IndiaAssociates.com – Property & Real Estate in Delhi, Noida, Greater Noida, National Capital Region (NCR) New Delhi India Real Estate

Khaitan & Co has hired ex-bureaucrat and lawyer Dr PK Agrawal as partner to head its real estate practice in Delhi. This is Agrawal’s first assignment at a law firm, which he has now taken up after retirement.

Agrawal said: “As an IAS officer, I was dealing with a lot of court cases, especially in revenue matters and land laws – there were lakhs of cases since it’s a big litigation area. In fact, I was already doing a half-lawyer’s job and I am happy that [in Khaitan] I’ll be doing a full lawyer’s job.

He added: “My team consists of three lawyers and two assistants. My job will be to advise the firm on real estate matters and also on Consumer Act related issues – if it comes through – and as usual on other constitutional matters.” Agrawal served as an IAS officer for 11 years in the field of land revenue and land reforms in various departments of Government of India undertakings and for the Government of West Bengal.

He worked as deputy secretary and director and joint secretary in Department of Consumer Affairs of the State of West Bengal, Ministry of Law & Justice, Ministry of Environment & Forests for 10 years and for the Department of Jails, Woman & Child Development, social welfare departments and PWD as Principal Secretary for 8 years.

He was principal secretary and additional chief secretary in the consumer affairs department for over two years. Agrawal has authored 50 books on land reforms and land laws. He was also guest faculty at Allahabad University and West Bengal University of Juridical Sciences even while he continued to remain a civil servant.

The Finance Ministry on Thursday ruled out rolling back of service tax on real estate developers at the time of construction, a move which the industry says will jack up housing and commercial property prices.

“Construction is a service. As a service, there is no reason why it should not be taxed,” revenue secretary Sunil Mitra said at a CII seminar here on Thursday, adding however, it is only 3 or 3.5 per cent that gets added up for the buyer. Central Board of Excise and Customs chairman V Sridhar has also said the realty sector would not attract 10 per cent service tax in effect.

“The tax is not at full 10 per cent ad valorem. We’ve a scheme of abatement for 67 per cent. The ratio, basically, was arrived at to represent the cost of inputs. So, in reality, it would pay only 33.3 per cent of the value,” Sridhar said. In the Budget speech, Finance Minister Pranab Mukherjee had said development of real estate complexes will attract service tax, unless the entire consideration for the property is paid after completion of construction.

“In the construction of complex services, it is being provided that unless the entire consideration for the property is paid after the completion of construction (i.e. after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service,” say the Budget papers. Complex is defined as consisting of more than 12 residential units. Industry players, however, said the tax would make housing costlier for buyers.

Following the interest rate hike by a few leading banks and the government proposal to slap service tax on the realty sector, the country’s largest real estate developer DLF on Monday said properties would turn dearer as developers would have to pass on the service tax burden to end-users. “If the signal from the bank and government is to raise the price, then why prices will not go up? That means the economy is to ready take a price hike. It will be wrong to assume that developers should not raise prices. How can you have two contradictory signals?” DLF group executive director Rajeev Talwar said on the sidelines of a seminar in New Delhi.

While a few private sector lenders, including ICICI Bank and HDFC Bank, recently increased home loan rates by up to 100 basis points, the Budget proposed to impose service tax on the realty sector both on commercial rentals as well as on sale of under-construction housing units. The service tax would come to be about 3.5 per cent of the cost of the apartment that includes the value of the land and also the cost of construction, realty body Credai said.

“Which tax has been absorbed in our country? It has only been passed through. Somewhere the new levy must be adjusted, how can you hope that the new levy will be adjusted and yet there will be no increase?” Talwar asked. However, Talwar did not quantify the likely jump in the prices, saying, “it will vary from location to location, project to project,”

The levying of service tax is only going to hit the consumers as they have to bear the burden, Talwar of DLF said, adding the increase in intrest rate and imposition of service tax are just the opposite of what a consumer would like. Since the levy of tax is across the board, it will hit all the segments of the real estate including commercial and retail, he added.

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If you are planning to buy a house, grab it before July, as realty prices are set to increase later. The service tax of 3.3%, announced in the Budget, will be effective on your home from July as the amendments to the Finance Bill will be put into effect in June. Moreover, banks have decided to increase interest rates in the range of 0.25-0.5 percentage points on home loans, which could further be hiked in the forthcoming credit policy. Companies including realty majors like DLF, under the aegis of Delhi-based real estate body National real estate Development Council (Naredco), will soon approach the FM for a rollback of service tax.

