Real Estate M and A in India 2024

Real Estate M and A in India

REAL ESTATE M AND A 2024

INDIA

Hardeep Sachdeva, Ravi Bhasin, Abhishek Awasthi

(AZB & Partners)

OVERVIEW

Typical transaction structures – public companies

What is the typical structure of a business combination involving a publicly traded real estate-owning entity?

The term ‘business combination’ is not typically used in reference to the Indian real-estate sector. Various structures of real-estate transactions, which mostly involve private limited companies, include:

transfer of development rights or joint development arrangements involving transfer or assignment of rights to develop, construct, market and sell real-estate assets in consideration of a revenue share or a share in the developed area;
development management arrangements involving provision of management services relating to construction, development, branding, marketing and sale of a real-estate project in exchange for management fees from the revenues;
setting up joint venture vehicles or equity, debt or quasi-debt investments in existing project companies for developing, constructing or any other form of execution or implementation of a real-estate project (commonly used by strategic investors and private equity funds);
business transfer arrangements implemented by way of transfer of business undertakings or by way of court-approved mergers or demergers; and
lending transactions by way of external commercial borrowings and rupee-denominated bonds issued overseas, or domestic loans.

The choice of adopting one of the above structures is, in addition to achieving the commercial intent of the parties, also driven by the variable statutory and regulatory limitations of different states and sectors of India.

Since real-estate projects are typically developed and implemented through project-specific special purpose vehicles, which again are typically not publicly traded entities, a publicly traded real-estate owning entity can also explore any of the aforementioned options, subject to compliance with the securities regulations applicable to publicly traded companies.

Typical transaction structures – private companies

Are there any significant differences if the transaction involves a privately held real estate-owning entity?

A transaction involving privately held real-estate owning entities is arguably easier to structure, as transactions involving publicly listed companies are subject to additional compliance requirements applicable to listed companies, which, among others, are prescribed under the following regulations from the Securities and Exchange Board of India (SEBI), as amended from time to time :

SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015;
SEBI (Prohibition of Insider Trading) Regulations 2015 (the PIT Regulations);
SEBI (Substantial Acquisition and Takeover of Securities) Regulations 2011 (the Takeover Regulations); and
SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018.

The aforementioned regulations, among other laws and regulations, prescribe additional compliance and disclosure requirements that have to be adhered to by listed public companies. For instance, share transfers beyond specified thresholds, corporate loans and investments, appointment and removal of key managerial personnel, deliberations of the board concerning the buy-back of securities, increase in capital through bonus shares, acquisitions, sale and disposal of units or subsidiaries, any other restructuring, et cetera, must be disclosed to the public in the manner prescribed under the aforementioned regulations.

Further, the Takeover Regulations also provide that an acquirer proposing to acquire direct or indirect control of a company, or an acquirer that is entitled to exercise 25 percent or more of the voting rights in a company, is restricted from acquiring more than 5 percent or more of the voting rights or shares in that company without making a public announcement of an open offer, thus affording the minority shareholders an exit opportunity.

Typical transaction process

Describe the process by which public and private real estate business combinations are typically initiated, negotiated and completed.

A real estate-related business combination is usually initiated by entering into a preliminary agreement, such as a term sheet, memorandum of understanding or letter of intent. This may be binding or non-binding depending upon the intention of the parties, but each of these documents customarily provides for exclusivity of dealings as a binding commitment on the part of the land or real-estate owner until such time as the definitive agreements are executed.

During the period between the execution of the term sheet until the signing of the transaction documents, legal due diligence is undertaken and the structure of the transaction is negotiated and finalized. The drafting and negotiation of the transaction documents usually commences and runs parallel to the legal due-diligence exercise and is finalized upon the completion of the legal due-diligence exercise.

Based on the outcome of the legal due-diligence exercise, the transaction documents incorporate certain conditions precedent, conditions subsequent and also specific representations and indemnities.

The nature of the transaction typically takes into account, inter alia, the following, to determine viability of the kind of transaction that the parties enter into:

the nature and form of assets of the target company;
the requirement of governmental or third-party consent to acquire key assets;
the liabilities of the target company; and
tax treatment of the alternative structures (including payment of capital gains tax under the provisions of the Income Tax Act 1961).

In the event the target entity is a listed company, additional care needs to be taken that the acquiring entity does not requisition any undisclosed price-sensitive information, and therefore the due diligence to be undertaken would be limited in nature and would have to comply with the information-sharing stipulations set out in the PIT Regulations. Further, in the event the acquiring entity is proposing to acquire shares or voting rights in a listed public company that entitle such a buyer to (1) exercise 25 percent or more of the voting rights of a company, or (2) exercise control over the listed target company, the acquirer would also have to make a public announcement of an open offer, giving an exit opportunity to the minority shareholders under the terms of the Takeover Regulations.

LAW AND REGULATION

Legislative and regulatory framework

What are some of the primary laws and regulations governing or implicated in real estate business combinations? Are there any specific regulations or laws governing transfers of real estate that would be material in a typical transaction?

