Realtors welcome passage real estate bill by Parliament

Realtors body NAREDCO on Tuesday hailed the passage of real estate regulatory bill by Parliament but said the new law should also have fixed the accountability of government agencies sanctioning the projects.

The Real Estate (Regulation and Development) Bill was passed by the Lok Sabha on Tuesday, five days after its passage by Rajya Sabha.

"The Bill seeks to protect the interest of the home buyers by enhancing transparency and fixing the accountability of developers, brokers and consumers, but it would have been more appreciated by the industry incase the accountability of financial institutions, Government and Government agencies, who have great role to play in project implementation, was also fixed," NAREDCO President Praveen Jain said.

He hoped that this would also be included at some stage.

Jain also said that the new law should have provision for single window process to facilitate quicker approval.

He also said that the provision of parking 70 per cent of the funds received from buyers for a project into an escrow account would "definitely pose a financial challenge to builders".

Gaurav Karnik, Partner & National Leader - Real Estate & Infrastructure, EY India, said "Real Estate Bill will bring greater transparency, timely completion of projects, reduction in fly by night operators in the sector".

It would also ensure that customers are treated fairly by ensuring no arbitrary changes in project plans, full disclosure on apartment size and fairer penalty provisions.

"Establishment of a regulator will give greater confidence to foreign investors in the sector. However, certain key asks of the sector such as introduction of single window clearances system, coverage of civic and other related authorities under its ambit, etc. are not covered under this Bill. Overall a welcome move for the sector," he added.

Sun Capital 

Budget 2016: Impact on alternative fund industry.

In the backdrop of slow global growth, turbulent financial markets and volatile exchange rates,one may say that expectations from the Union Budget 2016 were overall low. Amid a need to maintain fiscal discipline and with limited avenues to mobilise additional resources (except by increasing taxes), aspects like no substantial increase in service tax, no change in the structure of taxation for listed securities and no change in extension in holding period for an asset to qualify as longterm capital asset, all are signs of relief and indicators of a stable regime.

Having said that, the alternative fund industry, being the source of risk capital for Indian
entrepreneurs, had significant expectations from the Budget. They were hoping that the
government will significantly accept the recommendations of the Alternative Investment Policy Advisory Committee (AIPAC) formed by the Securities and Exchange Board of India (SEBI) under the chairmanship of NR Narayana Murthy. In fact, the report had a chapter dedicated to tax reforms required for the alternative funds industry.

While many of those recommendations could have been accepted, the Budget proposals fell
short of expectations in this regard. However, some proposals relevant to the alternative fund industry made their way and are summarized below: Withholding tax on distributions by Alternative Investment Funds (AIF): It is proposed that distribution of income by AIFs to nonresident investors shall not be subject to 10 per cent withholding tax provided such nonresident investor is eligible for tax treaty benefits.

This proposal will be warmly welcomed by the AIFs, specifically, the fund managers based in India, who were looking to raise capital from offshore investors, to capitalise on the recent FDI liberalisation allowing 100 per cent FDI in AIFs under the automatic route. However, it would have helped if the government had taken distributions to exempt resident investors or distributions of exempt income to residents out of 10 per cent tax withholding.

Applicable longterm capital gains tax rate to foreign funds: The issue of applicability of
reduced rate of 10 per cent tax on longterm capital gains arising on transfer of unlisted
securities for nonresidents is proposed to be resolved. It is proposed that such rate shall be
available on longterm capital gains derived on transfer of unlisted securities or shares of
company in which public is not substantially interested. While taxation of gains arising to most of the foreign funds would be protected under the applicable tax treaty, this amendment should help foreign funds in tax indemnity related discussions on exits.

Reduction in holding period: In another welcome move, the finance minister said that the
holding period of securities of unlisted companies to be treated as longterm capital asset is
proposed to be reduced from three to two years. However, enabling provisions to enact such amendment in the law seems to have been missed out.

