SUB-LEASING OF SPACE BY COMPANIES WITH FDI

SUB-LEASING OF SPACE BY COMPANIES WITH FDI
Aug 2019 , by , in Latest News

Commonly known that foreign direct investment (“FDI”) is not permitted in companies engaged in “real estate business”. However, the term “real estate business” in the exchange control laws in India has, in the past few years, undergone subtle but significant changes.

BY: ARCHANA TEWARY, PARTNER & POORANIMAA HARIHARAN, SENIOR ASSOCIATE, J. SAGAR ASSOCIATES

Historically, FDI was not allowed in completed projects/ assets. However, in 2015, FDI in completed projects/ assets was cautiously opened up, so that a developer could receive FDI in a completed project/ asset. It was also clarified that FDI up to 100% under the automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.

Pursuant to a clarification issued by the Department of Industrial Policy and Promotion on September 15, 2015, facility sharing between group companies through leasing/ sub-leasing arrangements for the larger interest of the business, was permitted.

However, provided such arrangements are on arm’s length basis and the annual lease rent earned by the lessor/ sub-lessor does not exceed 5% of its total revenue. This clarification was also construed to imply that other forms of sub-leasing which do not fall within such exemption (such as to third parties) could potentially fall within the ambit of real estate business.

Subsequently in November 2015, the reference to “earning income” was deleted and the present definition of “Real Estate Business” prohibits only “earning profits”. However, what constitutes “earning profits” as opposed to “earning income” is not clarified.

The changes have tested positions of law which were previously accepted for companies with business models such as co-working / co-sharing and companies which lease large office spaces.

WHAT THIS MEANS FOR COMPANIES WITH FDI?

A strong case can be made, that with the above changes to the definition of “real estate business”, if a company has taken premises on lease, or acquired a fully developed building, it could lease or sub-lease any excess or un-utilised premises to third parties, so long as it does not earn profits from such lease or sub-lease.

This view would also seem logical, since companies with big premises on lease, can avoid or reduce the expense of having to pay rent for un-utilised premises. FDI continues to be prohibited in “real estate business”. However, it may be time to look at FDI in completed premises outside the framework of “construction parks” and the “development of industrial parks”.

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