Depending on the nature of the real-estate transaction, one or more of the following Indian laws will govern, or have an impact on, real-estate business combinations or transactions, including:

local laws governing development regulations in a state that prescribe conditions for obtaining a development license to initiate a real-estate project and thereafter for obtaining the requisite consents, approvals and sanctions for various aspects of the real-estate project, and also provide for rules and regulations for the governance of a real-estate project;
the Real Estate (Regulation and Development) Act and the rules framed thereunder, which regulates and promotes the real-estate sector and ensures the sale of plots, apartments or buildings, as the case may be, or the sale of a real-estate project, efficiently and transparently and to protect the interest of consumers in the real-estate sector;
the Transfer of Property Act 1882, which, among others, deals with the fundamentals of sale, lease, encumbrances, gifts and exchange of a real-estate property;
the Indian Stamp Act 1899, along with the state amendments, provides for the stamp duty on various legal instruments that would be executed as a result of the transaction;
the Registration Act 1908 provides for the charges levied for registering legal documents;
the Companies Act 2013 and the rules framed thereunder, which, among others, governs the formation, operation, management and amalgamation of Indian companies and the rights of the shareholders in such Indian companies;
the Foreign Exchange Management Act 1999 (FEMA) and the rules framed thereunder, which is relevant when foreign entities or parties are involved;
the Environment Protection Act 1984 and the rules framed thereunder; and
the Limited Liability Partnership Act 2008.

In India, the states are also empowered to enact legislation related to the land and related subjects. Different states have different legislation and codes dealing with real estate.

Further, deeds and documents evidencing conveyance, mortgage, lease, et cetera, of real-estate properties are subject to stamp duties, which vary from state to state. Accordingly, structuring options would also have to be analyzed from a stamp duty efficiency perspective.

Cross-border combinations and foreign investment

Are there any specific material regulations or structuring considerations relating to cross-border real estate business combinations or foreign investors acquiring an interest in a real estate business entity?

The laws and policies relating to investment in India by foreign investors or acquirers are enshrined in FEMA and the rules and regulations prescribed thereunder. Further, the government, through the Ministry of Commerce and Industry and the Department for Promotion of Industry and Internal Trade, formulates foreign direct investment (FDI) policies. Such policies are suitably incorporated by way of amendments in the rules and regulations framed under FEMA. Moreover, the Reserve Bank of India (RBI) issues circulars and master directions to amend and consolidate the rules and regulations it frames under FEMA.

As per the Foreign Exchange Management (Non-debt Instruments) Rules 2019 framed under FEMA, FDI in capital linked instruments (such as fully, mandatorily and fully paid-up convertible debentures and preference shares, fully or partly paid equity shares, and warrants) issued by companies engaged in construction and development projects is allowed up to 100 percent without any approval. These projects include:

development of townships;
construction of residential or commercial premises;
roads or bridges;
hotels;
resorts;
hospitals;
educational institutions;
recreational facilities;
city and regional-level infrastructure; and

However, FDI is prohibited in real-estate business, which is defined as dealing in land and immovable property to earn a profit, but excludes the construction and development activities referred to above, and earning of rent or income on leasing the property, not amounting to a transfer. Further, 100 percent of FDI under the automatic route is also permitted in completed projects for the operation and management of townships, malls and shopping complexes, and business centers. Further, real-estate broking services and investments in registered real estate investment trusts are also excluded from the definition of ‘real estate business’ and 100 percent foreign investment is allowed in real-estate broking services under the automatic route.

Investment by foreign investors into Indian companies by subscribing to non-convertible debentures (NCDs) is governed by the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (Debt Regulations). Further, such investors are required to obtain prior registration as Category I or II foreign portfolio investors (FPI) under the Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations 2019 (the FPI Regulations) by submitting an application for a certificate of registration to the concerned designated depository participant. Upon obtaining such registration they can invest in unlisted or listed non-convertible debentures of an Indian company in compliance with the specific regulations or laws including SEBI laws (in the case of listed NCDs). FPIs may also invest in equity instruments in prohibited sectors, such as real estate business, up to a maximum individual investment of 10 percent, and aggregate FPI investment of 24 percent, of the paid-up equity capital on a fully diluted basis.

Foreign investors who meet certain eligibility criteria may also provide external commercial borrowing (ECB) either in foreign currency denominated ECB or Indian rupee-denominated ECB.

Foreign investors can also participate in overseas private placement offers or listings of rupee-denominated bonds in a Financial Action Task Force-compliant jurisdiction by an Indian entity to raise finance for undertaking activities such as the development of integrated townships or affordable housing projects.

Choice of law and jurisdiction

What territory’s law typically governs the definitive agreements in the context of real estate business combinations? Which courts typically have subject-matter jurisdiction over a real estate business combination?

The governing law for definitive agreements of real estate-related business combinations can be decided by mutual consent of the parties to those agreements, particularly when it comes to a cross-border investment transaction in real estate. While determining the jurisdiction of courts in the definitive agreements of a real-estate transaction, in the case of domestic contracting parties, due consideration should be given to where the immovable property, being the subject matter of the definitive agreement, is located since the courts within whose limits the immovable property is located will have territorial jurisdiction to try disputes regarding such immovable property under the Indian Civil Procedure Code 1908.