Safe harbor rules largely unchanged: Allowing onshore asset management of offshore pool of capital has been a key demand of the alternative fund industry for more than three years. If enacted, the amendment will help the government not only in restricting export of intellectual capital but also raise additional revenues by way of income tax on fund management fees.

While two small amendments have been made (explained below), a lot was expected about
investment diversification, investor diversification and provisions relating to arm’s length
management fees. One hopes that these will be dealt through a separate notification for which the law provides for – though this needs some sense of urgency.

(i) Safe harbor rules were applicable to an eligible investment fund resident of a country /
specified association, with which India has entered into a double taxation avoidance agreement.

This section is proposed to be amended to also include a country which may be notified by the government. Here also instead of a country to be notified, what the industry expects is that the fund could be set up or established or incorporated in the countries with which India has a tax treaty.

(ii) Currently, an eligible investment fund is not permitted to carry on or control and manage,
directly or indirectly, any business in India or from India. This condition is now proposed to be restricted to controlling any business in India and not from India.
Place of Effective Management (POEM) effective from April 1, 2016: In order to provide clarity for implementation of the POEMbased residency test and also to address concerns of the stakeholders, it is proposed to defer the applicability of such rule by a year. However, it is expected that the government will soon finalise the detailed guidelines relating to determination of POEM for effective implementation.

MAT on foreign companies: With a view to provide certainty in taxation of foreign companies, it is proposed that MAT provisions shall not apply to foreign companies if it is from a treaty country and does not have a permanent establishment in India or it is not from a treaty country and is not required to register under the Companies Act.

New asset classes: Probably the last hurdle from tax standpoint for REIT/ InvIT, is proposed to be cleared in this Budget. Once enacted, dividend received by an REIT / InvIT from wholly owned special purpose vehicles (SPV) shall not be taxable in the hands of the trust nor will it be subject to dividend distribution tax (DDT) in the hands of the SPV.

Similarly, a new taxation regime for securitisation trusts and its investors has been provided.
Amongst others, tax passthrough status has been provided to income of securitisation trust
and income from securitisation trust would be taxable in the hands of investors. Further, 100
per cent FDI is proposed to be allowed under the automatic route in asset reconstruction
companies. For foreign portfolio investors regulated by SEBI, it is proposed that they shall also be allowed to invest 100 per cent of security receipts issued by the securitisation trust. Both provisions should help fund managers focusing on these asset classes in short to medium term.

Other important amendments include introduction of the Organization for Economic
Cooperation and Development's (OECD) recommendation on certain action plan of Base Erosion and Profit Shifting (BEPS) project, tax incentives for units located in International Financial Services Center, systematic phase out of tax incentives currently available under the tax laws and replacing it with tax incentive for startups and entities generating employment.

The industry still craves for clarity around characterisation of gains of an AIF to be treated as ‘capital gain’, extension of tax passthrough to all categories of AIFs and allowing retirement and pension funds invest in AIFs – though the circular issued yesterday should address one of the concerns in this regard (regarding characterization).

One would hope the government issues the necessary guidance to provide certainty on the
above issues, as these are a must for better development of the alternative fund industry.
Vikram Bohra is partner and Devang Ambavi is associate director manager, Financial Services Tax and Regulatory Services, PwC India.

Budget 2016: Growth-oriented Budget

Amidst global challenges, the finance minister has presented a very prudent growth-oriented Budget without walking away from the fiscal deficit reduction road map.

Amidst global challenges, the finance minister has presented a very prudent growth-oriented Budget without walking away from the fiscal deficit reduction road map. This also opens up a window for the Reserve Bank of India to bring down interest rates further and expect at least one rate cut very soon.

Substantial investment of Rs 97,000 crore has been allocated for road sector. It is also been said that the government has decided to add 50,000 km of road length to the existing national highway network. This will create more development opportunities in the years to come.

