Report of the Insolvency Law Committee: The New Way Forward
Report of the Insolvency Law Committee: The New Way Forward
On November 16, 2017, the Government of India constituted a committee to undertake a comprehensive review of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) in light of the experiences of various stakeholders during the past year. The Ministry of Corporate Affairs (‘MCA’) constituted the Insolvency Law Committee (‘ILC’) which comprises representatives from across the industry. Bahram N Vakil, a founding partner of AZB & Partners (‘Firm’) and a member of the Bankruptcy Law Reform Committee (the committee entrusted with drafting of the IBC in 2015) is one of the members of the ILC.
The MCA released ILC’s report on April 3, 2018 (‘Report’). The Report proposes various amendments to the IBC and the rules and regulations thereunder. The Parliament is likely to consider the Report in the near future to make the relevant legislative changes. Some of the major changes proposed by the Report are as below:
- Homebuyers upgraded
The IBC does not explicitly categorise homebuyers who have paid advances towards completion of real estate projects as financial or operational creditors in the corporate insolvency resolution process (‘CIRP’) of the real estate developer.The ILC took the view that advances paid by homebuyers are effectively used by real estate developers as working capital to finance the completion of projects thereby giving it the commercial effect of a borrowing and has proposed that homebuyers be treated as financial creditors. Note that their secured status depends on the nature of their contract with the developer and the bank providing the home loan. The ILC has also proposed that a large block of creditors be allowed to participate in meetings of the committee of creditors (‘CoC’) through an authorised representative.
- Interest clock on interim finance extended
Under the IBC, interim finance and any interest on it is classified as insolvency resolution process cost which receives the highest priority on any payout under a resolution plan. However, in the event of liquidation, though the principal amount of interim finance still retains its highest priority, the interest stops accruing from the date of the liquidation order.The ILC felt that the clog on accrual of interest in liquidation was affecting liquidity and raising the coupon on interim finance. The ILC has proposed that interest on interim finance shall continue to accrue for up to one year from the liquidation commencement date. Note that the Insolvency and Bankruptcy Board of India (‘IBBI’) has already made necessary changes to this effect in the IBBI (Liquidation Process) Regulations, 2016.
- Disqualification for bidders – revisited again
Section 29A of the IBC was introduced to address concerns that persons who by their conduct had contributed to the financial distress of the corporate debtor or are otherwise deemed not to be fit and proper to gain control over distressed assets, should be disqualified from being resolution applicants. However, the market felt that the range of disqualifications and the affected persons was too large. To address this issue, the ILC has made several proposals, some of which are set out below:
i. Section 29A of the IBC lays down eligibility criteria vis-à-vis the resolution applicant as well as any person acting jointly or in concert with the applicant. The term ‘acting jointly or in concert’ is not defined in the IBC and causes market participants to rely on the definition contained in the Securities and Exchange Board of India (‘SEBI’) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This results in inclusion of an extremely broad range of persons, including even those who are involved in the resolution plan in an ancillary way. The ILC proposes to restrict the eligibility test only to the applicant and its connected persons. Additionally, any person acting with a common objective of acquiring voting rights or control over the company would also have to pass the eligibility test.
ii. Section 29A(c) of the IBC bars persons who have been in control of a non-performing asset (‘NPA’) for more than one year. However, this provision effectively disqualified several ‘pure play’ financial investors who are in the business of investing in companies across the credit spectrum. For instance, asset reconstruction companies, private equity and distressed debt funds are quite likely to have some distressed assets in their portfolios. The ILC has proposed that the test under Section 29A(c) of the IBC should not apply to such pure play financial entities.
iii. Section 29(A)(d) of the IBC bars persons who have been convicted of a criminal offence punishable with imprisonment for more than two years. This disqualification was thought to be very expansive and would disqualify applicants for offences, the commission of which have no nexus to the ability of the person to run the corporate debtor successfully. The ILC has proposed that the nature of offences, the commission of which will incur the disqualification should be economic in nature and a schedule listing such specific crimes be provided. Additionally, the disqualification should also not apply in case a stay against the conviction has been obtained from a higher court.
iv. Section 29A(h) of the IBC disqualifies persons who have executed an enforceable guarantee in favour of a corporate debtor currently undergoing CIRP. The ILC felt that the scope of the disqualification is overreaching since it bars guarantors solely on account of issuing an enforceable guarantee. The ILC has proposed that the disqualification should only apply against guarantors against whom the underlying guarantee has been invoked by the creditor and remains unpaid.
- Curious case of guarantors’ liability – now resolved
Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, a few recent judicial pronouncements have suggested that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor since it is not feasible to determine the liability of the relevant third party until the CIRP is concluded.The committee felt that the scope of the moratorium is very clear and should not be interpreted broadly. The intent of law could not have been to deprive creditors of contractually negotiated remedies against third parties as long as the corporate debtor’s assets remain unaffected. The ILC proposes that an explanation be added to Section 14 of the IBC to clarify that the moratorium does not apply to any recovery action that does not impact the assets of the corporate debtor.
- CoC voting thresholds reduced
The IBC provides that all decisions by the CoC be taken by vote of 75% of the CoC, by value. The ILC felt that effectively granting minority lenders constituting 25% of the CoC a veto right to any proposed resolution plan could cause many companies to be liquidated. To ensure that there is a higher likelihood of resolving a distressed company as a going concern under the IBC, the ILC has proposed that the voting threshold for important matters during the CIRP including voting on resolution plans be reduced to 66% of the CoC. Additionally, for other routine decisions that the CoC is required to take during the CIRP, the voting threshold should be reduced to 51% to assist the resolution professional in ease of conducting day to day operations.
- IBC trigger threshold now ten times
To keep debt recovery actions from small operational creditors at bay, the ILC recommended that the minimum amount to trigger the IBC be raised to Rs. 10 lakh (approx. US$ 15,000). This may reduce pressure on the NCLT – as statistics suggest that many small creditors used the IBC to coerce recovery. But what of the small creditor? Back to the long queues in the debt recovery tribunals? Perhaps small creditors can accumulate their debt and then trigger IBC.
- In and out with ninety percent
Currently, once an IBC case is admitted, the law does not permit withdrawal of the same without the consent of all creditors. This is consistent with the philosophy that this is a collective and representative process for all creditors and settlement with the ‘filing creditor’ should not permit withdrawal. The Supreme Court has thought otherwise and has permitted withdrawal post admission. The ILC reiterated the aforesaid philosophy but saw merit in permitting withdrawal post admission if 90% of the committee of creditors deem fit. Would this have been of use in the Binani Cement saga?
- Regulatory approvals window
An immediate issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Should the bidders bear this risk or the CoC live with the uncertainty? Today, negotiations resolve this tug-of-war to some extent while bidders draft their resolution plans treating the NCLT as a single window clearance. The ILC observed that single window clearance was not the intent of the IBC. This is a critical observation for bidders. Some solutions were debated but a comprehensive solution remained elusive. Instead, the ILC has recommended that a requirement be placed to obtain consents, dispensations and permits within a maximum of one year. It’s unclear how this will impact the fine balance currently trying to be achieved in practice by bidders.
- Competition approval fast tracked
In a welcome development, the ILC has been informed that the Competition Commission of India will clear notifications for combinations arising out of the IBC within 30 days, with an extension of 30 days for exceptional cases. This is already being borne out in practice and echoes the collaborative effort being taken by Indian regulators to make the IBC work.
- Liquidation waterfall and priority of security
Concerns had been raised that the language in the IBC liquidation waterfall may override inter se ranking of security amongst creditors; i.e., in liquidation, a secured creditor with a first charge over an asset may receive the same amount as another with a second charge over such asset. After reviewing the language, related laws and relevant case law, the ILC felt confident that any such interpretation would be incorrect and valid subordination agreements should not be disregarded by the IBC and so no change has been proposed.
- MSME promoters get a breather
Micro, small and medium enterprises are thought to be the bed rock of the Indian economy. When such companies go through the IBC process, keeping their incumbent promoters out of the bidding process has raised concerns of mass liquidation of such companies leading to potentially significant job losses. The ILC has recommended that promoters of such companies be permitted to bid for their companies in the IBC process (despite Section 29A disqualifications) unless they are willful defaulters. In balancing the opposing forces involved, this seems to be the socially appropriate decision.
- Limitation now uncomplicated
Lenders benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although doctrine of laches might still apply). But this was yet to be confirmed by the Supreme Court, which had declined to comment on this issue in one matter. The ILC has recommended that limitation should apply to IBC applications other than those made by a corporate debtor itself.
- No man’s land now occupied
A resolution plan is approved by the CoC and submitted to the NCLT for confirmation. At this stage, the role of the resolution professional ends and the CoC ceases to exist. But the NCLT order may take weeks or months. Who runs the company during this time and what duties, powers and protections apply to such person? The ILC has recommended that the resolution professional be statutorily required to continue during this period, presumably with the same duties, powers and protections as during the CIRP.
For queries, please email email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com. Bahram N Vakil, one of the founding partners of the Firm, leads the Restructuring and IBC Practice Group at the Firm. Ashwin Ramanathan, Piyush Mishra and Nilang Desai are partners and Suharsh Sinha is a senior associate in the Restructuring and IBC Practice Group at the Firm.
Major Amendments introduced to the Insolvency and Bankruptcy Code
Major Amendments introduced to the Insolvency and Bankruptcy Code
The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (‘Ordinance’), which has become effective from June 6, 2018. Pursuant to the Ordinance, many of the amendments suggested by the Insolvency Law Committee (‘ILC’), which included our founding partner Mr. Bahram N Vakil, have now been implemented. The major changes introduced by the Ordinance have been summarised below:
- Homebuyers Upgraded as ‘Financial Creditors’
Prior to the Ordinance, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) did not recognise persons who had paid advances towards completion of real estate projects as either ‘financial creditors’ or ‘operational creditors’. The Ordinance now provides that any amount raised from an allottee under a real estate project shall be considered a financial debt under the IBC. Since the number of such allottees could be numerous and their participation in a committee of creditors (‘CoC’) could be unwieldy, the Ordinance provides that allottees may appoint authorised representatives to attend CoC meetings on their behalf, with prior instructions on voting matters.
- Amendments to Eligibility Criteria for a Resolution Applicant
Section 29A sets out ineligibility criteria for potential bidders in a corporate insolvency resolution process (“CIRP”). The ambit of Section 29A may have been in some instances too wide and could have unintentionally disqualified some sophisticated bidders on technical grounds. The Ordinance has, therefore, introduced the following amendments to Section 29A :
i. Section 29A(c): NPA Related disqualification
(a) Section 29A(c) provides that persons controlling accounts which have remained non-performing assets (‘NPA’) in excess of one year are barred from acting as resolution applicants in an ongoing CIRP. However, no clarification had been provided on whether the one-year period would be determined from: (i) insolvency commencement date of the corporate debtor; or (ii) the time at which the bid was submitted in the ongoing corporate insolvency resolution process (‘CIRP’) of the corporate debtor. The Ordinance has clarified that the relevant date should be the latter.
(b) The Ordinance provides that the disqualification under Section 29A(c) shall not apply to a ‘financial entity’ (scope of which is discussed under Paragraph iii below).
(c) Successful resolution applicants acquiring companies under the CIRP end up being in control or management of accounts which have turned NPA. Such acquirers would, as a result, fall foul of Section 29A(c) and would be estopped from making any further bids for any other company undergoing CIRP. In order to rectify this anomaly, the Ordinance provides for a grace period of three years in favour of a resolution applicant, calculated from the date of acquisition of such corporate debtors with NPAs during which the acquirer will not be disqualified from bidding for other companies undergoing CIRP. A similar carve-out has also been granted under Section 29(A)(g) of the IBC, to successful bidders, who have acquired companies in CIRP where certain avoidable transactions may be been undertaken by the previous promoters or officers.
ii. Section 29A(d): Disqualification on account of Criminal Convictions
(a) Section 29A(d) of the IBC disqualified a resolution applicant if it or any of its ‘connected persons’ had been convicted for an offence punishable with imprisonment for two years or more. It was argued that there must be a rational nexus between the underlying offence and the ability of the bidder to successfully restructure the corporate debtor.
