OVERSEAS REALTY BUYS UNDER RBI SCRUTINY
The Reserve Bank of India (RBI) has expressed concern over the use of the overseas direct investment (ODI) route by some entities to purchase real estate assets, two people aware of the development said.
Indians can currently send money overseas via the Liberalized Remittance Scheme (LRS) and ODI routes.
The LRS applies to individuals looking to remit money abroad, with a limit of $250,000 per person per year. The ODI route, intended for entities such as companies and trusts, allows a much higher limit of $1 billion per year.
However, wealthy individuals often create companies or family offices to manage their overseas investments, effectively sidestepping the individual remittance limit set by the LRS.
During recent interactions with the authorized dealer banks, the central bank said buying real estate as an investment is not permitted under the current regulations. In fact, RBI is expected to issue a set of frequently asked questions (FAQs) on ODI rules to clarify its stance, the people cited above added.
They noted that some residents borrow from local lenders to fund such overseas purchases, raising concerns that a property market downturn in those countries could significantly impact local lenders.
To be sure, there is no specific prohibition in the ODI rules on buying real estate by resident Indians. However, that purchase must be for a bona fide purpose, legal experts said. For instance, if an Indian company sets up an overseas subsidiary, it can buy commercial space for it.
However, if the entity buys real estate purely for investment, it will be in violation of the rules.
An email sent to the spokesperson for RBI remained unanswered till press time.
“Overseas direct investment in a foreign entity engaged in buying and selling real estate is not permitted under the rules,” said Moin Ladha, a partner at law firm Khaitan & Co. According to another lawyer who advises clients on overseas investments, the ODI route is meant for corporate investments like creating foreign subsidiaries or joint ventures, but it has come to RBI’s notice that some people were buying real estate in London and Dubai using ODI money.
“Even in LRS, there are certain concerns about the purchase of real estate assets,” said the lawyer cited above on condition of anonymity.
A former RBI official said that the central bank is not concerned about the remittance’s end use as long as it is within prescribed limits. However, RBI is not comfortable with real estate investments abroad unless done for a specific purpose or where the property is being used for something, the former official said, adding that RBI wants to discourage speculative investments in overseas real estate.
“The central bank and the government do not want this to become a popular investment channel. But, sensing an investment opportunity, some people who do not have adequate funds might even take loans from Indian banks and invest abroad, creating a risk for lenders if market conditions deteriorate,” the former central bank official said.
He said the idea is also to stop people from roundtripping funds into real estate or using these investments for parking money that would have otherwise come into the country.
Experts said RBI and the government should consider providing adequate means for residents to purchase foreign real estate; otherwise, Indians may lose out on attractive investment opportunities. Globally, wealthy individuals are actively invested in real estate across markets. The rental yields are considered a safe source of income and returns by the wealthy.
www.intellexconsulting.com, www.intellexcfo.com, www.startupstreets.com