To revitalise projects under public- private partnership (PPP) model, two significant steps have been taken which include issuance of guidelines for renegotiation of PPP concession agreements in a transparent manner, and new credit rating system for infrastructure projects to be issued.

Due to creation of new credit rating system, the benefits accruing to infrastructure projects will be better appreciated, resulting in a better rating. This will help infrastructure developers tap bond market and because of better rating of projects, insurance and pension funds will be able to come forward to fund these projects.

Another significant step for a progressive public-private partnership  project frame work is making Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvIT) structure investor friendly.

In this regard, now distribution made out of income of special purpose vehicle to the REITs and InvITs having specified shareholding, will not be subjected to dividend distribution tax, in respect of dividend distributed after the specified date. With this change the long pending demand of investors will stand addressed and Infrastructure Investment Trusts can now become a success story.

The Budget will have a good impact on boosting domestic demand, which will help the overall economic growth. Renewed impetus to irrigation is also a very welcome move. The Budget talks about implementation of 89 irrigation projects under AIBP which were languishing for a longer time and fast tracking of the same.

The overall allocation for rural sector and agriculture sector will also help the growth to pick up substantially. Renewed focus on initiatives like skill development, Make in India and incentives associated with the same in the Budget will result in good amount of employment generation.

The only disappointment in the Budget proposal is with regards to double taxation of dividend income, and would have been good if the same could have been avoided.

Sun Capital

Effect of rising NPAs of banks on aam aadmi

The domino effect of rising NPAs of banks

With public sector banks having accumulated Rs 4.5 lakh-crore worth of nonperforming assets or loans in which repayments are not happening in time, there has been a lot of talk going around on the performance of the banks and how it reflects on the broader performance of the Indian economy.

With public sector banks having accumulated Rs 4.5 lakh-crore worth of nonperforming assets or loans in which repayments are not happening in time, there has been a lot of talk going around on the performance of the banks and how it reflects on the broader performance of the Indian economy.

While RBI has gone ahead with a 125 basis points rate cut, the 'aam aadmi' is yet to experience the full transmission. With banks further saddled with a huge NPA burden now, the customers are bound to feel the pinch

1. How do NPAs affect a bank's balance sheet?Accumulated bad loans severely dent a bank's interest income. As per regulatory norms, banks are expected to make provisions against bad loans. High provisioning figures further eat away from their profits. Banks such as Bank of Baroda, Bank of India and Punjab National Bank have all posted huge losses due to high provisioning this quarter.

2. Should investors be worried?With all public sector banks being listed entities, a bad quarterly result reflects strongly in the stock market. If a bank is suffering from mounting NPAs and does not give any positive forward looking statements then stock prices crash which in turn affects the bank's shareholders income. However, now with the RBI instructing banks to clean up their balance sheets over the last two quarters of FY16 it is left to be seen how the banks after recognising the bad accounts manage to recover them.

3. Does it impact your accounts with the bank?Yes. Banks already reeling under mounting losses will not offer any rate cut for the customers. Therefore, home loans and car loans will continue to pinch the pockets of the bank customers though the Reserve Bank of India has cut repo rates by 125 basis points.

4. What are the other constituents which are affected?The government which is the largest shareholder in public sector banks loses out on dividends from the banks. Moreover the government in its Economic Survey 2016 has mentioned that banks would require Rs 1.8 lakh crore which will be taxpayers' money at the end of the day. Another effect is that banks, being more worried about loan recovery fail to invest in latest technologies and digitization of banking. Thus, customer convenience is affected.

By Sun Capital

Budget 2016: Foreign investors can now establish ARCs in India

Sun Capital: Budget 2016: Foreign investors can now establish ARCs in India 

MUMBAI: The asset reconstruction companies got a huge leg up from the Union Budget
with relaxation in sponsor holding limit, 100 per cent foreign direct investment and a
complete passthrough of income tax. Finance Minister Arun Jaitley announced easing of
sponsor holding limit to 100 per cent from the current 49 per cent paving the way for foreign
investors to set up an ARC in India.