(b) This sub-section has been amended to provide that: (i) conviction for two years or more is a bar only if the offence relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC; and (ii) conviction for seven years or more would be a bar irrespective of which statute the offence fell under.
(c) A list of twenty-five laws is specifically mentioned in the Twelfth Schedule covering areas such as money laundering, foreign exchange, pollution control norms, tax, anti-corruption and securities market regulations. The Twelfth Schedule only covers Indian statutes and an interpretation may be taken that similar violation by the bidder or its connected persons under foreign laws may not attract the disqualification. However, the disqualification relating to conviction for seven years or more would apply under Indian as well as foreign laws.
(d) The Ordinance provides that the bar under Section 29A(d) will not apply if more than two years have elapsed from the date of release from imprisonment (rather than a bar in perpetuity).
iii. Explanation to Section 29A(i) : Reducing the Scope of ‘Connected Person’
(a) Part (iii) of the definition of ‘connected person’ under Section 29A(i) of the IBC, is extremely broad and includes the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. By virtue of their business model, it was inevitable that several pure play financial entities would have connected persons through their investee companies in India or abroad which suffered from the disqualifications (especially relating to NPAs) listed in Section 29A. The IBC was amended late last year to create a carve-out from part (iii) of the definition for scheduled banks, asset reconstruction companies and alternate investment funds registered with the Securities and Exchange Board of India (‘SEBI’) – however this exemption did not benefit foreign private equity players, venture capital and distressed assets funds.
(b) Pursuant to the Ordinance, relaxation has now been provided to foreign financial investors. The definition of ‘financial entities’ now includes the following additional classes of entities: (i) any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and (ii) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2017.
iv. Section 29A(d): Disqualification on account of Criminal Convictions
(a) The impact of Section 29A of the IBC was such that in many cases, it would force a change of control of the erstwhile promoter under a resolution plan or in liquidation. There was a concern that there may not be enough interest from third party buyers in companies under IBC, which are of a comparatively smaller size. A ‘one size fits all’ approach could hamper recoveries where there is little scope for turnaround of smaller companies unless the promoters submit a resolution plan. Recognizing this, the Ordinance provides for limited exemptions from the provisions of Section 29A of the IBC for Micro, Small and Medium Sector Enterprises (‘MSMEs’).
(b) However, the statutory thresholds for recognizing MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) are low. For instance, for companies engaged in manufacturing, the thresholds for classification as MSMEs are investment in plant and machinery ranging from less than INR 25,00,000 (approximately USD 37,000) to INR 10,00,00,000 (approximately USD 1.5 million). The Central Government had approved an amendment to the MSME Act on February 7, 2018 providing that the thresholds in the MSME Act be redefined. The proposal is to re-align the definition of MSMEs on the basis of annual turnover ranging from less than INR 5,00,00,000 (approximately USD 750,000) to INR 250,00,00,000 (approximately USD 37 million). Once the proposed amendment to MSME Act is notified, it will provide significant relief to promoters of a large number of small companies facing financial distress.
- Withdrawal of an Ongoing CIRP Proceeding
Once an application filed under the IBC is admitted, it can either lead to a successful resolution plan or liquidation. Under the IBC, a company undergoing the CIRP process did not have the power to arrive at a settlement or compromise by which the ongoing CIRP proceedings could be withdrawn. However, in a few cases, the courts had gone beyond the purview of the IBC and allowed settlement of the claims of a creditor, bilaterally leading to withdrawal of the matter.
The Ordinance clarifies that withdrawal of a CIRP proceeding will be permissible if 90% of the CoC approves it. However, such withdrawal will be permissible only prior to the resolution professional formally inviting resolution plans from interested bidders.
- CoC voting thresholds reduced
The IBC provided that all decisions by the CoC be taken by a vote of 75% of the CoC by value. The Ordinance has reduced the voting threshold from 75% to 66% for major decisions such as: (i) applying for an extension for the CIRP period from 180 to 270 days; (ii) replacement of an interim resolution professional or resolution professional; and (iii) approving a resolution plan. For other routine decisions, the voting threshold has been reduced to 51%.
- Role of shareholders of the corporate debtor in approving resolution plans
The consent of shareholders of the corporate debtor is generally required for significant corporate actions. The Ministry of Corporate Affairs (‘MCA’) released a clarification last year to the effect that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under any law) is deemed to have been given on its approval by the NCLT. The Ordinance specifically amends the IBC to incorporate the clarification proposed by the MCA.
- Resolution professional responsible for ongoing legal compliances by the corporate debtor
Under Section 17 of the IBC, on insolvency commencement date, the board of the company is suspended and an insolvency professional takes control over management control. However, several laws including many provisions of the Companies Act, 2013, regulations issued by SEBI, Factories Act, impose obligations on the board of the company. The Ordinance clarifies that insolvency professionals shall be responsible for complying with the requirements under all applicable laws on behalf of the corporate debtor.
- Participation of ‘related party’ financial creditors in the CoC
The IBC provided that financial creditors which were related to the corporate debtor would not be allowed to participate, attend or vote in CoC meetings. Financial institutions which had converted their debt into substantial equity stakes in the corporate debtor under any previous restructuring, were deemed ‘related’ to the corporate debtor and were thereby precluded from attending or voting in CoC meetings. The Ordinance provides an exemption from this prohibition for such financial creditors provided they are regulated by a financial sector regulator.
- Grace period for fulfilling statutory obligations
A critical issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Currently, acquirers tend to draft their resolution plans treating National Company Law Tribunal (‘NCLT’) as a single window clearance for all such approvals. But this approach is susceptible to legal challenge. The Ordinance provides for a one year grace period for the successful resolution applicant to fulfill various statutory obligations required under various laws to implement the resolution plan.
- Issue of guarantors’ liability resolved
Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, in a few cases, courts had taken the view that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor. The Ordinance states that the moratorium under Section 14 will not apply to the enforcement of guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP.
- Further regulations to govern the bidding process
In most CIRP proceedings, the CoC formulates a process memorandum which governs the timelines for receiving bids, procedure for rebidding, grounds for rejection of bids etc. Such provisions and their application have been subject to several legal challenges at the NCLT by unsuccessful bidders. In a press release accompanying the Ordinance, the government has indicated that the regulations will govern issues such as non entertainment of late bids, bar on negotiations with late bidders and a standardised process for maximization of value of the corporate debtor.
- Triggering CIRP by a company voluntarily
The IBC provided that a company may initiate its own CIRP and that the persons eligible to initiate a voluntary CIRP were: (i) the corporate debtor itself; (ii) a shareholder of the company specifically authorised to do so under the articles; (iii) director and key employees; and (iv) the chief financial officer. The Ordinance now makes a special resolution of shareholders mandatory for filing for its CIRP. It remains to be seen if a special resolution will be possible in closely held companies where promoters have a dominant stake. But directors and officers will need to be mindful of provisions in the IBC which impose civil and criminal sanctions on erstwhile directors and officers of the company for wrongful trading.
- Limitation Act to apply to IBC
Lenders have benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although the doctrine of laches might still apply). However this has not been confirmed by the Supreme Court till date, as it had declined to comment on this issue. The Ordinance now provides that the law of limitation will apply to IBC applications.
SEBI Permits FPIs to Invest in Unlisted Debt Securities and Securitized Debt Instruments
SEBI has, by way of a notification dated February 27, 2017, amended the provisions of the SEBI (Foreign Portfolio Investors) Regulations, 2014 to permit registered FPIs to invest in (i) unlisted non-convertible debentures (‘NCDs’)/bonds issued by an Indian company subject to the guidelines issued by the Ministry of Corporate Affairs and (ii) securitized debt instruments, including certificates/instruments issued by special purpose vehicles set up for securitization of assets with banks, financial institutions or non-banking financial companies (‘NBFCs’) as originators, and certain listed securitized debt instruments. Additionally, SEBI has specified by its circular dated February 28, 2017, that investment by FPIs in unlisted corporate debt securities in the form of NCDs/bonds will be subject to minimum residual maturity of three years along with an end use-restriction on investments in ‘real estate business’, capital market and purchase of land. SEBI has also clarified that investment by FPIs in securitized debt instruments will not be subject to the minimum three-year residual maturity requirement. SEBI has also specified that investments in unlisted corporate debt securities and securitized debt instruments will be permitted up to an aggregate of Rs. 35,000 crores (approximately US$ 5.4 billion) within the existing investment limits prescribed for corporate debt from time to time (presently, Rs. 244,323 crores (approximately US$ 38 billion)).
RBI had earlier, by way of a notification dated October 24, 2016, introduced corresponding amendments to FEMA 20 and prescribed similar conditions for such investments by an FPI by way of a circular dated November 17, 2016. A summary of these RBI notifications has been captured in our January 2017 edition of Inter Alia.
Further, SEBI has also amended the definition of ‘offshore derivative instrument’ to permit FPIs to issue instruments with the underlying being unlisted debt securities or securitized debt instruments held by such FPI.
Amendment to SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014
Pursuant to the meeting of the SEBI board held on September 23, 2016, SEBI has amended the SEBI (Real Estate Investment Trusts) Regulations, 2014 and the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Some of the key amendments include:
i. The minimum holding of the mandatory sponsor in the infrastructure investment trust (‘InvIT’) has been reduced from 25% to 15%;
ii. The existing limit of three sponsors has been removed from both regulations;
iii. The permissible investment limit for investment by real estate investment trusts (‘REIT’) in ‘under construction’ assets has been increased from 10% to 20%; and
iv. InvITs and REITs are allowed to invest in a two-level SPV holding structure, through a holding company.
The Maharashtra Land Revenue Code, 1966
The Maharashtra Land Revenue Code, 1966 (‘MLRC’) has been amended on August 22, 2016 with retrospective effect from August 15, 1967, i.e., the date on which the MLRC came into force. Pursuant to the amendment, all leases granted by the State Government or the Collector in respect of any land or foreshore vested in the State Government, which have been in existence on or before August 15, 1967 or were granted thereafter, will, notwithstanding the terms and conditions of such leases, be also subject to the following terms:
i. the leasehold rights in such land may be further assigned or transferred only with the prior permission of the Collector on payment of such premium on account of unearned income and transfer fees; and
ii. in the event of contravention of the above condition, the lessee / transferor of such leasehold rights will be subject to pay penalty in addition to such premium and transfer fees at rates to be specified by the Government.
Draft Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates of Interest and Disclosures on Website) Rules, 2016
Pursuant to the Real Estate (Regulation and Development) Act, 2016 (‘RERA’), the State Government of Maharashtra published the draft of the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates of Interest and Disclosures on Website) Rules, 2016 (the ‘Draft Rules’) to invite comments from the general public. The Draft Rules and the comments will be taken into consideration by the Maharashtra Government on or after December 23, 2016. The Draft Rules provide for registration fees payable by the promoters for registration of their projects as well as the fee payable by real estate agents who are also required to be registered under the RERA. While the Draft Rules continue to provide for the retention of 70% of the amounts realized from allottees in relation to a specific project in a separate bank account, it has provided further detail and clarity as to what constitutes construction costs and land costs for a particular project and the amounts that may be withdrawn by the promoter at various stages of construction. The Draft Rules have clarified that the construction costs would include the principal sums and interest, paid or payable to any financial institutions including scheduled banks or NBFCs etc., or money-lenders for the relevant project. Mr. Gautam Chatterjee, IAS, Officer on Special Duty to the Chief Minister, has been appointed as the special officer under the RERA for the State of Maharashtra pursuant to the Government Resolution dated December 26, 2016.