APPROVAL AND WITHDRAWAL

Public disclosure

What information must be publicly disclosed in a public-company real estate business combination?

The information that needs to be made public during a real-estate-related transaction concerning a listed public company is governed by:

the Companies Act 2013;
the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations); and
the SEBI (Prohibition of Insider Trading) Regulations 2015 (the PIT Regulations).

Under the Companies Act 2013, specific disclosures are required to be made by listed public companies upon the occurrence of a private placement of securities, filing of a prospectus, share transfers, corporate loans and investments, related-party transactions and the appointment or removal of directors and key managerial personnel. Periodic disclosures must be made in these companies’ board reports and financial statements, which must also be published on their websites. As per the Listing Regulations, listed public companies are required to make disclosures of certain matters deliberated upon in the board meeting that concern stock exchanges, including matters regarding:

buy-back of securities;
increase in capital through bonus shares;
financial results;
fundraising;
acquisitions;
schemes of arrangement;
sale or disposal of any unit or subsidiary of a company;
any other restructuring; and
issuance of securities.

Under the PIT Regulations, the promoters, employees and directors of a listed company have certain one-time and continual obligations for disclosures to the company, which relate to the holding of securities in a company by those persons and the trades made by them, specifically where such trades breach the specified threshold under applicable laws. Further, the company is obligated to disclose such information to the concerned stock exchange.

In addition to the above-mentioned disclosure requirements that apply to all listed public companies, certain additional disclosures, as prescribed under the Real Estate (Regulation and Development) Act 2016, are required to be made by all companies engaged in the development, sale, marketing or advertisement of real-estate projects.

Duties towards shareholders

Give an overview of the material duties, if any, of the directors and officers of a public company towards shareholders in connection with a real estate business combination. Do controlling shareholders have any similar duties?

Under Indian law, directors are construed to be agents of the company and bear a fiduciary duty towards the company and the stakeholders in the company. Material duties of the directors and officers of a company are prescribed under the Companies Act 2013, Indian securities laws (including the PIT Regulations, the Listing Regulations and the Takeover Regulations) and common law. These broadly comprise the following:

a duty to exercise reasonable skill and care;
a duty to avoid acts that are ultra vires the charter documents of the company;
a duty to exercise independent judgement;
to act in good faith to promote the objects of the company; and
ensure that there are no direct or indirect conflicts of interest with the company.

Additionally, a company’s key managerial personnel, directors and officers deriving immediate authority from the board can be designated as ‘officers in default’ for compliance with the Companies Act 2013. Under Indian law, the duties of controlling stakeholders, such as promoters, are comparatively less than those as compared to directors and other officers of a company. However, similar duties can be contractually prescribed to such controlling stakeholders.

Shareholders’ rights

What rights do shareholders have in a public-company real estate business combination? Can parties structure around shareholder dissent or rejection of a real estate business combination, and what structures are available?

The rights of shareholders of a listed public company in real-estate transactions are protected by a number of disclosure requirements, consent requirements and thresholds set forth in the Companies Act 2013, the Listing Regulations, the Takeover Regulations and the Issue of Capital and Disclosure Requirements Regulations. Under the Companies Act 2013, certain matters can only be undertaken if a special resolution approving such matters has been passed at a shareholders’ meeting of such company. These include:

undertaking investment or provision of loans or guarantees by a company exceeding 60 percentof the paid-up share capital, free reserves and securities premium account or exceeding 100 percent of that company’s free reserves and securities premium account;
issuing securities via private placement;
varying rights of a certain class of shareholders; and
altering of a company’s articles of association resulting in the conversion of such a company from a public company into a private company.

Further, the Companies Act 2013 also prescribes that the board of directors cannot exercise power in certain matters, except with the consent of the shareholders by a special resolution. These matters include sale, lease or otherwise disposition of the whole (or substantially the whole) of the undertaking of the company or where the company owns more than one undertaking, of the whole (or substantially the whole) of any of those undertakings.

The Companies Act 2013 also allows minority shareholders holding one-tenth of the issued share capital of a company to file a suit for oppression or mismanagement before the National Company Law Tribunal. Further, minority shareholders, if they exceed 100 in number, can file a class action suit to restrain a company from undertaking actions that are ultra vires its charter documents.

Under the ICDR Regulations, certain types of transactions, such as undertaking a preferential issue of securities, cannot commence unless a prior special resolution approving such issue has been obtained. The Takeover Regulations also protect the minority shareholders’ interests by ensuring that an acquirer proposing to acquire direct or indirect control of a company or an acquirer that is entitled to exercise 25 percent or more of the voting rights in a company is restricted from acquiring more than 5 percent or more of the voting rights or shares in such a company without making a public announcement for open offer, thus ensuring that minority shareholders have an exit opportunity.