"I propose to make necessary amendments in the Sarfaesi Act to enable the Sponsorer of
an ARC to hold upto 100 per cent stake in an ARC and permit noninstitutional investors to invest in securitization receipts," Jaitley said.

Currently, no sponsor can hold more than 50 per cent of an ARC's shareholding either by
way of FDI or by routing it through foreign portfolio investor controlled by the single sponsor.

"It looks very clear now that a foreign entity can also come in and establish an ARC in
India," VP Shetty, Executive Chairman, JM Financial ARC told ET. "Easing of sponsor limit
would certainly help ARCs to strengthen their capital base."

"The easing of sponsor holding limit will resolve capital issue for the ARCs to a very large extent," Siby Antony, MD & CEO, Edelweiss ARC told ET. "It's a good thing that the budget has given a lot of importance to ARCs for NPA management."

The government also relaxed foreign direct investment rules for ARCs by permitting 100 per cent FDI through the automatic route. The investment basket of foreign portfolio investors will now be expanded to include securities issued by such special purpose vehicles.

"Earlier only QIBs defined by Sebi were allowed to subscribe now it has been expanded, though we need little more clarification on who all will be part of non institutional investors," Antony added.

The Finance Minister also announced a compete pass through of income tax for all securitization trusts. "I propose to provide a complete pass through of income tax to securitization trusts including trusts of ARCs," Jaitley added. "The income will be taxed at the hands of the investor instead of the trusts."

The measures announced by the FM is aimed at enabling banks to clean their balance sheet which is saddled with rising bad loans.

"We have been representing to the government and RBI to allow us to have more capital so that we can participate in the market more significantly," Shetty added. "All the ARCs together have Rs 4000 crore of capital invested, with this capital our capacity to invest in bank bids is limited."

Sun Capital Advisory Services

Budget 2016 gives massive push to affordable housing supply and construction activity, seeks to spur demand

Sun Capital: Budget 2016 gives massive push to affordable housing supply and construction activity, seeks to spur demand

NEW DELHI | BENGALURU: The budget announcement on allowing 100 per cent deduction for profits to housing projects building homes up to 30 sq metres in the four metro cities and 60 sq metres in other cities is likely to spur supply of affordable homes, demand for which makes for almost 90 per cent of the demand for homes in India.

(Representative image) Builders and real estate experts say the exemption for affordable housing projects would bring in a 15-20 per cent upside on profits after paying the MAT tax. 

"100 per cent deduction for profits to an undertaking in housing project for flats upto 30 sq. metres in four metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019 and completed in three years. MAT to apply," finance minister Arun Jaitley announced in the budget today. 

Builders and real estate experts say the exemption for affordable housing projects would bring in a 15-20 per cent upside on profits after paying the MAT tax for a real estate developer building such a project, making it easier for the developer to attract foreign and domestic investment for housing projects.

In the budget, the FM also said that construction of affordable houses up to 60 square metres under any scheme of the Central or State Government including PPP Schemes will be exempt from service tax. 

First time home buyers will get deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned in 2016-­17, where house cost does not exceed Rs 50 lakh. 

"This will push developers to redeploy money into building more affordable housing. The FM has tried to address supply side concerns on the housing front. This will bring in much greater supply, spur construction activity and employment connected to it. Anyway 90 per cent of demand for housing is in this segment," says Rajeev Talwar, chief executive officer of DLF. 

Getamber Anand, national president of industry body Confederation of Real Estate Developers' Associations of India (CREDAI) says the government has actually understood that ease of doing business has to become reality to spruce 0 Comments Ravi Teja Sharma , Sobia Khan Search for News, Stock Quotes & NAV's READ MORE : real estate | MAT | Budget 2016 | Arun Jaitley Comments Add Your Comments actually understood that ease of doing business has to become reality to spruce up the GDP. 

"There has been a lot of rationalization of taxes. Small pain points of the real estate industry like harassment by excise department on ready mix concrete being manufactured on site for self use have been addressed," he says. 