Meeting of the SEBI Board
The SEBI Board met on September 23, 2016 and took the following decisions:
i. Currently, FPIs are required to transact in securities through stock brokers registered with SEBI, while domestic institutions such as banks, insurance companies, pension funds etc. are permitted to access the bond market directly (i.e. without brokers). SEBI has decided to extend this privilege to Category I and Category II FPIs.
ii. In order to facilitate the growth of Investment Trusts (“InvIT”) and Real Estate Investment Trusts (“REIT”), SEBI has decided to amend the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”). The key amendments will include:
a. InvITs and REITs will be allowed to invest in the two level SPV structure through the holding company subject to sufficient shareholding in the holding company and other prescribed safeguards. The holding company would have to distribute 100% cash flows realised from the underlying SPVs and at least 90% of the remaining cash flows.
b. The minimum holding of the mandatory sponsor in the InvIT has been reduced to 15%.
c. REITs have been permitted to invest upto 20% in under construction assets.
d. The limit on the number of sponsors has been removed under the REIT Regulations.
iii. The SEBI Board has approved amendments to the SEBI (Portfolio Managers) Regulations, 1993, to provide a framework for the registration of fund managers for overseas funds, pursuant to the introduction of section 9A in the Income Tax, 1961.
iv. The SEBI Board has decided to grant permanent registration to the following categories of intermediaries: merchant bankers, bankers to an issue, registrar to an issue & share transfer, underwriters, credit rating agency, debenture trustee, depository participant, KYC registration agency, portfolio managers, investment advisers and research analysts.
v. The Securities Contracts (Regulation) (Stock Exchanges and Cleaning Corporations) Regulations, 2012 have been amended to increase the upper limit of shareholding of foreign institutional investors mentioned in the Indian stock exchanges from 5% to 15% and to allow an FPI to acquire shares of an unlisted stock exchange through transactions outside of recognised stock exchange including allotment.
Foreign Investment in Units Issued by REITs, InvITs and AIFs
Salient features of foreign investment permitted by RBI, pursuant to its circular dated April 21, 2016, in the units of investment vehicles for real estate and infrastructure registered with the SEBI or any other competent authority are as under:
i. A person resident outside India (including a Registered Foreign Portfolio Investor (‘RFPI’) and NRIs may invest in units of real estate investment trusts (‘REITs’);
ii. A person resident outside India who has acquired or purchased units in accordance with the regulations may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI;
iii. An Alternative Investment Fund Category III with foreign investment can make portfolio investment in only those securities or instruments in which a RFPI is allowed to invest; and
iv. Foreign investment in units of REITs registered with SEBI will not be included in ‘real estate business’.
Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018
The RBI has, by way of a notification dated March 26, 2018, issued the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (‘2018 Regulations’) that replaces the erstwhile Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 (‘2000 Regulations’). Some of the key changes introduced by way of the 2018 Regulations are set out below:
i. The 2018 Regulations has replaced the concepts of ‘a person resident outside India who is a citizen of India’ and ‘a person of Indian origin’ under the 2000 Immovable Property Regulations with ‘Non-Resident Indian’ (‘NRI’) and ‘Overseas Citizen of India (‘OCI’), respectively and treats NRIs and OCIs at par with respect to their capacity to hold and / or transfer immovable property in India.
ii. An NRI or an OCI is generally permitted to acquire any immovable property, other than agricultural land/ farm house / plantation property in India, by way of a sale or gift from a person resident India or another NRI or OCI, who is a ‘relative’ (as defined under Section 2(77) of the Companies Act, 2013). While the 2000 Regulations were silent on this aspect, the 2018 Regulations provide that a person resident outside India, not being an NRI or OCI but whose spouse is an NRI or an OCI, may acquire one such immovable property, jointly with the NRI / OCI spouse.
iii. Any person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, or persons of Hong Kong, Macau or Democratic People’s Republic of Korea, and including persons from aforesaid countries having a place of business in India in a manner permissible under FEMA, will not be permitted to acquire or transfer any immovable property in India in their individual capacity, without the prior approval of the RBI, other than on lease not exceeding five years. However, such restriction would not apply where such person is an OCI.
iv. Under the 2018 Regulations, a person resident in India under a long term visa, who is a citizen of Afghanistan, Bangladesh or Pakistan and belongs to minority communities in those countries (namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians), may purchase only (a) one residential immovable property for self-occupation and (b) one immovable property for carrying out self-employment activities, inter alia subject to such immovable property not being in / around any restricted / protected areas and cantonment areas. This dispensation was not provided for under the 2000 Regulations.
v. The 2018 Regulations do not have retrospective application on any existing holding of immovable property by a person resident outside India, which was acquired under the 2000 Regulations.
 Section 2 (77) of the Companies Act, 2013 states: “relative”, with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed.
Participation by Strategic Investor(s) in InvITs and REITs
Pursuant to SEBI’s circular dated January 18, 2018 (‘SEBI Circular’), a Real Estate Investment Trust (‘REIT’) / Infrastructure Investment Trust (‘InvIT’) may invite subscriptions from strategic investors subject to inter alia the following:
i. The strategic investors can, either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.
ii. The investment manager or manager is required to enter into a binding unit subscription agreement with the strategic investors proposing to invest in the public issue, which agreement cannot be terminated except if the issue fails to collect minimum subscription.
iii. The entire subscription price has to be deposited in a special escrow account prior to opening of the public issue.
iv. The price at which the strategic investors have agreed to buy units of the InvIT/ REIT should not be less than the public issue price. In case of a lower price, the strategic investors should bring in the additional amounts within two working days of the determination of the public issue price, and in case of a higher price, the excess amount will not be refunded and the strategic investors will be bound by the price agreed in the unit subscription agreement.
v. The draft offer document or offer document, as applicable, will disclose details of the unit subscription agreement, including the name of each strategic investor, the number of units proposed to be subscribed etc.
vi. Units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue.
Maharashtra Rules Notified under Real Estate (Regulation and Development) Act, 2016
The Government of Maharashtra has by way of notification no. 23 dated March 8, 2017 established Maharashtra Real Estate Regulatory Authority (‘MahaRERA’), for regulation and promotion of the real estate sector in the State of Maharashtra. Additionally, the Housing Department, Maharashtra also released the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, rates of interest and disclosures on websites) Rules, 2017 dated April 20, 2017, which came into effect on May 1, 2017 (‘Rules’). The Rules inter alia set out (i) information required to be furnished by promoters for registration of a real estate project, (ii) parameters for ascertaining land cost; and (iii) the model form of the agreement for sale to be entered into with the allottees. Further, in the case of a termination or cancellation of the registration of a project (i.e. either by MahaRERA or by the association of allottees) the authority is required to take measures to protect the interests of lenders having a mortgage or investors, as disclosed by the promoter and the Rules require that an opportunity be given to such party.
Guidelines for Issuance of Debt Securities by REITs and INVITs
SEBI had recently permitted Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’) to issue debt securities by amending the SEBI (REIT) Regulations, 2014 (‘REIT Regulations’) and the SEBI (INVIT) Regulations, 2014 (‘InvIT Regulations’). SEBI has issued guidelines for issuance of such debt securities by REITs and InvITs by its circular dated April 13, 2018 (‘Circular’) which provides that REITs and InvITs issuing debt securities must follow the provisions of SEBI (Issue and Listing of Debt Securities Regulations), 2008 (‘ILDS Regulations’) in the following manner:
i. Restriction in Regulation 4(5) of the ILDS Regulations on issue of debt securities for providing loan to or acquisition of shares of any person, who is party of the same group or under the same management and the requirement for creation of a debenture redemption reserve, will not apply to issue of debt securities by REITs and InvITs;
ii. Compliances to be made under Companies Act in terms of the ILDS Regulations, will not apply to REITs / InvITs for issuance of debt securities, unless specifically provided in the Circular.
For the issuance of debt securities, REITs / InvITs will appoint one or more SEBI registered debenture trustees, other than the trustee to the REIT / InvIT issuing such debt securities. Further, the securities will be secured by the creation of a charge on the assets of the REIT / InvIT or holding company or SPV, having a value which is sufficient for the repayment of the amount of such debt securities and interest thereon. The Circular also provided for certain additional disclosure and compliance requirements.
Establishment of an Appellate Tribunal for the State of Maharashtra under RERA
The Real Estate (Regulation and Development) Act, 2016 (‘RERA’) provides for appeals to be preferred to the appellate tribunals of the respective States against the orders passed by the regulatory authorities of such States. For the State of Maharashtra, the Maharashtra Revenue Tribunal (“MahaRT”) was designated as a temporary appellate tribunal for hearing appeals from the orders passed by the Maharashtra Real Estate Regulatory Authority (‘MahaRERA’) till the constitution of the appellate tribunal as required under RERA. The Government of Maharashtra has, on May 8, 2018 constituted the Maharashtra Real Estate Appellate Tribunal (‘Appellate Tribunal’), as the permanent appellate tribunal under RERA for the State of Maharashtra, to hear appeals from the orders passed by MahaRERA. All matters pending with MahaRT now stand transferred to the Appellate Tribunal.
CCI Dismisses Allegations of Anticompetitive Conduct and Abuse of Dominance Against UP Housing & Development Board
On August 14, 2018, CCI dismissed information filed by Mr. DK Srivastava (‘Informant’) against UP Housing & Development Board (‘UPHDB’). It was alleged that UPHDB arbitrarily charged higher prices for the sale of Lower Income Group (‘LIG’) residential flats after allotment and threatened to cancel allotment for failure to pay. Basis such threats, the Informant alleged that he was required to pay Goods and Services Tax (‘GST’) and restoration costs. Moreover, UPHDB had failed to deliver possession of the flat per the terms of the brochure. This, it was alleged, amounted to an abuse of dominance under Section 4 of the Act.
In order to define the relevant market, CCI noted that residential flat and commercial units were different in terms of end use and intent for which they are bought. CCI also distinguished between residential plots and residential flats in terms of end use. CCI observed that residential plots are purchased with intent to build and provide flexibility to purchasers with respect to floor plans, number of floors and space utilization. On the other hand, this kind of discretion is missing when it comes to purchasing a residential flat. In view of the above, CCI defined the relevant market as the market for “provision of services of development and sale of residential flat”.
While defining the geographic market, CCI noted that the consumer purchasing a residential flat in Ghaziabad may not prefer purchasing a residential flat anywhere else due to several factors such as price, availability of transport facilities, proximity to the places of frequent commute and locational preferences. Further, it was observed that conditions for demand and supply may change between Noida and Delhi and thus, may not be considered substitutable. However, as CCI found conditions within Ghaziabad to be homogenous, it identified the relevant geographic market as Ghaziabad. Accordingly, the relevant market was defined as the “market for provision of services of development and sale of residential flats in Ghaziabad”.
To determine whether UPHDB was dominant in the identified relevant market, CCI relied on its decision in Shri Masood Raza and Uttar Pradesh Avas Avam Vikas Parishadi. In this decision, CCI recognized that while the Ghaziabad Development Authority (‘GDA’) also developed residential flats of varying size in Ghaziabad and allotted them to the public under various schemes; it had the exclusive power to undertake development work in Ghaziabad. It also noted that GDA was larger than UPHBD in size. Noting the presence of several large private developers of residential flats in Ghaziabad, CCI observed that consumers may not be said to be dependent on UPHDB alone for the provision of real estate services.
Absent dominance, CCI dismissed allegations pertaining abuse of dominance against UPHDB.
 Case No. 09 of 2018
CCI Grants Interim Relief to Confederation of Real Estate Developers Association of India – NCR Against HUDA’s Conduct
In its order dated August 1, 2018, CCI issued an order under Section 33 of the Act, granting interim relief to the Confederation of Real Estate Developers Association of India – NCR (‘Developers’) against the conduct of Department of Town and Country Planning (‘DTCP’) and Haryana Urban Development Authority (‘HUDA’) (collectively, ‘Respondents’).
The primary allegation was with respect to compelling Developers to pay External Development Charges (‘EDC’) and Infrastructure Development Charges (‘IDC’). The Developers requested CCI to restrain the Respondents from invoking the bank guarantee against them and sought a cease and desist order against the Respondents from taking any coercive actions including compelling the Developers to pay EDC or IDC or any increase or any penalty payment until the disposal of the case.
While considering the application for interim relief, CCI relied on the factors laid down in M. Gurudas and Others v. Rasaranjan and Others i.e. (i) existence of prima facie case; (ii) balance of convenience and (iii) irreparable injury.
To determine the existence of the first element of prima facie case, CCI referred to its prima facie order issued under Section 26(1) of the Act, directing the DG to conduct an investigation. However, citing the SC decision in Competition Commission of India v. Steel Authority of India Limited (‘SAIL Case’) that required CCI to apply a higher standard for establishing a prima facie case than the one required under Section 26(1) of the Act, CCI considered the Respondents’ conduct beyond its prima facie order under Section 26(1) of the Act. In doing so, CCI noted that despite collecting EDC from Developers, the Respondents had failed to undertake external development services (‘EDS’) or infrastructure work. While the Respondents contended that other government agencies had indeed undertaken some infrastructure works, CCI noted that they did not cover basic facilities like water supply, sewerage, drains, roads, electrical works, etc. without which the flats would be uninhabitable.