Acquirers who are registered holders of more than 90 percent of the equity share capital of a company can structure around the risks posed by shareholder dissent by undertaking a minority squeeze-out, under the Companies Act 2013.

Termination fees

Are termination fees typical in a real estate business combination, and what is their typical size?

Termination fees or breakaway fees can be contractually agreed in transaction documents for a real-estate transaction, so that such fees are payable by the acquirer to the target company or the promoter of the target company, or by the target company or promoter to the acquirer to ensure that neither party reneges on their obligations during a transaction. Typically, where the target company or its shareholders dissent to proceed or fail to complete the conditions precedent, the investors may be entitled to seek specific performance or have a pre-agreed amount as damages payable by the company or shareholders that would, among other things, account for all expenses incurred by the investor on the transaction.

In the context of a real-estate transaction involving the acquisition of securities of a listed public target company that is regulated by the Takeover Regulations, a draft letter of offer is required to be submitted to the relevant stock exchange and SEBI, which should, among other things, contain the following:

the details of the offer;
the offer price and related financial arrangements;
the terms and conditions of the offer; and
the procedure for settlement and acceptance of the offer.

Accordingly, any termination fees mentioned in the transaction documents will have to be disclosed in the draft offer letter and will be scrutinized by SEBI, which might seek clarification or direct modification of the letter.

Takeover defenses

Are there any methods that targets in a real estate business combination can employ to protect against an unsolicited acquisition? Are there any limitations on these methods?

Hostile takeovers are uncommon in India and the disclosure requirements set out in the Takeover Regulations mandate that any person (including the persons acting in concert) that acquires 5 percent or more of the shares is required to disclose their activities to the stock exchange and the target company. Further, additional acquisitions also is required to be disclosed to the stock exchange and the target entity. This gives an opportunity to the management of the target company to either increase its shareholding in the company or to get a person perceived as friendly to the management to acquire a shareholding in the target entity. Additionally, defense strategies can be formulated on a case-by-case basis to thwart a hostile takeover.

Notifying shareholders

How much advance notice must a public target give its shareholders in connection with approving a real estate business combination, and what factors inform this analysis? How is shareholder approval typically sought in this context?

A public target company is required to provide advance notice to its shareholders based on the type of real-estate transaction contemplated. Under the Companies Act 2013, a company is required to give prior notice to shareholders for convening a shareholders’ meeting for matters requiring a shareholders’ resolution, such as private placement of securities or issue of securities on a preferential basis. Typically, this notice must be given 21 days in advance; however, shorter notice can be provided subject to fulfillment of certain criteria. During a shareholders’ meeting, a resolution can either be passed as an ordinary resolution or a special resolution. Ordinary resolutions can be passed by a simple majority of shareholders whereas special resolutions can only be passed if the votes cast in favor of those resolutions exceed the votes cast against such resolution in a ratio of 3:1.

Shareholder approval must be passed as an ordinary and special resolution at a shareholders’ meeting of the listed public company. Additionally, in certain transactions (e.g, schemes of arrangement) shareholder approval can only be sought once an application is submitted to the National Company Law Tribunal, which then passes an order convening a meeting of the members of the company, wherein those members must approve the scheme by a three-quarters majority

TAXATION AND ACQUISITION VEHICLES

Typical tax issues and structuring

What are some of the typical tax issues involved in real estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?

Real-estate transactions typically involve payments of stamp duty, registration charges, and a goods and services tax (depending on the nature of the transaction). For a sale of immovable property held as an investment, the profits or gains arising from transfer or disposal of real estate will likely be subject to capital gains tax in the hands of the transferor (unless a specific exemption applies). Similarly, in the event of a share transfer arrangement wherein the seller sells shares (which are held as an investment) of a land-holding company to a purchaser, the profits or gains arising from that transfer will likely be subject to capital gains tax in the hands of the seller (unless a specific exemption applies). Additionally, any development rights arrangement, joint development arrangement or any other revenue-sharing arrangement will involve a levy of goods and services tax.

Mitigating tax risk

What measures are normally taken to mitigate typical tax risks in a real estate business combination?

Tax issues depend on various parameters and are highly critical when evaluating a real-estate structure. The acquisition of the business or assets of a company could give rise to transaction costs in the form of stamp duty, capital gains tax, goods and service tax, et cetera, and transactions will have to be examined on a case-by-case basis for the evaluation of tax efficiencies.

Types of acquisition vehicle

What form of acquisition vehicle is typically used in connection with a real estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?

Until recently, acquisition vehicles in real-estate transactions were largely undertaken through private limited companies. However, depending on the nature of investment, investor and the transaction, limited liability partnerships, are frequently being considered as viable vehicles in real estate business acquisitions.

Parties to a real-estate transaction will finalize the choice of the acquisition vehicle based on the type of transaction. Examples include:

the sale or purchase of immovable property;
the sale or purchase of shares;
the lease of immovable property;
a joint venture;
the subscription to shares of a company or capital of a limited liability partnership;
the tax treatment of that vehicle;
the nature of the investor (especially where the investor is a non-resident, there are certain restrictions in terms of investing in vehicles other than companies); and
liability arising from utilizing that vehicle.