The property prices are expected to go up with real estate companies passing on the additional burden to buyers. Effectively, someone buying a house property in Delhi will have to pay a service tax of 3.3% on the price of the accommodation and also a stamp duty of 8% as a sale of immovable property. The 3.3% tax will not include the amount to be paid towards special charges like garden facing or community hall facility as these charges will be taxed at 10% of the total charges. However, Sanjay Chandra, MD of country’s second-largest realty firm Unitech says an increase in interest rates is unlikely to affect the demand as the increase is only in trigger rates and hence there is no change in effective interest rates.

“The service tax will have some marginal impact, but the market will absorb that for two reasons. One, the change in personal tax slabs will leave more disposable income in the hands of consumer and second, the better prevailing economic conditions are likely to result in at least 10% increase in the salaries of the working class for the next financial year. These two facts will more than offset the marginal impact of service tax, which is expected to be 2% to 3%,” he said.

When contacted, Naredco president and realty company Omaxe’s group chairman Rohtas Goel said, “We will hold a meeting of the association to discuss the Budget proposals, particularly levying of the service tax on housing, which will have a negative impact on the realty sector.” However, finance ministry officials have said they won’t entertain any request for change in the Budget proposal. Central Board of Excise and Customs member YG Parandhe said, “We are not taking up the issue as it stands now” when asked if there is a possibility to relook at the proposal.

Realtors body NAREDCO said it will hold a meeting of its members to assess the negative impact of imposition of service tax on housing complexes under construction. “We will call a meeting of the association to discuss the Budget proposals, particularly the levying of service tax on housing which will have a negative impact on realty sector,” National real estate Development Council (NAREDCO) President Rohtas Goel said. Goel, who is also the Chairman and Managing Director of Omaxe Ltd, said the dates for meeting has not been decided yet. The country’s two largest realty firms DLF and Unitech are members of NAREDCO.

According to the Budget paper, the construction of real estate complexes will attract service tax, unless the entire consideration for the property is paid after the completion of construction. While some developers are of the view that the service tax of 10.3 per cent would be imposed on 33 per cent of the total sales value, other feel it should be on 33 per cent of the total construction cost. An official with leading realty firm said the levy of service tax on housing is detrimental. “Affordable housing will become non-affordable and black money would come into play due to this proposal,” he said. Another realtor’s body CREDAI had said that applicability of service tax to all under-construction flats and homes being booked prior to completion will increase the end cost and will significantly impact affordability of the home buyer.

India Infoline has advised high-risk traders to buy Indiabulls <a title="real estate India” href=”http://www.indianground.com/”>real estate for target of Rs 185. “Indiabulls real estate is pointing to continued strength in the weeks to come as it has broken a downward-sloping trend line since early-January 2010. A detailed study of the daily chart shows that the stock has corrected from the high of Rs 236 in January 2010 to touch a low of Rs 151 last week.

On Thursday, the stock staged a smart breakout past the downward sloping trendline. This bullish breakout signals the end of the intermediate downtrend. We recommend high risk traders to buy the stock in the range between Rs 171-175 for a target of Rs 185 with stoploss of Rs 166,” the report said.

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Foreign debt, banned in real estate, is finding its way into property firms, as bankers and lawyers help builders cobble together new deals to raise money. Even though foreign loans, better known as external commercial borrowings (ECBs), are not permitted in construction, property firms have spotted a mechanism where the debt can be provided by foreign institutional investors (FIIs) registered with Sebi. No rules are broken and the deals, involving a three-way transaction, come across as normal private placements in the corporate bond market. It begins with a real estate company placing non-convertible debentures (NCDs) with a local entity like a non-banking finance company (NBFC) to borrow.

The next step involves listing the debt security, soon after which an FII steps in. Once the NCD is listed in the stock exchange, the NBFC offloads the paper to a foreign fund. Since FIIs cannot invest in unlisted debt, the NBFC warehouses the NCD till the paper is listed and then recovers the money by selling the debentures to a foreign fund. The two transactions are parts of a back-to-back deal struck among the NCD-issuing firm, the local NBFC and an FII. At least four developers, three from Mumbai and one from Bangalore, have raised over Rs 1,000 crore in the past few months through this route.

“It does not directly violate the Press Note on foreign investment in property, and such FII investment is within the overall corporate bond ceiling applicable to foreign funds….but it’s against the spirit of the regulation,” admits a senior banker who has advised one such NCD issuance. Indeed, a few foreign banks have made presentations to property firms on the convenience of such fund raising that has become more attractive since the government plugged a loophole in the foreign direct investment (FDI) norms in real estate.