CCI also noted that a policy was issued in 2010 that allowed relaxations with respect to collecting EDC up until the time the rates for medium and low potential zones were finalized and also, the Developers were exempted from payment of any EDC when it wasn’t charged to the allottees. However, no such benefit or a similar policy was in place for high potential zone. Additionally, 60% of the collected IDC was already transferred and utilized for refund purposes for other projects by HUDA. In view of the above fact, the CCI noted that the alleged anticompetitive conduct has been continued by the Respondents and there was a prima facie case to intervene.
On the following two elements of balance of convenience and irreparable injury, CCI noted that to obtain a license to set up a colony in Sohna, a Letter of Intent (‘LOI’) and LC-IV (Agreement by owner of land intending to set up a colony) (‘Agreement’) between the Developers and DTCP had to be executed. The LOI and the Agreement required Developers to pay the EDC either within 30 days of grant of license or in 8 to 10 six monthly installments. The Agreement additionally, contemplated annual interest in case of delayed EDC payment by Developers. CCI also noted that licenses were to be renewed every five years and renewal fee deposited each time, even if the reason for non completion of the project was limited to EDS.
Citing Dalpat Kumar and Anr. v. Prahlad Singh and Ors., CCI held that in order for the third element of ‘irreparable injury’ to be satisfied, it needed to be reasonably satisfied that absent its interference, Developers and consumers would suffer irreparable loss. To this extent, CCI noted that without interim relief, Developers, and consequently consumers, would suffer significant damages for which they were unlikely to be appropriately compensated. CCI also noted that if interim relief is not granted, Developers may lose their licenses and be forced to pay penal interest even when the Respondents are at fault. Such actions will cause irretrievable harm to Developers.
On this basis, CCI noted that the balance of convenience lay in favour of the Developers and absent intervention, irreparable harm would be caused to Developers and consumers alike. In order to preserve status quo, CCI noted that it was important to intervene and restrain the Respondents from taking coercive steps with respect to EDC installment payments. CCI, in its order, also took cognizance of the fact that EDC was imperative in order carry out EDS, but as Respondents had failed to take requisite action, CCI granted interim relief to Developers. Specifically, CCI directed that, where Developers had already paid 10% of EDC and deposited 25% of EDC in the form of bank guarantee, DTCP will not coerce the Developers for remaining installments or take coercive measures with respect to licenses granted to the Developers. Expressly CCI has directed that the status quo be maintained until final disposal of the matter.
 AIR 2006 SC 3275
 (1992)1 SCC 719
Settled Possession For Possessory Title
Although, the proposition remains that “possession is nine-tenth of the law”, but the “settled possession” is must to establish possessory title rights in an immovable property under Indian law. Despite several judgements on the law on adverse possession, the possessory title claims were more often based on “land grabbing”. The Hon’ble Supreme Court of India on January 29, 2019, in the matter of Poona Ram vs. Moti Ram & Others, while explaining the law on possession and ownership of immovable property, held that “a person who asserts possessory title over a particular property will have to show that he is under settled or established possession of the said property. But merely stray or intermittent acts of trespass do not give such a right against the true owner.”
Just to get to some basic facts of the case. In Poona Ram vs. Moti Ram & Others, Moti Ram had filed a suit in which he claimed possessory title which seemed merely based on his prior possession for a number of years, however he did not have any documents supporting his possession. On the contrary, Poona Ram submitted title deeds to the suit property claiming better title to the suit property. The Trial court decreed the suit and the First Appellate court reversed the findings of the Trial court holding that Poona Ram had proved Poona Ram’s title and possession over the suit property. The High Court of Rajasthan (“High Court”) however, restored the Trial court’s order and held that since Poona Ram was not able to establish (i) a better title, or dispossession of Moti Ram in accordance with law; or (ii) Moti Ram not being in possession of the suit property, Moti Ram had the possessory title to the suit property basis his long term possession. Accordingly, an appeal was filed by Poona Ram in the Apex Court.
The essential element laid out by the Supreme Court in Poona Ram vs. Moti Ram was that a person who asserts possessory title over a particular property will have to show that he is under settled or established possession of the said property. In the said appeal, the Supreme Court bench comprising of Justice NV Ramana and Justice MM Shantanagoudar examined whether Moti Ram had better title over the suit property and whether he was in settled possession of the property, which required dispossession in accordance with law.
The Apex Court, while deciding the said matter, elaborated on the meaning of the term “settled possession” and held that, “settled possession means such possession over the property which has existed for a sufficiently long period of time, and has been acquiesced to by the true owner. A casual act of possession does not have the effect of interrupting the possession of the rightful owner.” The Apex Court further laid down the essential elements of settled possession and held that settled possession must be (i) effective; (ii) undisturbed; and (iii) to the knowledge of the owner and, or without any attempt at concealment by the trespasser.
The law provides for the difference between a possessory title and a proprietary title. Article 65 to Schedule I of the Limitation Act, 1963 (“Limitation Act”), prescribes a timeline of 12 years, within which an aggrieved person may file a suit for recovery of possession of immovable property or any interest therein based on proprietary title (based on title documents). This timeline is applicable from the point of time “when the possession of the defendants becomes adverse to the plaintiff”. Further, Article 64 to Schedule I of the Limitation Act, prescribes a timeline of 12 years within which an aggrieved person may file a suit for recovery of possession of immovable property or any interest therein based on possessory title (based on possession). This timeline is applicable from the date of dispossession of the aggrieved person from the suit property. The Limitation Act further lays down that if a person fails to file suit for recovery of possession, within the aforesaid period of limitation, his right to recover the possession of that property also extinguishes.
The Apex Court while reversing the order of the High Court held that the conclusion arrived at by the High Court and the reasons assigned for the same are not correct as there is absolutely no material on record to show possessory title of Moti Ram in the suit property. The Apex Court further held that in order to claim possessory title, Moti Ram was required to show that he had settled possession over the suit property and that he had better title to the suit property than any other person. Accordingly, since there was no documentary proof that Moti Ram was in settled possession of the suit property, the appeal was dismissed and the High Court order was reversed.
In light of the above, the following are the key take-aways on a possessory title claim:
(i) the claimant must prove his own case and show that he has better title than any other person;
(ii) better title to the property must be proved by passing the test of “settled or established possession” that is by showing an intention to possess and subsequent possession of the subject property for a sufficiently period of time (under the law), with the acquiescence and knowledge of the owner of the subject property;
(iii) such “settled possession” must be effective and undisturbed, and without any attempt at concealment by a trespasser; and
(iv) the claimant cannot succeed on the weakness of the case of the opposite party.
This is certainly a very welcoming judgement and will help reducing frivolous possessory title claims.
Hardeep Sachdeva, Senior Partner
Nitin Saluja, Associate
Guidelines for the Public Issue of Units of InvITs and REITs
SEBI has introduced amendments to the guidelines for public issue of units of Infrastructure Investment Trusts and Real Estate Investment Trusts (together, ‘Investment Vehicles’) in order to further rationalise and ease the process of public issue of units of Investment Vehicles. Key highlights amongst them are:
i. the definition of ‘institutional investors’ has been updated to refer to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;
ii. Mutual funds, alternative investment funds (‘AIFs’), FPIs other than category III FPIs sponsored by associate entities of the merchant bankers, insurance companies promoted by, and pension funds of, associate entities of the merchant bankers have been permitted to invest under the category of anchor investors;
iii. Bidding period may be extended on account of force majeure, banking strike or similar circumstances, subject to total bidding period not exceeding 30 days;
iv. Time period for announcement of the floor price or the price band by the investment manager has been reduced from five days to two days prior to the opening of the bid (in case of initial public offer); and
Investment Vehicles are required to accept bids using only the application supported by blocked amount (‘ASBA’) and consequent changes in bidding process have been made.
SEBI Informal Guidance on Investment in Corporate Debt by FPIs
SEBI has issued an interpretative, non-binding letter dated November 28, 2018, to Genpact India Private Limited (‘Genpact’) under the SEBI (Informal Guidance) Scheme, 2003 providing guidance on SEBI (FPI) Regulations, 2014 (‘FPI Regulations’), RBI circulars dated November 17, 2016 and April 17, 2018 and SEBI circular dated February 28, 2017 on Investment by FPIs in debt (collectively the ‘Circulars’).
Genpact had issued certain rated, unsecured, redeemable and non-convertible debentures (‘NCDs’) on a private placement basis to a FPI registered with SEBI (‘FPI Entity’). The NCDs issued had a maturity period of more than three years and were utilized to meet funding requirements for day-to-day operations, downstream investments and general corporate purposes.
Prior to the Circulars, except for infrastructure companies, FPIs were allowed to invest in listed NCDs only. Pursuant to the Circulars, FPIs had been permitted to invest in unlisted corporate debt, subject to a minimum residual maturity of more than one year, and an end-use restriction on investment in real estate business, capital market and purchase of land.
A clarification was sought on whether Genpact is permitted to delist its existing listed NCDs subscribed to by the FPI Entity prior to the date of the Circulars coming into effect and utilize the proceeds of such listed NCDs in making downstream investments on private arrangement basis. In this regard, SEBI was of the view that:
i. There was no violation to the end-use restriction rules for the proceeds raised from the issuance of NCDs as Genpact’s nature of business was in accordance with the said rules; and
ii. On de-listing of NCDs, SEBI was of the view that it depends on the terms of the offer document/private placement memorandum issued by Genpact to the FPI Entity on whether the NCDs are required to be necessarily listed or ‘may be’ listed. If as per the offer document/private placement memorandum, the NCDs have to necessarily be listed, then they should be held till maturity and subsequently de-list in accordance with the procedure set out in Regulation 59 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015.
Maharashtra Land Revenue (Conversion of Occupancy Class-II and Leasehold lands into Occupancy Class-I) Rules, 2019
The Government of Maharashtra, by its notification dated March 8, 2019, notified the Maharashtra Land Revenue (Conversion of Occupancy Class-II and Leasehold lands into Occupancy Class-I) Rules, 2019 (‘Conversion Rules’). The Conversion Rules apply to the lands granted or allowed (generally by the State Government through the Collector) to be used for agricultural, residential, commercial or industrial purpose on Occupancy Class II basis (i.e., lands which are not freely transferable and require prior permission of the competent authority for any transfers) or on a leasehold basis.
The Conversion Rules permit the conversion of the abovementioned lands to Occupant Class I (i.e., lands that are freely transferable and are not subjected to any permission of the competent authority) on an application to the District Collector and on the payment of the prescribed premium, provided that the violations or breaches (if any) of the terms or conditions of the grant of the land have been rectified. The premium prescribed under the Conversion Rules varies from 15% – 75% of the value of the land as per the applicable rate of assessment, depending on the category of holding. Further, the Conversion Rules provide for an increase in the premium, in the event the application for the conversion is made after the expiry of three years from the date of publication of the Conversion Rules. The Conversion Rules also provide relief to the extent that any amount that is already paid to the Government towards change of use or towards conversion of leasehold rights into Occupancy Class II as per the prevailing policy of the Government will be adjusted towards the amount payable for conversion to Occupant Class I.
India – Real Estate 2019
1. Legal system
How would you explain your jurisdiction’s legal system to an investor?
The Indian legal system bears the influence of the English common law system, which is reliant on the value of binding case law precedents, rulings on equity and the principles of natural justice. Despite the influence of the English common law system, the Indian legal system has also incorporated elements of civil law, such as certain investigative powers of the judiciary relating to the institution of commissions of enquiry or questioning of witnesses.
The judicial hierarchy flows upwards from the district or lower courts in every district or city to the High Courts in the states, all subject to the supervision and judgment of the apex court of India, the Supreme Court. With respect to disputes pertaining to transfer of immovable property, the courts’ powers extend to granting injunctions in accordance with the Civil Procedure Code 1908 (CPC) and ordering performance of contracts under the Specific Relief Act 1963 (SRA).