TAKE-PRIVATE TRANSACTIONS

Board consideration in take-private transactions

What issues typically face boards of real estate public companies considering a take-private transaction? Do these considerations vary according to the structure of the target?

Take-private transactions involve several steps to be undertaken in compliance with the Companies Act 2013 and the rules thereunder. Some of the key issues that a board of such a company must face include:

estimating a timeline within which the entire take-private process will be completed;
deliberating the reasons in favor of undertaking the take-private transaction and its impact on the shareholders, debenture holders and creditors of the company, because the same has to be mentioned in the petition filed with the National Company Law Tribunal; and
authorizing an officer of the company to coordinate the service of notices to the creditors and debenture holders of the company, the Securities and Exchange Board of India (SEBI), and any other concerned regulatory authority.

Additionally, a listed public company will also have to, among other things, comply with the provisions of SEBI (Delisting of Equity Shares) Regulations 2009.

Time frame for take-private transactions

How long do take-private transactions typically take in the context of a public real estate business? What are the major milestones in this process? What factors could expedite or extend the process?

Going-private transactions by a listed public company are contingent on the compliance of the provisions of the Companies Act 2013. Under the Companies Act 2013, the following steps must be completed for, inter alia, conversion of the company into a private company:

the board of directors must pass a resolution, subsequently approved by the shareholders through a special resolution, approving the alteration of articles converting the company into a private company;
within 60 days of the date of passing of the special resolution, an application must be filed with the Regional Director providing, among other things, a rationale for the conversion of the company and the impact of such a conversion on the shareholders, debenture holders and creditors of the company;
at least 21 days before the date of filing of the application, the company must advertise the application, serve a notice regarding such application to every creditor and debenture holder of the company and serve a notice along with a copy of the application to SEBI, the Regional Director, the Registrar of Companies and any other relevant regulatory body;
if an objection has been received or the Regional Director on examining the application has a specific objection under the provisions of the Companies Act 2013, it will be recorded in writing and the Regional Director shall hold a hearing or hearings within a period of 30 days, as required, and direct the company to file an affidavit to record the consensus reached at the hearing;
on the date of the hearing the Regional Director may pass an order approving or disapproving the application;
the order passed by the Regional Director shall be filed by the company with the Registrar of Companies within 15 days of the date of receipt of approval along with applicable fees; and
the company is required to submit forms evidencing compliance with the provisions of the Companies Act and rules made thereunder including – Form MGT-14 for filing the duly passed resolutions, Form GNL-2 for submission of documents, Form RD-1 for application of conversion made to the Regional Director, and Form INC-28 for filing a copy of the Order of the Regional Director.

Additionally, a listed public company will also have to, among other things, comply with the provisions of SEBI (Delisting of Equity Shares) Regulations 2021 (Delisting Regulations) with respect to the timelines involved in completing the delisting process, which includes, for example:

appropriate disclosures by the acquirer to intimate the intention to delist and make an initial public announcement;
board resolution and special resolution to be issued within 21 days and 45 days of the date the acquirer expresses his or her intention to delist the company respectively;
opening of an escrow account not later than seven working days after obtaining the shareholder’s approval;
receipt of in-principle approval from the stock exchange within 15 working days of obtaining the shareholder’s approval or regulatory approval (whichever is later);
making of detailed public announcement within one working day of receipt of in-principle approval;
dispatching of letter of offer to the shareholders within two working days of detailed public announcement;
opening of the offer within seven working days of the date of the detailed public announcement;
bidding period will remain open for a period of five working days;
public announcement to be made within two working days of the closure of the offer disclosing success or failure of the offer; and
release of shares in the case of failure and payment in the case of successful delisting to be done as prescribed under the Delisting Regulations.

NEGOTIATION

Non-binding agreements

Are non-binding preliminary agreements before the execution of a definitive agreement typical in real estate business combinations, and does this depend on the ownership structure of the target? Can such non-binding agreements be judicially enforced?

Non-binding preliminary agreements such as term sheets, memoranda of understanding and letters of intent are typically executed prior to the execution of the definitive agreements, and the negotiation and finalization of the definitive agreements. Non-binding preliminary agreements are primarily executed so that parties can obtain a brief outline of the commercial entities involved in the real-estate transaction to be pursued, the proposed rights and obligations of the parties, and the larger commercial understanding sought to be achieved in such a transaction. Generally, the clauses related to the exclusivity and the confidentiality are made binding on the parties. Where these preliminary agreements are followed by payment of advances, these preliminary agreements are binding on the parties. The clauses that the parties decide to make binding can be judicially enforced in a court of law.

Typical provisions

Describe some of the provisions contained in a purchase agreement that are specific to real estate business combinations. Describe any standard provisions that are contained in such agreements.