In the past few years, FDI worth billions of dollars came in, as overseas investors subscribed to equity and quasi-equity products, often with put options, sold by real estate firms which were starved of bank finance. But a chunk of this inflow was based on an interpretation that the three-year lock-in on FDI applied only to the “original” amount brought in and not the full quantum of FDI in a project. Many investors took advantage of this: an offshore fund, which decided to pump in $25 million, split the inflow, first bringing in $5 million, the minimum amount, and the balance $20 million subsequently. The understanding was that the lock-in applied only to the $5 million and not the $25 million.

This flexibility in interpretation disappeared after the government clarified last year that the full amount, irrespective of whether the money comes in tranches, would be locked in for three years. The move, which came as a jolt to several foreign investors, paved the way for the more recent NCD route that’s catching on among local developers. “There are advantages…first, there is no lock-in because an FII can sell NCD as and when it wants; secondly, the debt is secured against mortgage of assets, pledge of shares etc; and thirdly, unlike FDI, here the foreign investor can fund even those projects which are not FDI compliant,” said a lawyer familiar with such debt raising.

For foreign equity or FDI in real estate, a project cannot be less than 50,000 square metre of built-up area among other things. “These conditions don’t come in the way when a foreign fund buys NCDs,” he said. Interestingly, such NCD issuance has also been done by a leading NBFC, which like property firms are restricted from tapping the ECB market. According to a real estate fund manager, some of the foreign investors, who are reluctant to increase their equity exposure after the downturn, prefer secured debts with a decent interest return. Sebi’s listing regulations extend to debentures that have been privately placed; and, NCDs can be listed, even if the real estate company or a project-specific special purpose vehicle (SPV) floated by it is a private firm or an unlisted public entity.

Foreign debt, banned in real estate, is finding its way into property firms, as bankers and lawyers help builders cobble together new deals to raise money. Even though foreign loans, better known as external commercial borrowings (ECBs), are not permitted in construction, property firms have spotted a mechanism where the debt can be provided by foreign institutional investors (FIIs) registered with Sebi. No rules are broken and the deals, involving a three-way transaction, come across as normal private placements in the corporate bond market. It begins with a real estate company placing non-convertible debentures (NCDs) with a local entity like a non-banking finance company (NBFC) to borrow.

The next step involves listing the debt security, soon after which an FII steps in. Once the NCD is listed in the stock exchange, the NBFC offloads the paper to a foreign fund. Since FIIs cannot invest in unlisted debt, the NBFC warehouses the NCD till the paper is listed and then recovers the money by selling the debentures to a foreign fund. The two transactions are parts of a back-to-back deal struck among the NCD-issuing firm, the local NBFC and an FII. At least four developers, three from Mumbai and one from Bangalore, have raised over Rs 1,000 crore in the past few months through this route.

“It does not directly violate the Press Note on foreign investment in property, and such FII investment is within the overall corporate bond ceiling applicable to foreign funds….but it’s against the spirit of the regulation,” admits a senior banker who has advised one such NCD issuance. Indeed, a few foreign banks have made presentations to property firms on the convenience of such fund raising that has become more attractive since the government plugged a loophole in the foreign direct investment (FDI) norms in real estate.

In the past few years, FDI worth billions of dollars came in, as overseas investors subscribed to equity and quasi-equity products, often with put options, sold by real estate firms which were starved of bank finance. But a chunk of this inflow was based on an interpretation that the three-year lock-in on FDI applied only to the “original” amount brought in and not the full quantum of FDI in a project. Many investors took advantage of this: an offshore fund, which decided to pump in $25 million, split the inflow, first bringing in $5 million, the minimum amount, and the balance $20 million subsequently. The understanding was that the lock-in applied only to the $5 million and not the $25 million.

This flexibility in interpretation disappeared after the government clarified last year that the full amount, irrespective of whether the money comes in tranches, would be locked in for three years. The move, which came as a jolt to several foreign investors, paved the way for the more recent NCD route that’s catching on among local developers. “There are advantages…first, there is no lock-in because an FII can sell NCD as and when it wants; secondly, the debt is secured against mortgage of assets, pledge of shares etc; and thirdly, unlike FDI, here the foreign investor can fund even those projects which are not FDI compliant,” said a lawyer familiar with such debt raising.

For foreign equity or FDI in real estate, a project cannot be less than 50,000 square metre of built-up area among other things. “These conditions don’t come in the way when a foreign fund buys NCDs,” he said. Interestingly, such NCD issuance has also been done by a leading NBFC, which like property firms are restricted from tapping the ECB market. According to a real estate fund manager, some of the foreign investors, who are reluctant to increase their equity exposure after the downturn, prefer secured debts with a decent interest return. Sebi’s listing regulations extend to debentures that have been privately placed; and, NCDs can be listed, even if the real estate company or a project-specific special purpose vehicle (SPV) floated by it is a private firm or an unlisted public entity.