Broadly, the key legislation governing real estate in India includes the following:
- Transfer of Property Act 1882 (TPA);
- Indian Contract Act 1872 (Contract Act);
- Real Estate (Regulation and Development) Act 2016 (RERA);
- Registration Act 1908 (Registration Act);
- Indian Stamp Act 1899 (Stamp Act); and
- Indian Easements Act 1882 (Easements Act).
In addition, various other pieces of legislation, including the CPC, SRA and a gamut of state-specific laws and municipal laws, deal with development and zoning norms, prescription of the conditions for obtaining development licences, completion certificates, and occupation certificates in relation to such real estate projects.
Foreign investment in the construction and development sector is additionally regulated by the Foreign Exchange Management Act 1999 (FEMA) and the rules, notifications and circulars issued thereunder and those issued by India’s central bank, the Reserve Bank of India (RBI).
The Contract Act and the TPA permit oral agreements for transfer of property. However, the TPA also provides that any sale of immovable property above 100 Indian rupees requires a written agreement to be executed and registered (under the Registration Act).
Apart from the above-mentioned state-specific laws, a central law – RERA – has been enacted for the purpose of protecting consumer interests in the real estate sector; regulating the construction, development, sale, advertising and marketing of real estate projects in a time-bound, transparent and efficient manner; and creating a separate real estate regulatory authority, with state-specific and union territory-specific jurisdiction, for adjudication of disputes between consumers and promoters of real estate projects.
2. Land records
Does your jurisdiction have a system for registration or recording of ownership, leasehold and security interests in real estate? Must interests be registered or recorded?
In India, all real estate transactions involving the sale, conveyance or lease of immovable property and land require registration of the definitive agreements or deeds (such as the sale deed or conveyance deed and the lease deed), as the case may be. In a real estate transaction, an agreement to sell, a memorandum of understanding, or a letter of intent (which provides for execution of a definitive agreement or deed at a later date) does not ordinarily require registration.
The law on registration of documents in India is contained in the Registration Act, which provides for compulsory registration of certain documents, while there are other situations where registration of documents is optional.
Registration of the following is mandatory:
- instruments of gifts of property;
- leases of immovable property from year to year;
- non-testamentary instruments, such as deeds of exchange;
- documents assigning rents;
- sales of immovable property; and
- trust deeds evidencing interest in immovable property with a value of 100 rupees or more.
Registration of the following is optional:
- leases of immovable property not exceeding one year; and
- instruments evidencing interest in immovable property with a value of less than 100 rupees.
If a document that is required to be registered is not registered, it cannot affect any immovable property, confer any power to adopt or be received as evidence of any transaction affecting such property. A registered instrument over the same property will rank above an unregistered instrument covering the same property.
3. Registration and recording
What are the legal requirements for registration or recording conveyances, leases and real estate security interests?
A document (such as an agreement to sell, conveyance or lease) required to be registered under Indian law needs to be executed before a registrar (a government official, who is appointed under the Registration Act) at district level or sub-registrar at sub-district level, and the parties have to appear before such registrar or sub-registrar for authentication and registration of the document.
Apart from the payment of stamp duty as per the stamp duty legislation, the registration of a document also involves payment of registration charges on the instrument recording the transfer of interest, the rates of which may vary from state to state. In some states, there are additional state-specific charges imposed (eg, municipal charges or taxes, transfer charges, etc), payable to the concerned municipal authorities, development authorities, corporations, etc. Payment of stamp duty, if payable on any instrument or document, is mandatory, notwithstanding registration of such instrument.
As per the Stamp Act, in the absence of any agreement to the contrary, with a sale or conveyance deed the purchaser is required to pay stamp duty, and with a lease deed the lessee is liable to pay stamp duty.
4. Foreign owners and tenants
What are the requirements for non-resident entities and individuals to own or lease real estate in your jurisdiction? What other factors should a foreign investor take into account in considering an investment in your jurisdiction?
As a rule of thumb, foreign companies or foreign citizens are not allowed to directly buy or own real estate in India. A foreign company or foreign citizen may own shares in Indian companies, which may buy or own real estate or carry out construction development of real estate projects in India. The ability of such Indian companies to buy or own will be subject to the business operations of such an Indian company and the proposed usage of the real estate by such an Indian company. An Indian company with a foreign shareholding can own or take on lease any real estate for its business and operations.
The exceptions to the rule of direct ownership or purchase of real estate by a foreign company or a foreign citizen are very limited. In accordance with the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000, a foreign company having its branch office or other place of business in India (and which has been set up in accordance with the regulations framed under FEMA) may acquire immovable property for carrying on its business operations in India. For this purpose the foreign company is required to file certain declarations with the RBI as prescribed.
Further, non-resident Indians and persons of Indian origin are entitled to purchase and transfer immovable property (excluding agricultural land) and make payment for this with funds received in India through normal banking channels by way of inward remittance from any place outside India or by debit to an NRE/FCNR (B)/NRO account.
5. Exchange control
If a non-resident invests in a property in your jurisdiction, are there exchange control issues?
A foreign company or individual can invest in the capital of an Indian company engaged in construction, development of townships, housing and built-up infrastructure. There used to be certain ‘project area’ and ‘minimum capitalisation’ requirements for foreign direct investment (FDI) in the construction and development sector, but these requirements have been done away with. Today, 100 per cent FDI under the automatic route is also permitted in completed projects for the operation and management of townships, malls or shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and control of the investee company from residents to non-residents is also permitted.
However, as per the FDI policy, no FDI can be undertaken in an Indian company engaged in the construction of farmhouses, trading in transferable development rights, or ‘real estate business’ (ie, the business of dealing in land and immovable property with a view to earning profit therefrom). The term ‘real estate business’ does not include development of the following:
- construction of residential or commercial premises;
- roads or bridges;
- educational institutions;
- recreational facilities;
- city and regional level infrastructure; and
- townships or earning of rent or income on the lease of a property, not amounting to transfer.
With respect to repatriation, the FDI policy in relation to the construction and development sector states that the investor will be permitted to exit on completion of the project or after development of trunk infrastructure ie, roads, water supply, street lighting, drainage and sewerage). Further, as per the FDI policy, the investor is permitted to exit and repatriate the foreign investment before completion of the project, provided that a lock-in period of three years, calculated with reference to each tranche of foreign investment, has been completed. Further, the transfer of a stake by one non-resident to another non-resident without repatriation of the investment is allowed and is subject neither to any lock- in period nor to any government approval.
It is pertinent to note that the exit restriction based on the progress of the project and the three-year lock-in period are not applicable for investments in:
- hotels and tourist resorts;
- special economic zones;
- educational institutions;
- old age homes; and
- investments by non-resident Indians.
6. Legal liability
What types of liability does an owner or tenant of, or a lender on, real estate face? Is there a standard of strict liability and can there be liability to subsequent owners and tenants including foreclosing lenders? What about tort liability?
The owner of immovable property typically bears the burden of payment of statutory taxes and levies under local state laws (eg, property tax and other municipal taxes or charges). However, with respect to commercial properties granted on lease or licence, the taxes may be contractually passed on to the lessee or licensee.
The rights and liabilities of buyers and sellers of immovable property are prescribed under the TPA. Customarily, while the seller is responsible for payment of statutory dues until the date of transfer of immovable property, there are provisions in law that make the buyer or its lessee liable for non-payment of statutory dues by the seller prior to the effective date of transfer. Therefore, the need to conduct due diligence prior to acquisition of immovable property arises.
In addition, the TPA also prescribes the rights and liabilities of mortgagors and mortgagees in relation to immovable property: mortgagors who are in possession of the mortgaged property are required to pay public charges during the subsistence of the mortgage; and mortgagees who are in possession of the mortgaged property are required to manage the mortgaged property, collect rents and profits accruing thereto, and pay all public charges in relation to the same.
Under RERA, certain liabilities have been imposed on promoters of real estate projects and consumers. Promoters are required to disclose pertinent information – such as sanctioned plans and schedule for completion of the real estate project – to the consumer at the time of issuance of allotment letters. Promoters are also liable, among other things, in relation to:
obligations, functions and responsibilities under RERA and rules made thereunder, as per the sale agreement executed with consumers, until the conveyance of the apartment, plot or building, as the case may be;structural defects in the apartment, building or plot for a period of five years from the date of handover of possession;regulatory compliances such as procurement of occupancy certificate or completion certificate, and lease certificate; andmaintenance of essential services and payment of all outgoings in relation to a real estate project until the time of handover of the real estate project to the association of allottees.Consumers are primarily liable for making payments, including their share of statutory dues and charges, in accordance with the sale agreement executed with the promoter of a real estate project, and paying interest in case of a default in relation to such payments.
7. Protection against liability
How can owners protect themselves from liability and what types of insurance can they obtain?
At the outset, adequate due diligence, conducted prior to acquisition of the property, prevents the passage of undisclosed risks and liabilities to the buyer. Adequate indemnity obligations should be obtained from the transferor of the property in this regard.
In India, insurance policies can be obtained for general as well as specific perils (eg, fire, flood, earthquake, lightning, etc). Coverage may vary from policy to policy and from insurance provider to insurance provider.
Public liability insurance may also be obtained by owners for others who may be affected by any accident at the property, or in connection thereof.
However, there can still be third-party claims for environmental hazards resulting from the property or the usage thereof, which may not be covered under insurance, providing sufficient scope for tortious claims and claims for damages by third parties and public interest litigation by public or environment-spirited citizens.
8. Choice of law
How is the governing law of a transaction involving properties in two jurisdictions chosen? What are the conflict of laws rules in your jurisdiction? Are contractual choice of law provisions enforceable?
Agreements and contracts pertaining to immovable property are principally subject to the local courts within whose jurisdiction the property is situated.
However, the choice of law and dispute resolution fora for investment agreements under which foreign investment or FDI is made into construction development companies are usually international fora such as the International Chamber of Commerce, the Singapore International Arbitration Centre, the London Court of International Arbitration etc, in addition to arbitrations in India, whether ad hoc or institutional.
Which courts or other tribunals have subject-matter jurisdiction over real estate disputes? Which parties must be joined to a claim before it can proceed? What is required for out-of-jurisdiction service? Must a party be qualified to do business in your jurisdiction to enforce remedies in your jurisdiction?
The CPC distinguishes between subject matter, territorial and pecuniary jurisdiction of civil courts. Accordingly, a court within whose limits the subject matter of a dispute is situated will have jurisdiction. In a situation where the immovable property is situated within the jurisdiction of different courts, a suit can be instituted in any such civil court. However, the CPC also acknowledges that the jurisdiction of civil courts can be expressly, by way of statute, or impliedly barred. Thus other fora, such as revenue courts, which have jurisdiction to entertain suits relating to rent, revenue or profits of land used for agricultural purposes under local land laws, can also adjudicate upon certain real estate-related disputes.
With regard to immovable property, the CPC provides that suits can be instituted for the purpose of:
- compensation for wrongs; and
- the determination of any other right or interest in immovable property.
Persons who are adjudged to be necessary parties can institute a suit with respect to immovable property. Furthermore, a court can join any other person as a party to such suit for immovable property if the court is of the opinion that said person’s presence is necessary for the complete adjudication of the dispute.
Additionally, RERA provides that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the authority or the adjudicating officer or the appellate tribunal is empowered by or under RERA to determine. It also provides that no injunctions shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under RERA.
10. Commercial versus residential property
How do the laws in your jurisdiction regarding real estate ownership, tenancy and financing, or the enforcement of those interests in real estate, differ between commercial and residential properties?
The distinction between commercial and residential property does show in the master plan issued by the municipal authority of a city, in which separate zones are earmarked for residential and commercial use. Alternatively, these distinctions are made in development approvals or licences obtained by a developer from the relevant authorities.
Similarly, the building regulations and by-laws of various cities and states distinguish between residential, industrial, commercial, institutional properties, etc, and provide for different procedures with respect to each type of property. Further, varying rates of taxes and circle rates (the government-notified value of a property) are provided for residential and commercial property.
11. Planning and land use
How does your jurisdiction control or limit development, construction, or use of real estate or protect existing structures? Is there a planning process or zoning regime in place for real estate?
The development and construction of real estate are governed by the development regulations, building regulations and by-laws, and the respective master plan of a city or area of a state. A state government, usually, from time to time enacts and enhances its development plans for five or 10 years or for longer periods.