Purchase agreements for real-estate transactions that involve the purchase of shares, investments in an entity or the purchase of immovable property typically contain representation and warranties (R&Ws) concerning the title of the immovable property and the shares. Other R&Ws that are included in purchase agreements for real-estate transactions include, but are not limited to:

obtaining and maintaining the status and validity of approvals such as development licenses;
the development potential of the immovable property;
existence or non-existence of third-party rights or any other encumbrances;
existing or threatened litigation;
development restrictions on the immovable property such as not falling in forest zones, or subject to Archaeological Survey of India restrictions or other statutory and regulatory restrictions and the like; and
compliance with laws such as environmental laws and local land laws.

These R&Ws are generally followed by highly negotiated indemnity provisions in the definitive agreement.

Stakebuilding

Are there any limitations on a buyer’s ability to gradually acquire an interest in a public company in the context of a real estate business combination? Are these limitations typically built into organizational documents or inherent in applicable state or regulatory related regimes?

A buyer’s ability to gradually acquire an interest in a public target is subject to certain compliances prescribed under the SEBI (Substantial Acquisition and Takeover of Securities) Regulations 2011 (the Takeover Regulations) to ensure the protection of the interests of the public shareholders of a company.

As per the Takeover Regulations, any acquisition of shares or voting rights by a buyer that results in such a buyer, and persons acting in concert with such a buyer (a public accounts committee), holding more than 5 percent of the total shareholding or voting rights of a listed public company will trigger a disclosure requirement. Further, that buyer will be required to disclose every additional change in the shareholding or voting rights, where such change exceeds 2 percent of the total shareholding or voting rights of such company. A buyer is restricted from acquiring shares or voting rights in a listed public company that entitle the buyer to exercise 25 percent or more of the voting rights of a company or from acquiring control over the company without making a public announcement for the open offer.

Finally, a buyer, along with a public accounts committee (if applicable), which has acquired shares or voting rights enabling that buyer to exercise 25 percent or more of the voting rights in a company is restricted from undertaking any gradual acquisition of shares or voting rights in a listed public company resulting in the acquisition of more than 5 percent or more of the shares or voting rights of the company, without making a public announcement for the open offer in accordance with the Takeover Regulations.

In certain circumstances, the buyer proposing to acquire 25 percent or more of the voting rights or control of a company can apply for an exemption from the requirement of making a public announcement for open offer, upon fulfillment of certain criteria as stipulated in the Takeover Regulations, such as the acquisition being made under an inter se transfer of shares among immediate relatives or promoters, or the acquisition being undertaken in the ordinary course of business, such as the invocation of a pledge by a public financial institution or scheduled commercial bank. The aforesaid limitations are inherent in applicable laws and regulations and therefore may or may not be built into organizational documents.

Certainty of closing

Describe some of the key issues that typically arise between a seller and a buyer when negotiating the purchase agreement for a real estate business combination, with an emphasis on building in certainty of closing. How are these issues typically resolved?

Some of the key issues that typically arise between a seller and a buyer when negotiating a purchase agreement include:

the resolution of issues arising from the findings of the legal due diligence exercise (including any title or approval-related issues or litigation);
the finalization of conditions precedent and conditions after the closing;
management and other controlling rights in the company holding the immovable property;
clarifying the conduct of the seller and the company whose shares or properties are being sold, during the pre-closing period;
demarcating the actions to be completed by the buyer and the seller on the closing date, post-closing actions or restrictions and continuing obligations;
agreeing on the representation and warranties (R&Ws) and the need and extent of disclosures to qualify the same; and
the quantum, limitation on, and time period within which the buyer can seek indemnification from the seller.

Typically, in cases of 100 percent acquisitions (whether through the sale of shares of companies owning assets or outright purchase of immovable property through sale deeds), there are no termination clauses available with the seller, and buyers have remedies of indemnities (if agreed) or other statutory remedies of seeking damages under the law. Agreements, except above, usually contain clauses on termination for non-performance.

Environmental liability

Who typically bears responsibility for environmental remediation following the closing of a real estate business combination? What contractual provisions regarding environmental liability do parties usually agree?

Upon closing of a real-estate transaction, the acquirer typically bears the liability concerning all environmental non-compliances on such immovable property. However, any liability arising (whether retrospective or in future) because of non-compliance with the environmental laws for the period prior to the closing of a transaction is usually (and if covered under the contract) on the account of the seller. In cases where the transaction involves sale of shares of a company owning the land or project, then the liability continues to be of such company, however, the transaction agreements may (depending upon the negotiated arrangement) contain representations for the period before closing of the transaction along with corresponding indemnities.

Other typical liability issues

What other liability issues are typically major points of negotiation in the context of a real estate business combination?

The other key issues that are negotiated in a typical real-estate business combination transaction concern the:

responsibility of obtaining and maintaining the approvals for the launch and construction of the real-estate project and the transfer or endorsement of existing approvals;
timelines for the completion and delivery of the real-estate projects;
appropriation of the receivable in the project between the partners;
distribution of the cash flows;
the validity period of the indemnity obligations;
procedure on establishing dispute resolution or liability of parties on bearing costs towards settling disputes;
stamp duty, registration and other charges costs and obligations;
entitlement towards tax benefits and any corresponding liabilities;
R&Ws being provided by the existing shareholders or promoters;
accountability concerning the liabilities arising out of the construction of the project;
liability arising from the ongoing litigations concerning the land or the project; and
financing of the project and branding of the projects.