In his speech, Jaitley extended excise duty exemption, which is presently available to concrete mix manufactured at site for use in construction work to ready mix concrete as well. 

The big challenge before the industry, Anand says, is to now lobby with states to increase density norms to achieve 30 sq metres and 60 sq metres of housing. 

In Haryana, for examples, the density norms are so low that you cannot do 30 sq metres of housing at all. 

"Supply of these kinds of homes cannot increase unless density norms area changed and density is increased for housing projects," he explains. 

Ashish Puravankara, managing director of Puravankara Projects says there is a huge shortage of affordable homes across cities. 

"The enhanced home loan interest deduction will further encourage buyers to invest more in this segment. This will further encourage private participation in affordable housing," he says. 

Anand of CREDAI says the budget has put the onus on real estate developers to finish houses within three years of start if they are to avail the exemption for affordable homes. "This would also be a challenge for us in the absence of single window clearance for project affordable," he says. 

"The government's service tax exemption on houses less than 60 sq m, and the additional exemption of Rs 50,000 for housing loans up to Rs 35 lakhs for homes not above Rs 50 lakhs will both likely improve first-­time home buyers' sentiment," says Jason Kothari, CEO, Housing.com. 

Shishir Baijal, managing director of property consultancy Knight Frank India says the housing sector will get a push from both supply and demand side. 

Baijal pointed out that the government's focus on digitization of land records is in the right direction especially in the rural areas, which will render land records free from encumbrances. 

The budget has also increased the limit of deduction of rent paid under section 80GG from Rs 24,000 per annum to Rs 60,000, to provide relief to those who live in rented houses

Sun Capital Advisory Services

India Budget 2016: Winners and Losers

Sun capital: India Budget 2016: Winners and Losers

Arun Jaitley, India's finance minister, Jayant Sinha, State finance minister, second right, and other members of the finance ministry in New Delhi, India, on Feb. 29

India’s annual budget is one of the nation’s most closely watched events -- not just for the numbers, but for the political message during a speech that runs for about 90 minutes.

This year rural villagers came away as undisputed winners, with Finance Minister Arun Jaitley announcing plans to "transform India for the benefit of the farmers, the poor and the vulnerable." That was expected: Prime Minister Narendra Modi lost a key state election in November, and faces as many as nine more contests next year. Here are the winners and losers.

WINNERS:

• Farmers -- pledges to double income of farmers by 2020, allocates 360 billion ($5.3 billion) to agriculture and farmers’ welfare; steps to ensure a greater share of retail food prices reach producers; announces 200-billion-rupee irrigation fund and record 9 trillion in credit for farmers. Affected companies include Shakti Pumps India Ltd., Jain Irrigation Systems Ltd.
• Poor families -- 100 percent of households to have cooking gas within three years; 100 percent of villages to have electricity by May 1, 2018.
• State-run banks -- 250 billion rupees to recapitalize government-controlled banks. "If additional capital is required by these banks, we will find the resources for doing so," Jaitley said. “We stand solidly behind these banks." Shares of State Bank of India Ltd. and Bank of Baroda could be affected.
• India’s biggest commodities exchange -- MCX Ltd. headed for a three-week high on the budget’s proposal to expand foreign direct investment in the exchanges.
• Housing developers -- 100% deduction in profits for affordable housing projects approved by March 2019. Projects must be built within three years. Shares of DLF Ltd., Unitech Ltd. could benefit.
• Tax litigants -- one-time dispute resolution scheme for those involved in retrospective tax disputes to pay only arrears; interest, penalty to be waived. Vodafone Group Plc, Cairn India Ltd. could gain.
• Infrastructure projects -- allocates 2.21 trillion rupees in total outlay for roads, railways and ports. Larsen & Toubro Ltd., India’s biggest engineering company, could see a boost.
• Energy industry -- "calibrated" market-based pricing to incentivize deep sea hydrocarbon exploration; 30 billion rupees a year to boost nuclear power investment. Reliance Industries Ltd., Oil & Natural Gas Corp., Oil India Ltd. could benefit.
• Startup Investors -- Profits made after two years of holding exempt from capital gains tax, compared with three years earlier. Move to benefit angel investors, seed funds and other early backers of startups.