Appropriate development permission or planning permission is provided by state-appointed authorities within the local laws and development regulations. Local municipal authorities in urban areas are empowered to enforce compliance, under applicable local laws, for various aspects of development and construction, including:
- permitted height of buildings;
- floor area ratio or floor space index, which provides the basis for determining the maximum permissible floor area construction;
- water requirements; and
- general building requirements (eg, distance from ancient monuments, eco-sensitive zones, etc).
Construction cannot be undertaken until necessary approvals, such as building plans for the proposed construction prepared by a qualified architect in compliance with applicable laws and applicable environmental consents and approvals, are sanctioned by the authorities concerned.
12. Government appropriation of real estate
Does your jurisdiction have a legal regime for compulsory purchase or condemnation of real estate? Do owners, tenants and lenders receive compensation for a compulsory appropriation?
The Land Acquisition Act 1894 (Erstwhile LA Act) has been the paramount legislation governing acquisition of private property by the government. Provisions for acquisition of land are also found in other legislation, including:
- the Indian Forests Act 1927;
- the Metro Railway (Construction of Works) Act 1978;
- the National Highways Act 1956;
- the Petroleum and Minerals, Pipelines (Acquisition of Right of User in Land) Act 1962; and
- state-specific laws (eg, the Karnataka Industrial Areas Develop-ment Act 1966).
The Erstwhile LA Act was replaced by the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013 (LA Act), which took effect on 1 January 2014. Under the LA Act, the compensation to be made to landowners has been increased to four times the market value of the land (in rural areas) and twice the market value of the land (in urban areas).
The LA Act provides a detailed mechanism for the calculation of the amount of compensation and the factors to be considered while arriving at such amount. The LA Act does not provide any scope for modification of such compensation by way of contractual arrangements. In addition, under the LA Act, acquisition follows a far more detailed process that includes conducting a social impact study of the proposed acquisition, planning and taking steps for rehabilitation and resettlement of landowners, seeking the consent of landowners, etc.
Are there any circumstances when real estate can be forfeited to or seized by the government for illegal activities or for any other legal reason without compensation?
Long-term leases and conveyances of the acquired lands granted by the government for a specified purpose allow for revocation of the lease or conveyance and seizure of the property by the government in the event of default by the lessee or transferee on payment of rent, consideration, municipal charges or taxes; use of the property for any purpose other than for which it is leased, conveyed or acquired or for any illegal or immoral purpose. However, such rights are not usually exercised without providing a cure period to the lessee or transferee to cure the said default. The length of such cure period depends on the terms of the lease or conveyance, and may differ on a case-by-case basis.Getting the Deal Through
Other cases of forfeiture of property revolve around actions taken by the civil and criminal courts. The CPC empowers the courts to seize and attach property of a judgment debtor if he or she fails to satisfy a decree passed by a court. Similarly, the Code of Criminal Procedure 1973 authorises attachment of the property of an accused that fails to appear before the court despite service of summons to appear.
Non-payment of statutory taxes and bankruptcy could also lead to attachment of property by the competent government authority or court of law.
14. Bankruptcy and insolvency
Briefly describe the bankruptcy and insolvency system in your jurisdiction.
The CPC provides that in the case of immovable property, attachment can be made by an order prohibiting the judgment debtor from transferring or charging such immovable property, and a prohibition on any person from taking any benefit from such transfer or charge (Order 21, Rule 54). However, the CPC also provides that immovable property in the form of houses or buildings and land appurtenant thereto on which an agriculturist, labourer or domestic servant is residing cannot be attached (section 60).
The Insolvency and Bankruptcy Code 2016 (IBC) provides for the codification of the existing framework of insolvency and bankruptcy laws in India and among other things streamlines the processes for insolvency resolution and liquidation of corporate persons, and insolvency resolution and bankruptcy for individuals and partnership firms. The IBC’s enactment brings various benefits, such as enabling any financial creditor, operational creditor or the corporate debtor itself to initiate an insolvency resolution process upon the event of a default by the corporate debtor, to be resolved within a fixed period of 180 days from the submission of an application for the initiation of the insolvency resolution process.
15. Investment entities
What legal forms can investment entities take in your jurisdiction? Which entities are not required to pay tax for transactions that pass through them (pass-through entities) and what entities best shield ultimate owners from liability?
As mentioned in questions 4 and 5, under the FDI policy, investment can be made by way of subscription or purchase of capital-linked instruments of Indian companies engaged in the real estate development and construction sector, or subscription or purchase of units issued by a real estate investment trust (REIT) or alternative investment fund established and registered in accordance with the extant regulations issued by the Securities and Exchange Board of India (SEBI).
Investment by non-resident entities in the real estate business is prohibited (ie, trading in or dealing in land, property, etc). However, non-resident entities can be incorporated as companies, foreign portfolio investors (to be able to invest in listed securities including listed debt securities such as non-convertible debentures or listed corporate bonds), or provide external commercial borrowing to Indian companies if such non-resident entities meet certain eligibility criteria.
16. Foreign investors
What forms of entity do foreign investors customarily use in your jurisdiction?
The most prevalent entity formation for foreign investment is the private limited company.
Foreign investors seeking to invest through subscription of non-convertible debentures issued by an Indian company are required to obtain registration from SEBI as Category I, II or III foreign portfolio investors (as the case maybe) in accordance with the SEBI (Foreign Portfolio Investors) Regulations 2014, and have to comply with the restrictions and conditions prescribed therein.
17. Organisational formalities
What are the organisational formalities for creating and maintaining the above entities? What requirements does your jurisdiction impose on a foreign entity? Does failure to comply incur monetary or other penalties? What are the tax consequences for a foreign investor in the use of any particular type of entity, and which type is most advantageous?
As mentioned above, the most viable form of investment is FDI into companies incorporated in India. Where the foreign investor proposes to set up a 100 per cent-owned Indian company, incorporation formalities under the Companies Act will need to be complied with and additional reporting requirements of the RBI will need to be made. Where a foreign investor is investing in an existing company or acquiring shares from an existing shareholder, the RBI will need to be informed by way of filing of the prescribed online forms.
Foreign investors registered as foreign portfolio investors under the SEBI (Foreign Portfolio Investor) Regulations 2014 are among other things required to:
- ensure that they comply with the conditions imposed by SEBI at the time of grant of registration;
- comply with the investment conditions specified in the SEBI (Foreign Portfolio Investor) Regulations 2014; and
- inform SEBI in case of any material change in information submitted with SEBI at the time of registration.
Acquisitions and leases
18. Ownership and occupancy
Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.
Indian law recognises multiple classes of interests in immovable property, ranging from a mere easement right created by prescription or by operation of custom to freehold rights in the property conveyed through a registered sale or conveyance deed. Security interests in the nature of a mortgage or a charge may also be created to secure the payment of a debt or to secure the performance of certain obligations.
One of the rights that can be created is a licence right. A licence is a mere right to access or use immovable property for a limited purpose during limited hours. Under a typical leave-and-licence agreement, the licensor retains constructive possession of the property while actual possession may be transferred for a limited purpose and duration.
The next set of rights are those created under a lease registered with the sub-registrar having jurisdiction over the area in which the property is situated, through which actual physical possession of the property is transferred to the lessee. Registration of leases beyond a period of 12 months is compulsory under the Registration Act. Further, leases may also be executed for longer periods (eg, in perpetuity or for 99 years) involving the grant of leasehold rights in a property, mostly by the government in consideration of a lump-sum premium and payment of yearly rent. The rights created under such a lease are long-term leasehold rights (but not freehold).
While a registered lease operates as an effective transfer of leasehold rights in the property against the world at large, transferring freehold rights in a property under a conveyance or sale deed, without reserving any rights thereunder, may create the most marketable and freely transferable interest. Government conveyances usually, however, do reserve certain rights for the government – for instance, the rights to mines and minerals in the land underneath the property, etc, and usage of the property as per the development and zoning norms.
As far as attendant benefits and burdens on or attached to immovable property such as easements are concerned, such interests can be passed on to the transferee if held by the transferor at the time of such transfer. For example, the easements, rents and profits arising out of the transferred land will vest with the transferee in terms of the TPA and the Easements Act. Practically, this means that if an individual were to acquire interest in an immovable property to which a right of way is annexed, he or she would be entitled to enjoy the right of way along with the property for the duration of such transfer.
Is it customary in your jurisdiction to execute a form of non-binding agreement before the execution of a binding contract of sale? Will the courts in your jurisdiction enforce a non-binding agreement or will the courts confirm that a non-binding agreement is not a binding contract? Is it customary in your jurisdiction to negotiate and agree on a term sheet rather than a letter of intent? Is it customary to take the property off the market while the negotiation of a contract is ongoing?
At the option of the parties, depending on the underlying intent of the transaction, non-binding agreements such as a term sheet or memorandum of understanding (MOU) or letter of intent (LOI) may be executed between the parties prior to execution of the definitive agreement, briefly detailing the commercial understanding of the prospective transaction and the rights and obligations of parties in respect thereof. Customarily, these documents are executed as an indication of the transferee’s willingness to enter into the proposed transaction, subject to satisfactory due diligence of the property to be acquired and completion of certain conditions precedent by the transferor. These documents may, in some instances, entail payment of a token amount as an advance payment towards the purchase consideration, which is adjustable in the final consideration payable and simultaneously operates as a motivation for the owner to part with the relevant documents pertaining to the property for conducting due diligence.
In order to ensure that a term sheet, MOU or LOI is not binding on the parties, it may be clarified in such document that the parties have mutually agreed:
- to have no obligation under the term sheet, MOU or LOI;
- that the parties will negotiate in good faith and enter into a definitive agreement for the proposed purchase of the property; and
- that such document is not intended to be a binding contract.
Other than brief highlights of the proposed transaction, the aforesaid documents may include clauses providing for the following, among other items:
- exclusivity in dealings;
- confidentiality of the information;
- representations and warranties;
- conditions precedent to the signing of the definitive documents;
- due diligence;
- indemnity obligations; and
- dispute resolution, etc.
Generally, certain clauses such as exclusivity and confidentiality are specifically stated to be binding, while the others remain non-binding.
Upon a dispute arising as to the binding nature of such term sheet, MOU or LOI, the court will usually seek to determine the intention of the parties – that is, whether they intended such documents to be binding or non-binding. If certain provisions of the term sheet, MOU or LOI are stated to be binding, the court may also specifically examine whether the provision to which the dispute relates was intended to be binding. If such term sheet, MOU or LOI is held to be binding and the parties have commenced performance thereunder, a possible consequence could be that the court decides that the term of the formal contract or definitive agreement drawn up later will be deemed to have commenced from the date of the said term sheet, MOU or LOI.
Generally, a customary binding contract for the sale and purchase of real estate in India is an agreement to sell (ATS) under which the parties agree to the basic terms for the transfer of the property and agree to enter into a sale deed for the proposed transfer.
20. Contract of sale
What are typical provisions in a contract of sale?
Like most contractual agreements, a sale deed will typically include:
- details of the executants, recitals and background to the transaction;
- details of the property (usually the property is demarcated on a map and a layout plan is annexed);
- details and manner of payment of sale consideration, respective obligations and liabilities of the parties with respect to taxes and charges attached to the property;
- restrictive covenants imposed on the parties, representations and warranties, etc; and
- boilerplate clauses including indemnity for breach or representations (or otherwise), dispute resolution, notices, etc.In large transactions that involve the fulfilment of numerous obligations post-execution of the definitive agreement, proceeds may be deposited in an escrow. In some real estate transactions, parties execute an ATS with payment of partial consideration and the remaining consideration is paid upon fulfilment of the conditions precedent simultaneously with the execution of the sale deed, thereby concluding the transaction.
With regard to taxes, public charges, rent and other outgoings, the TPA and usually the sale deeds attribute liability to the seller for clearing all dues and charges and assuming the risk of loss of the property until the effective date of transfer, after which the onus is shifted to the purchaser.
21. Environmental clean-up
Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?
The concept of environmental clean-up has not fully evolved in India. However, judicial determination and review of acts of pollution through public interest litigation have led to the formulation of the ‘polluter pays’ principle, which renders the polluter liable for compensating the victims of the pollution and, to the extent possible, restoring the environment to its natural form and taking corrective action to remedy the harm caused by its acts.