Sellers’ representations regarding leases

In the context of a real estate business combination, what are the typical representations and covenants made by a seller regarding existing and new leases?

In the context of real estate-related transactions involving the sale of leased-out immovable property, the typical representations and covenants made by the sellers are with respect to the enforceability and validity of leases in the premises along with details of the rent roll, security deposit and payment of the maintenance charges. The sellers are also required to disclose if there are any defaults on the part of the seller or the lessee in relation to the project. Further, the sellers are also required to provide a non-compete and non-solicitation warranties stating that the seller shall not construct any real-estate project within an agreed radius from the immovable property and that the seller will not solicit any existing lessee from the property.

DUE DILIGENCE

Legal due diligence

Describe the legal due diligence required in the context of a real estate business combination and any due diligence specific to a real estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?

The legal due-diligence exercise primarily focuses on determining whether the seller has a clear and marketable title to the immovable property proposed to be acquired or that forms part of the real estate-related business combinations. A title search, typically for a period of 30 years, is conducted on the immovable property to ascertain the title flow of the property.

Additionally, the title search will also involve searching for litigation, winding-up petitions or insolvency petitions or any acquisition proceedings or any restrictions under government directions on the immovable property or the seller from the available records. In cases of the purchase of a company by the purchaser, legal due diligence is also undertaken to cover the aspects related to the seller’s corporate structure, business compliances, approvals and permits, existing key or material agreements, intellectual property rights, financing arrangements, employees and litigation to which the seller is a party.

Other than the lawyers, the legal due diligence experts involved, particularly in real-estate transactions, are technical consultants to review the approvals and to physically check compliance of the construction with these approvals, and tax consultants to assess the most beneficial structure of that acquisition. Most of the diligence experts are usually involved after signing of the non-binding agreements or term sheets.

Searches

How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers, and does this depend on the nature of the underlying asset?

Typically, a title search of a property is undertaken by reviewing the records maintained by the revenue authorities concerning the title of the land. Further, searches are also conducted in the office of the sub-registrar of assurances to verify the registration status of the title documents through which the title of the land has been transferred. Regarding the lien or charges on an immovable asset owned by a company, a search is undertaken on the online records maintained by the Ministry of Corporate Affairs to verify any charges registered by the company. Concerning bankruptcy and litigation, there are no central repositories that exist at this time. To check any litigation on the seller of the property, a search can be conducted on the websites of courts that have an online judgment information system.

Further, under the Insolvency and Bankruptcy Code 2016 and the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations 2017, public companies registered as information utilities with the Insolvency and Bankruptcy Board of India are empowered to accept and maintain records on the debts and liabilities of persons, assets over which security interests have been created, balance sheets and cash-flow statements, and records of default, among other things, from financial and operational creditors.

If the purchaser is unsure as to whether the seller has a clear and marketable title to the immovable property, the purchaser may consider mitigating the risk by asking the seller to rectify any discrepancy in the title before its transfer to the purchaser, or the purchaser can take indemnities from the seller.

Representation and warranty insurance

Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?

Warranty and indemnity insurance is uncommon in India and is mostly availed in instances involving offshore transactions. Further, premiums for such insurance are also high.

Review of business contracts

What are some of the primary agreements that the legal teams customarily review in the context of a real estate business combination, and does the scope vary with the structure of the transaction?

Some of the primary issues that legal teams scrutinize in real-estate transactions concerning immovable properties include the:

review of title documents and the flow of title, including the revenue records maintained with the local registrars;
payment of government and municipal dues;
review of the financings including all security documents to check if the immovable property has been encumbered;
regulatory licenses or permits restricting or regulating the transfer of title;
underlying maintenance or other service contracts, if any;
contract related to the maintenance of the plant and machinery installed in the property; and
determination of the amount of stamp duty and registration fees payable in relation to the lease deed.

BREACH OF CONTRACT

Remedies for breach of contract

What are the typical remedies for breach of a contract in the context of a real estate business combination, and do they vary with the ownership of target or the structure of the transaction?

The typical remedies for a breach of contract in the context of a real-estate transaction are payment of damages and specific performance of the contract. For example, in a real-estate transaction involving the sale of immovable property where the seller and purchaser have executed a sale agreement:

the purchaser can seek specific performance of the sale agreement if the seller fails to hand over possession of the immovable property or seek damages if the seller fails to refund the prior consideration paid by the purchaser; and
the seller can forfeit the amounts paid by the purchaser towards the sale consideration, if the purchaser fails to pay the balance amounts of the sale consideration.

Further, purchasers typically seek interim injunctions prohibiting the sale of the immovable property to third parties pending the resolution of a dispute, or to maintain the status quo.

FINANCING

Market overview

How does a buyer typically finance real estate business combinations?

