in India.

On critically analyzing Section 2(v)((ii) of the Act, it would not incorrect to state that anybody corporate not registered or incorporated in India would be called person resident outside India. Therefore, foreign companies would qualify to be called as a person resident outside India. However, in line with Section 2(v)(iii) of the Act, branch or office or any agency of such body corporate shall not be considered as a person resident outside India provided such branch, office or agency is situated in India.

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When can a Foreign Company Acquire or Hold Properties in India?

As per Section 6(5) of the Act, a person resident outside India may hold, own, transfer or invest in immovable property situated in India only when such property is acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. 

Further, Clause 7 of Part II of the Master Direction and Clause 4 of the Notification states that branch, office or any other place of business, other than a liaison office, which has been established by a person resident outside India can acquire immovable property in India. However, such property can only be purchased when it is necessary or incidental to the activity being carried on by the branch or office. 

In addition to the aforementioned requirement, the person resident outside India who has acquired immovable properties in India has to file Form IPI within a period of 90 days from the date of the acquisition. However, acquisition of immovable properties by branch offices of persons of Pakistan, China, Bangladesh, Sri Lanka, Afghanistan, Iran, Hong Kong, Macau, Nepal, Democratic People’s Republic of Korea and Bhutan has been carved out in the said clause unless prior approval has been obtained by RBI.

Further, in addition to the above requirement, Clause 4 of the Notification also includes blanket provisions stating that such person acquiring immovable property through its branch or office should be compliant with all the laws, rules, regulations or directions for the time being in force. 

In light of the abovementioned provisions as contained in the Act, Master Direction and Notification, foreign companies are not allowed to acquire properties by any means including asset sale in India except on occasions when such foreign companies have branch or office situated in India. In addition to the requirement of having such a branch or office in India, such immovable property can only be acquired when acquiring such property would be necessary or incidental to the business of such branch or office and not to the business of the foreign company.  

Whether repatriation of sale proceeds allowed or not?

Clause 8 of the Master Direction, as well as Notification, states that sale proceeds generated from the sale of immovable property acquired by such person resident outside India through branch or office shall not be repatriated outside India without the general or specific permission of the Reserve Bank of India.

Exceptions

In terms of Clause 1 of Part II of the Master Direction, the aforementioned restrictions shall not apply to acquisition or transfer of immovable property in India by a person resident outside India in case of a lease not exceeding five years.