Further, environmental aspects of real estate transactions fall within the purview of the environment laws of India, such as:
- rules enacted
- the Environmental Protection Act 1986;
- the Air Prevention and Control of Pollution Act 1981; and
- the Water Prevention and Control of Pollution Act 1974, and there under, such as the Hazardous Wastes (Management, Handling and Transboundary Movement) Rules 2008 and the notifications enacted there under.
The provisions of the Companies Act 2013 have mandated certain classes of companies to discharge corporate social responsibility, which includes activities relating to environmental protection and conservation.
22. Lease covenants and representation
What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?
Sellers need to make disclosure of all existing encumbrances on the property, including existing leases. Usually with respect to existing leases, the rent received, the area of the premises leased out, the duration of the lease, the background of the lessee related to payment of rent including defaults by the lessee and the liabilities of the seller towards the lessee, if any, are disclosed and warranted against.
Between the date of the contract and closing or between the execution of an ATS, LOI or MOU and the execution of a sale deed, the seller is restricted by covenants in the ATS, LOI or MOU not to create any further third-party right or encumbrance over the property without the consent of the buyer.
Additionally, prior to entering into such transactions, it should be determined whether the transaction documents for the existing lease arrangement require the seller to obtain the prior written consent of the tenant to the sale of the leased property and/or require the buyer to provide an undertaking to the effect that the rights and entitlements of the tenant in relation to the leased property will not be disturbed pursuant to the sale of the leased property.
23. Leases and real estate security instruments
Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?
If the lessee duly executes a lease prior to the creation of a security interest over the property, the lease will prevail over the security instrument, the secured creditor will be bound by such a lease and will need to wait until the expiry of the lease to enforce its security interest to sell the property. On the other hand, if the lease is created subsequent to a prior security interest, without the consent or knowledge of the secured creditor, the lease can be struck down and the tenant evicted, although eviction proceedings in India are long, drawn-out and complicated.
While under Indian law a security interest includes a mortgage, charge, hypothecation or assignment upon property created in favour of a secured creditor, a mortgage is the most common form of security interest created over immovable property.
24. Delivery of security deposits
What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?
It is very common for leases to entail payment of security deposits as a security against any damage caused to the property by the lessee or default in payment of the periodic rent by the lessee, during the lease period. Such security deposits are usually equivalent to three to six months’ rent and may be adjustable against the rent due for the last months of the lease term. Rent revisions are usual, but the rates are dependent upon commercial negotiations between the parties. The usual escalation (for most residential and commercial properties) is 10 to 15 per cent after every three years of the lease term.
Well-informed and advised buyers impress upon delivery (to them) of the security deposit received from the tenants or an adjustment in the valuation.
25. Due diligence
What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?
The TPA places the onus on the buyer to verify the title of a property itself, for which it may conduct a title search and due diligence to assure itself of the validity of the transferor’s title to the property being transferred. The title search is usually conducted for a period of 30 years prior to the proposed transaction for which the due diligence is undertaken. Detailed due diligence can cover various aspects relating to the property, including:
- title flow;
- encumbrance check;
- zoning and permitted usage;
- construction-related approvals; and
- conformity with laws, litigation, etc.
A title search involves a check at the office of the concerned sub-registrar within whose jurisdiction the immovable property is situated, to check the registered documents of the sale deed, lease deed, mortgage deeds, etc, from the register of documents executed and registered. In addition to conducting a title search, it is ensured that the definitive agreements provide for all customary representations and warranties and sufficient indemnities for breach of the same.
As far as priority among interests is concerned, as discussed in question 3, the Registration Act gives precedence to registered documents pertaining to land or immovable property over unregistered documents.
Furthermore, the principle of ‘no one can give what he doesn’t have’ applies, whereby no person can transfer a better title than he or she possesses. Consequently, since the title of the seller is subject to the agreements in respect of the property previously registered, the title obtained by the buyer will similarly be so subject thereto.
In addition, government confirmations or approvals under state-specific laws pertaining to development and zoning regulation and building by-laws are required at various stages of construction and development of a real estate project, and the status of such government confirmations or approvals should be reviewed at the time of due diligence. For example, most state-specific laws require developers to obtain a development licence prior to commencement of construction, and completion or occupation certificates upon completion of construction. Similarly, Indian environmental laws require developers to obtain prior consents in certain situations. Furthermore, as per RERA, no advertisement, sale, marketing, booking or invitation for sale of an apartment, plot or building in a real estate project can be undertaken without prior registration of such real estate project.
26. Structural and environmental reviews
Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?
As discussed in questions 6 and 21, real estate projects are subject to structural and environmental concerns. Structural engineers and architects conduct engineering reviews to verify that the building conforms to structural safety norms and specifications and is constructed as per the approved plans and layouts. Representations and warranties with corresponding indemnities are usually obtained from the seller to the effect that the property is constructed as per the approved layout plans and all consents and approvals related thereto have been obtained. The scope of such representations and warranties may also include representations on mandatory environmental clearances and approvals under applicable laws. Similarly, occupancy and completion certificates issued by municipal bodies and local authorities require satisfaction as to structural safety, fire safety, hygiene and sanitary conditions, etc.
27. Review of leases
Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?
For short-term or low-value property leases, some clients prefer to follow standard formats provided by lawyers that are updated with the relevant commercial details by the business side and provided for final review to the lawyers. However, leases involving higher or longer commitments or complex transactions are generally prepared, reviewed and negotiated by lawyers. Usual causes of concern are related to:
- representations and warranties of the parties;
- breaches and termination-related provisions;
- lock-in periods;
- lease extensions and renewals;
- delivery of premises;
- payment and securing of the security deposit;
- registration and stamp duty implications; and
- dispute resolution, etc.Property management and maintenance agreements are also negotiated and reviewed alongside the lease. They are coterminous agreements with the lease deed, entail payment of nominal stamp duty and do not have to be registered. Lenders do require that any outflow of money with respect to any contract or understanding such as project management agreements, etc, be subservient to the financing security instruments.
28. Other agreements
What other agreements does a lawyer customarily review?
Other than title documents, lawyers review the LOI, MOU or ATS at the first stage, which is thereafter followed by a sale or lease deed. Depending on the magnitude and complexity of the transaction, an agreement for transfer of property may be coupled with numerous other agreements.
A transfer of property such as a residential house between the owner of the house and a prospective buyer will involve a title search and review of the terms of transfer (consideration, encumbrances, compliance with local laws pertaining to rent, etc); whereas a transfer of immovable property, as between two corporate entities, will involve more complex agreements. These may include:
- escrow arrangements, in which monetary consideration flows from one party to another;
- a share purchase agreement, where the purchaser buys 100 per cent of the share capital of the company owning the immovable property;
- agreements to set up a single purpose entity (SPE) that will acquire the immovable property, or to carry out construction and development; and
- powers of attorney (POA) executed to facilitate the buyer entity’s post-transaction title requirements.As far as development and construction of real estate properties are concerned, a lawyer will be required to draft and review the following, among other things:
- joint development agreements;
- collaboration agreements;
- development rights agreements;
- service contracts pertaining to supply of building materials; and
- labour agreements.
29. Closing preparations
How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?
Indian law permits executory consideration – namely, payment and delivery taking place after the contract has been created – so the timing of closing and funding can be determined by the parties to the transaction. Having said that, generally, there is no strict concept of closing of simple real estate transactions involving sale deeds, and the same is usually accomplished by the parties by executing the deed by which the transfer is effected and having it registered at the relevant sub-registrar’s office simultaneously with payment of the consideration by the buyer and delivery of original documents pertaining to the property by the seller.
The list of deliverables may vary depending on the nature of the entities involved in the transaction and the nature of the transaction. For instance, in cases of acquisition of shares of a company owning immovable property, the following documents will need to be handed over to the purchaser:
- share certificates;
- corporate filings;
- statutory registers;
- share transfer forms; and
- other corporate and secretarial documents.Further, all transactions where the title is being transferred will involve the seller delivering original documents, including:
- the deed by which transfer of property is effected;
- title documents of the seller and the past owners;
- clearances and approvals obtained from appropriate authorities;
- mutation certificate;
- documents evidencing existence of encumbrances; and
- authorisation by the board of directors, if the seller is a company or a POA.
30. Closing formalities
Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?
With respect to the transfer of immovable property, the process of execution and registration of the deed of transfer in the presence of two witnesses at the concerned sub-registrar’s office simultaneous with payment of the consideration constitutes closing in India.
The parties may either be personally present or may authorise their lawful attorneys (via registered POAs) or, in the case of a company, an individual (duly authorised by a board resolution) to execute the transfer deed on their behalf.
As noted above, transfer deeds are required to be executed along with stamp papers, e-stamp papers or franking (depending on the rules of the concerned state) of the requisite value (based on the stamp duty rates prevalent in the concerned state). Except in prescribed special circumstances, under the Registration Act registration of documents is required within four months of the execution of such document.
31. Contract breach
What are the remedies for breach of a contract to sell or finance real estate?
An ATS immovable property usually contains provisions to the effect that a breach by the buyer to pay the balance consideration renders the seller liable to forfeit the advance consideration paid under the ATS.
Further, an ATS also customarily records provisions stipulating that a breach by the seller to deliver possession of the property when the purchaser is willing to perform its part of the obligations will make the seller liable for refund of the advance consideration with substantial interest or penalty (at times twice the amount advanced) or will entitle the buyer to compel specific performance under the ATS.
However, enforcing specific performance under the SRA has its own limitations, but pursuant to the recent amendments to the SRA, the plaintiff can seek specific performance of a contract as a matter of right, and does not need to prove damages owing to non-performance in a court of law.
Damages are usually granted under the Contract Act if the damage caused by the breach of contract is direct. Indirect, special and remote damages are not granted under Indian law. If the contract stipulates a penalty amount, then the plaintiff will be entitled to compensation up to the penalty amount depending, among other things, on the quantum or excessiveness of the penalty amount.
Under the TPA, in the case of a mortgage deed, at any time after the mortgage money has become due to the mortgagee, and before a decree has been made for the redemption of the mortgaged property, if the mortgagor has failed to pay the mortgage money, the mortgagee can obtain a decree from the court debarring the mortgagor from redeeming the mortgaged property, or for the sale of such property.
Under special enactments such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act), on the failure of the borrower to repay the secured debt and the consequent classification of his or her account as a non-performing asset by the secured creditor, the secured creditor can initiate proceedings to enforce its security interest and take possession of the secured assets, provided that notice has been sent to the borrower to discharge the liability in full within the stipulated period and the borrower has failed to do so.
32. Breach of lease terms
What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?
For a breach of the lease terms by the tenant, the landlord retains the right to terminate the lease deed in accordance with the terms contained therein and upon failure to vacate the premises, the lessor can seek eviction of the tenant. However, eviction is a cumbersome and tedious process in India and it may take many years to evict a tenant, depending upon the location of the property and the courts having jurisdiction.
On the other side, upon a breach of the covenants by the lessor and failure to rectify them, the lessee may, if the lease permits, serve notice of termination on the lessor. In such cases the lessee also has a right to have the same rectified at the lessee’s cost and deduct such cost from the rents payable by the lessee or recover the same from the lessor.
The TPA expressly provides that a lease can be determined by forfeiture upon the breach of an express condition. If such forfeiture relates to non-payment of rent, the lessee retains the right to seek relief against forfeiture at the time of hearing of a suit, by paying a sum equivalent to the rent and interest due along with the full cost of the suit, or by providing such security that the court deems fit. If the forfeiture results from the breach of an express condition, the lessor can enforce his or her rights against the lessee only after serving notice and giving the lessee a chance to rectify the breach, if possible.
As far as special rules are concerned, different states have their own specific rent control legislation that takes precedence over the general law of the land in the case of a clash of provisions. For instance, under the Delhi Rent Control Act 1958, a tenant to whom the act applies cannot be evicted by a landlord unless the conditions specified in this legislation are satisfied, in addition to those specified in the TPA. In the case of a conflict of laws, however, the specific state law prevails over the general laws.
33. Secured lending
Discuss the types of real estate security instruments available to lenders in your jurisdiction.
