In this blog post, Sunidhi, a student of the Rajiv Gandhi National University of Law, Patiala writes about the law that regulates the purchase of property by foreigners in India. The blog post explains the loophole in the law that defeats its purpose.
Introduction
The law relating to purchase and sale of property by a person resident outside India is governed by the Foreign Exchange Management Act (FEMA), 1999.
“An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.[1]”
The FEMA act, unlike other acts, is more of a restrictive act, i.e., everything under it is prohibited unless otherwise specifically permitted. FEMA regulates the purchase of properties by Non-Resident Indians (NRI), Persons of Indian Origin (PIO), and foreign citizens.[2] The agricultural or plantation land can strictly be purchased by an Indian citizen only. So, the buyer should ensure before purchase that the purchase property is not built on such land.
Who Is A Foreigner?
A foreigner under FEMA refers to a person resident outside India. Section 2(w) defines that a ‘person resident outside India’ includes person who stays outside India for:
- Employment outside India
- Carrying on businesses outside India
- Any other purpose, indicating the intention to remain outside India for an uncertain period.
Consideration of a Person as a Foreigner
According to Section 2(v) of FEMA, an individual who has come to stay in India is not considered a foreigner or is regarded as a person residing in India if:
- an individual who has lived in India for more than 182 days during the preceding financial year, and
- an individual who has come to stay in India for the purpose of employment, carrying on business in India or for a purpose that indicates his intention remain in India for an uncertain period.
If any of the above two conditions are met then he is considered as a person residing in India, i.e., he is not included in the category of a foreigner for the purpose of purchase of property in India.
What The Law States
According to the Foreign Exchange Management Act, 1999 a foreigner can buy property neither in Goa nor India. Only a person who is a resident of India can buy property in Goa as well as the whole of India. But Indians are not restricted from purchasing property situated outside India.
Section 6(4) of the FEMA, 1999 states that Indians are not only allowed to purchase land situated outside India but also to invest in foreign currency, and security provided the foreign currency, security or property was acquired when he/she was resident outside India or inherited from a person who was a resident outside India.
The law prohibits foreigners from purchasing property in India, but there are two exceptions stated in Section 6(5) of FEMA, 1999 that allow them to purchase property in India. These are:
- A person residing outside India can purchase property in India if he/her owned such property when he/she was resident of India
- Or the property is inherited by the person residing outside of India from a person who was resident in India.
Section 6(5) also states that the person residing outside India can also own, invest or transfer Indian currency or security provided that it has been inherited from a resident in India or bought when he/she was himself/herself resident of India.
However, the citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, or Bhutan, who are residing in India can only purchase immovable property in India with the prior permission of the RBI, who will consider the request in consultation with the Government of India.[3]
Can They Buy Property Through A Company Incorporated In India?
It is illegal for a foreigner/person residing outside India to buy immovable property in India until he/she fulfills any of the above-stated conditions to become a person residing in India. It is illegal to buy property on a tourist visa in India because the tourist visa expires in 180 days.
Although it is illegal for a foreigner to buy property in India, they buy it under the garb of a company registered under Indian law in Goa. As Section 2 (v) (iii) of FEMA states that office, branch or agency in India owned or controlled by a person resident outside India is considered as a property belonging to a person residing in India. Therefore, a foreigner can purchase a non-agricultural property in India by forming a company and registering it under Indian Law.
The companies registered under Indian law by the foreigners with the prime motive of acquiring property in India can then legally hold property in Goa or India as they abide by the guidelines set by FEMA and RBI. Therefore, a loophole in FEMA has allowed foreigners to acquire property in India legally. This loophole prevents the Goa Government from preventing foreigners from buying property in India moreover Goa.
The figures provided by the Registrar of Companies (RoC) office at Goa substantiate the fact that companies incorporated under Indian law have been used to purchase property in Goa. The number of companies registered with the RoC has been increasing ever since the enactment of FEMA. The number has grown from 114 in 2002 to 189 in 2003. Then in 2004 the figures almost doubled and rose to 397. In 2005, it jumped to 655 and then it plateaued at 647 in 2006 and 565 in 2007. The ROC has also confirmed that compared to Indian Entrepreneurs, foreigners mainly register such firms in Goa. The major portion of it consists of companies in the tourism and travel sector where 100% FDI is allowed.
All this has become possible for the foreigners with the support of Indian lawyers, Chartered Accountants (CAs) and Company Secretaries (CSs). They prepare the documents of the company that keeps the company on the safe side of the law by compiling with the requirements of the ROC. This includes issuance of shares, conducting board meetings, the general meeting of shareholders, etc.
Hence, foreigners have succeeded in piercing the wall of FEMA to acquire property in India by registering a company under Indian law.
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References:
[1] Objective, Foreign Exchange Management Act, 1999.
[2] Available at http://www.saffronart.com/real-estate/Guidelines.aspx, last accessed on July 11, 2016, at 6:05 p.m.
[3] Ibid.