LOSERS:

• The High Rollers -- 1 percent cess on luxury cars valued at 1 million rupees or more; surcharge on income tax raised to 15 percent from 12 percent on those earning 10 million rupees or more a year; additional 10 percent tax on those earning 1 million rupees or more in dividend income.
• Coal producers -- tax on coal production to double to 400 rupees per ton. Companies affected include NTPC Ltd., Tata Power Co., Adani Power Ltd.
• Smokers -- taxes on cigarettes to be hiked as much as 15 percent. Affected stocks include ITC Ltd., India’s biggest cigarette maker, and Godfrey Phillips India Ltd.
• Carmakers -- an infrastructure cess ranging from 1 percent to 4 percent on vehicles to help combat pollution. Shares of Maruti Suzuki India Ltd. fell to a 16-month low.
• Jewelry makers -- Excise duty on jewelry and higher threshold for exempt purchases. Companies affected include Titan Co.

Sun Capital Advisory Services

DLF pushes ahead with REIT listing plans

Suncapital: Country’s largest real estate firm by market capitalisation is gearing up to launch REITs worth up Rs6,000 crore in two tranches over the next two years

DLF is currently putting together commercial office assets totalling around 25 million square feet of land into the REITs portfolio

Mumbai: Pushing a step closer to launching India’s first Real Estate Investment Trust (REIT), real estate firm DLF Ltd expects to complete forming a special purpose vehicle (SPV) within the next six months, said a top company executive of the Delhi-based company.

“We would be ready with the SPV in the next six months. As we announced earlier, we have signed non-disclosure agreements with 25 global investors. We should be the first one to crack it (REITs),” Rajeev Talwar, chief executive officer (CEO), DLF Ltd, told Mint over the phone.

Country’s largest real estate firm by market capitalisation is gearing up to launch REITs worth up Rs.6,000 crore in two tranches over the next two years.

REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and listing them on stock exchanges as trust. Investors earn return on investment either through value appreciation or rental income generated from commercial assets.

REITs will also give overseas investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreigners.

DLF is currently putting together commercial office assets totalling around 25 million square feet of land into the REITs portfolio. As part of the process, promoters of DLF have decided to sell around 40% of its stake in DLF Cyber City Developers Ltd (DCCDL), a rental arm of the company to institutional investors. DCCDL earns around Rs.2,200 crore a year from rentals.

“Basically what is going on right now is divestment (of commercial portfolios) and to get foreign investors into the REIT portfolio. They have to come in the fair market valuation. In the first two quarters of the year, we would have brought all the funds and complete with our first stage which is to form an SPV,” Talwar said.

The listing of REITs, which many believe would bring stability and attract funds to the sector, has not been able to take off mainly due to tax hurdles.

Finance minister Arun Jaitley in the Union budget on Monday proposed to exempt REITs from the purview of dividend distribution tax (DDT), removing a significant hurdle to floating it in India.

“Exemption of DDT on REIT along with the FDI (foreign direct investment) policy changes in December last year will help get huge inflows from foreign institutional investors. For foreign institutional investors, the taxation was making it a lower return product for them. Now this (exemption) increases return and thereby attract more inflow of funds,” he said.

Anuj Puri, chairman and country head of JLL India, said with the proposal to remove DDT, REITs would become a realty soon with few listings likely to happen this year either by financial institutions or developers.

“Currently, around 229 million sq. ft of office space can be seen as REIT-compliant. If we assume that even 50% of these get listed, we are looking at a total REITs listing worth $18.5 billion,” Puri said.

Sun Capital Advisory Services