Customarily, a mortgage is the most common form of security interest created over immovable property. The TPA provides for different types of mortgage, such as the following:
Simple mortgage: where the property is mortgaged without any delivery of possession, and upon failure to repay the loan the sale proceeds of the property may be appropriated towards the mortgage sum.
Mortgage by conditional sale: where the mortgagor ostensibly sells the mortgaged property to the mortgagee with a covenant that the mortgage will become void pursuant to payment of the mortgage sum.
Usufructuary mortgage: where possession of the mortgaged property is delivered to the mortgagee, who is authorised to retain the mortgaged property and receive rents and profits accruing therefrom.
English mortgage: where the property is transferred absolutely to the mortgagee who will re-transfer the same to the mortgagor upon payment of the mortgage sum.
Mortgage by deposit of title deeds: where the mortgagor delivers the documents of title to immovable property to the creditor with the intent to create a security thereon (this is only prevalent in certain states).
Anomalous mortgage: mortgages that do not fall into one of the above categories.
Other security instruments are pledges or hypothecation of movables, which may form part of a real estate project, or escrow of project receivables, which is primarily wanted to ensure control over the cash flows of a project. In a self-liquidating project, cash flows are considered the best security, since the mortgage over the immovable property keeps diminishing as the allotment or sale of units to third-party customers occurs.
In the recent past, real estate developers managed to make successful issuance of mortgaged-back securities to public and financial institutions.
34. Leasehold financing
Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?
State government instrumentalities and municipal authorities usually grant ground leases in India. These leases usually allow the lessees to obtain financing through pre-identified banks and lenders subject to receipt of prior approval from the lessor. The lessee’s lender in such a case acquires no better rights than the lessee itself. In case the borrower defaults in repayment of the secured debt, the lender bank only has the right to appropriate leasehold rights in the property to itself or its nominee if the borrower obtains the land under a ground lease. This is because the rights of the lender will not ordinarily override the lessor’s rights under the contractual documents executed. If, however, the borrower defaults in repayment in respect of funds secured against a charge over land owned by the borrower, the lender may appropriate the charged land and may sell or encumber it to recover the amount due from the borrower.
In addition, lease rental discounting can be obtained by the owners of leased properties. These financing arrangements are on the basis of the lease rentals, lease tenures and other covenants of leases on a property.
Under applicable laws, there is no minimum lease term for a lease being financed or a shorter maximum term for the financing depending on the business decision of the lenders.
The terms of a lease deed pursuant to which a ground lease has been granted should ordinarily permit the lessee to obtain financing, subject to the lessor’s consent, and enable the creation of security over the leased premises or receivables accruing therefrom, to the lender.
35. Form of security
What is the method of creating and perfecting a security interest in real estate?
See question 33.
Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?
Valuation for the transfer of real estate usually revolves around the benchmark of circle rates of the properties notified by the government (though the market rates could be significantly higher in certain jurisdictions). Real estate appraisers and valuation firms are used for valuation of properties in larger transactions where the value of the property is significantly higher than the circle rate therefor. These valuations can be on the basis of the net operating income from the property (if leased), the net present value of discounted free cash flow of a potential development on a property, the replacement cost of the property or the locational advantage of a property and the like.
37. Legal requirements
What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?
Lenders from foreign jurisdictions are subject to the RBI’s Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, dated 1 January 2016, bearing FED Master Direction No. 5/2015–16 (ECB Framework), as updated from time to time. This master direction provides for certain conditions that must be satisfied by borrowers and lenders in case of the loan falling under the automatic route or the approval route. In the case of the automatic route, foreign lenders must supply a certificate of due diligence to the bank of the borrower in compliance with regulatory requirements to which the foreign lender is subject.
Another route that foreign lenders and investors use is through subscription to secured non-convertible debentures of Indian companies, in accordance with the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, which may or may not be listed on a stock exchange in India. The security interest is created in favour of a debenture trustee, who is responsible for holding the security on behalf of the non-resident and overseeing compliance by the borrower. The non-resident subscriber must be registered with SEBI as a foreign portfolio investor.
38. Loan interest rates
How are interest rates on commercial and high-value property loans commonly set (with reference to Libor, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?
Interest rates are set on the basis of the interest rates set by the RBI. Interest rates are higher in India, since it is still a developing country and there is a high level of inflation. Consequently the interest rates for any loans or financing are high. While Indian banks usually do not lend money for the acquisition of land, they do lend for construction of real estate projects. Loans are easily available for homebuyers as well. The fees and lender costs are generally excluded from the interest and are charged separately.
Additionally, the interest chargeable in relation to loans that qualify as external commercial borrowing will be subject to the conditions prescribed under the ECB Framework and may vary accordingly. For example, developers of special economic zones and REITs can avail of external commercial borrowing from eligible lenders at interest rates not exceeding 450 basis points (4.5 per cent) above the applicable benchmark.
39. Loan default and enforcement
How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?
As mentioned in question 31, after a mortgage payment has become overdue, a mortgagee can institute proceedings to obtain a decree debarring the mortgagor from redeeming the mortgage property or for sale of the property. Similarly, in the case of a mortgage by way of conditional sale, default in payment of a loan will make a conditional sale absolute. If a loan is secured by a security interest as defined in the SARFAESI Act, a secured creditor will have the option to enforce its security interest according to the procedure laid down in the SARFAESI Act, which is more expeditious than the usual civil court process. Upon receipt of notice from the secured creditor, the borrower is required to discharge its liability within the stipulated time frame, failing which the secured creditor will have the right to take possession of the secured assets of the borrower.
Additionally, in accordance with the IBC, a financial or operational creditor can initiate an insolvency resolution process upon the occurrence of a default on a debt owed by a corporate debtor to such financial or operational creditor. This remedy is becoming increasingly popular among creditors since the insolvency resolution process is professionally managed and must be completed within 180 days from commencement of the insolvency resolution process.
40. Loan deficiency claims
Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?
There are no limitations. Indian law does not allow remote or indirect damages awards.
41. Protection of collateral
What actions can a lender take to protect its collateral until it has possession of the property?
Lenders usually seek interim orders to protect the status quo of the property. Lenders also seek rent deposits or other income or revenue from the property to be deposited with a court-appointed receiver or escrow agent or in a separate bank account. Further, the TPA prescribes certain liabilities which the mortgagee in possession has to bear, such as:
- to manage the property as a person of ordinary prudence would manage it;
- to make best endeavours to collect rent and profits;
- to make repairs; and
- not to undertake any destructive activity, etc.In the event of failure of a mortgagee in possession to comply with its responsibilities, when account is made pursuant to a decree of a court, such mortgagee must be debited with the loss, if any, occasioned by such failure.
May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?
Recourse is first available to the collateral. However, in winding up, insolvency or other recovery proceedings initiated by a lender, the court can award recourse to all other assets of the borrower.
43. Cash management and reserves
Is it typical to require cash management system and do lenders typically take reserves? For what purposes are reserves usually required?
The lender typically takes charge over all cash flows of the borrower (or as agreed for security and collateral). These are created through hypothecation of the receivables along with escrow account agreements. It is not customary in India to maintain reserves for expenses, but in most cases the lenders require appropriate debt service cover reserves to be maintained in lending agreements.
44. Credit enhancements
What other types of credit enhancements are common? What about forms of guarantee?
Guarantees, including personal guarantees of promoters, are very common in India. In fact, lenders rely more on personal guarantees from promoters or key shareholders rather than a security offered by the borrower company, since promoters make every effort to ensure that lenders are paid if the project does not perform. Depending on the negotiations, suitable covenants can be built into guarantee documents to protect the lenders in the event the borrower creates any mischief.
45. Loan covenants
What covenants are commonly required by the lender in loan documents?
Usually there are negative and affirmative covenants in loan documents and additionally certain information covenants. Furthermore, with respect to the freehold and leasehold financing, among other things, one important covenant is in relation to maintaining the ownership of the property. In the freehold asset class, ownership is already in favour of the borrower or owner, whereas with leasehold assets, a covenant with the effect of maintaining leasehold ownership is provided.
46. Financial covenants
What are typical financial covenants required by lenders?
The most typical are security cover and the asset value, where periodic appraisals are conducted to keep the security enhanced if the value diminishes, and special rights requiring the permission of the lender for any major actions of the borrower or its shareholders.
47. Secured movable (personal) property
What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?
48. Single purpose entity (SPE)
Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?
This varies on a case-by-case basis.
Hardeep Sachdeva, Partner
Ravi Bhasin, Partner
Abhishek Awasthi, Partner
CCI Dismisses Allegations of Anti-Competitive Agreements and Abuse of Dominant Position against M/S Sana Realtors Limited
On April 23 2019, CCI dismissed allegations (made by Dejee Singh and 9 other individuals, (the ‘Informants’)) of infringement of Sections 3 and 4 of the Act against M/S Sana Realtors Limited (‘Sana Realtors’). 
The allegations pertained to delay in handing over possession of small office / home office (‘SOHO’) units in a project launched by Sana Realtors in Gurugram, Haryana in the year 2009. The Informants further alleged that Sana Realtors, inter alia, imposed one-sided, arbitrary and unfair clauses in its sale agreements amounting to an abuse of dominance. The Informants’ claim was supported by distinguishing the market for SOHO units from purely residential apartments and commercial/office units.
CCI disagreed with the Informants’ proposed market definition and disregarded their attempt to showcase SOHO units as a separate relevant market. CCI defined the relevant market as “market for commercial units for office space in Gurugram” and did not find Sana Realtors to be dominant in this market (taking into account competition from large players like DLF, Omaxe, and others.) Accordingly, CCI summarily dismissed the allegations of abuse of dominance .
 Case No. 6 of 2019
NCLAT Dismisses an Appeal on Account of Settlement Between the Parties
On May 17, 2019, National Company Law Appellate Tribunal (‘NCLAT’) dismissed an appeal filed by Mr. Ranjit Singh Gujral (‘Appellant’) against a CCI order, dismissing the allegations of violation of Section 3 and 4 of the Act made by the Appellant against Vatika Limited (‘Vatika’) and Confederation of Real Estate Developers’ Associations of India (‘CREDAI’). The Appellant decided to withdraw the appeal due to an out-of-court settlement with Vatika and CREDAI. Therefore, NCLAT decided to dismiss the appeal. However, the dismissal order did not record the terms of settlement. 
 Case No. 23 of 2018
 Competition Appeal (AT) No. 01of 2019
CCI Approves Glenville’s Acquisition of Sole Control over TJ Holdings and an Increase in Shareholding in CapitaLand from 40.79% to 51%
On May 8, 2019, CCI approved the acquisition of sole control by Glenville Investments Pte. Limited (‘Glenville’) over TJ Holdings (III) Pte. Limited (‘TJ Holdings’) and increase in its shareholding in CapitaLand Limited (‘CapitaLand’) from 40.79% to 51% (‘Proposed Combination’). Glenville, TJ Holdings and CapitaLand are hereinafter collectively referred to as ‘Parties’. The Proposed Combination also envisaged restructuring of certain businesses between CapitaLand and Ascendas-Singbridge Pte. Limited (‘Ascendas-Singbridge’), which is also a wholly owned subsidiary of TJ Holdings.
Glenville, is a wholly owned subsidiary of investment holding company Temasek Holdings (Private) Limited (‘Temasek’). It is an investment holding company having subsidiaries engaged in real estate development/rental services and building/project consultancy services in India.
TJ Holdings, is present in the real estate development/rental services through its wholly owned subsidiary Ascendas-Singbridge, with a focus on business, science and industrial parks market in India. CapitaLand is headquartered in Singapore, and is primarily engaged in real estate investment, development services, that include, shopping malls, serviced residences, offices and homes.
Considering the overlaps in the real estate sector, the Parties defined the market as ‘real estate development and related services’, as well as the narrower segment of ‘commercial real estate development and related services’ segment, which was taken to include the hospitality segment and ‘Commercial real estate rental services’. CCI however refrained from delineating a relevant market. In its assessment, the proposed transaction did not raise any competition concern, and CCI accordingly approved the Proposed Combination given that: (i) the resultant incremental market share was below 5% in all segments and the combined market shares of the Parties was below 5% at a pan India level (except in Chennai where it is in the range of 5-10%); and (ii) there were no vertical foreclosure concerns arising out of the Proposed Combination.
 Combination Registration No. C-2019/03/647