Depending on the commercial considerations that a buyer wishes to achieve in a real-estate business combination, the financing structure (which typically includes availing of debt financing from a bank, an equity investment or mezzanine financing) is finalized. The cost of financing plays a major role in those kinds of financing. These financing structures are also dependent on the nature of assets. For a rent-generating asset, the buyer may consider a lease rental discounting facility from a lender.

Seller’s obligations

What are the typical obligations of the seller in the financing?

In real-estate financing, the sellers are obliged to provide a clean and marketable title to the property. Also, the sellers are under an obligation to repay the outstanding debt concerning the real estate property and clear any dues or pending payments to such existing lenders. The sellers are also required to ensure the continuity of the leases in the property to obtain and provide all the consents or approvals as may be required to be obtained from the lenders or any other statutory authorities. The sellers are also required to ensure that all the insurance policies, approvals, permission and utilities are transferred or assigned in the name of the buyer and the property is free and clear of any encumbrances (eg, mortgage) or that require consent from the security holders has been obtained for the proposed transaction.

Repayment guarantees

What repayment guarantees do lenders typically require in the context of a property-level financing of a real estate business combination? For what purposes are reserves usually required in the context of property-level indebtedness?

Lenders typically require borrowers to provide security cover that, among other things, comprises:

the creation of a charge on the immovable or movable property of the borrower by way of a mortgage on the immovable property, or hypothecation of cash flows or the borrower’s movable assets;
corporate and personal guarantees from promoters;
a pledge of the securities of the borrower by its promoter or the majority shareholders;
non-disposal undertakings by the promoters or majority shareholders; and
the creation of a debt-service reserve account to ensure the repayment to lenders.

Further, lenders also insist that all management of the receivables or cash shall be routed through suitable escrow arrangements and the receivables shall only be utilized under an agreed waterfall.

Besides the commercial considerations of ensuring business continuity, lenders also require that the borrowers maintain certain reserves for ensuring timely payment of interest and repayment of the principal amounts.

Borrower covenants

What covenants do lenders usually insist on in the context of a property-level financing of a real estate business combination?

While providing loans in a real-estate transaction, lenders usually require that the borrower should provide exhaustive financial, information-related and negative covenants regarding the conduct of the borrower during the tenure of the loan.

Further, the borrower is also required to provide covenants related to:

the maintenance of security cover;
the end use of the funds;
the charge on the secured property and the receivables arising therefrom;
leasing criteria;
restrictions on deviation from the approved plans of construction or business plan;
restrictive covenants including with respect to creating additional encumbrances on the secured property and, or alienating the secured property in any manner;
change of control of the borrower;
information covenants including the requirement of disclosure of project development, maintenance of financial ratios and furnishing of reports periodically;
mechanism for utilization of the receivables in a project including deposit of the receivables into a separate lender’s controlled escrow account;
fund management and escrow;
the regulation of related-party transactions;
step-in rights in the event of default; and
management continuity.

In financing related to a project under construction, lenders also insist on the appointment of third-party independent consultants, such as quality surveyors and project management consultants.

Typical equity financing provisions

What equity financing provisions are common in a transaction involving a real estate business that is being taken private? Does it depend on the structure of the buyer?

Under the SEBI (Delisting of Equity Shares) Regulations 2021 (Delisting Regulations), a listed public company proposing the delisting of its equity shares is required to provide an exit opportunity to its public shareholders if none of its equity shares will remain listed on a recognized stock exchange. A listed public company is prohibited from delisting its equity shares if a buy-back of equity shares or a preferential allotment of equity shares has occurred. Further, no delisting can take place until a period of three years has elapsed from the date of listing of such equity shares.

Also, promoters cannot utilize the funds of such a company for financing any exit opportunity undertaken under the Delisting Regulations. Therefore, these methods of equity financing cannot be undertaken in a going-private real estate-related transaction. Thus, promoters or third-party acquirers can participate in an exit opportunity only by utilizing their funds to purchase the shares of the public shareholders.

COLLECTIVE INVESTMENT SCHEMES

REITs

Are real estate investment trusts (REITs) that have tax-saving advantages available? Are there particular legal considerations that shape the formation and activities of REITs?

Indian law provides certain advantages to REITs, such as tax incentives under the Income Tax Act 1961 for unitholders as well as the REIT. For instance, the interest income earned by a REIT from a special purpose vehicle and the rental income derived by REIT from real-estate assets is exempt at REIT level, but the same is taxed at the unit-holder level and this amount can be distributed to unitholders subject to applicable withholding amounts. Exchange of shares of a special purpose vehicle with units of REIT is tax-neutral for the promoters.

Further, transfer of listed REIT units on the market or unlisted REIT units in an initial public offering would be subject to securities transaction tax and eligible for concessional capital gains tax rates subject to prescribed conditions.

Furthermore, REITs are required to be registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Real Estate Investment Trusts) Regulations 2014 (REIT Regulations), and the said regulations prescribe several conditions on the functioning and operation of a REIT as an investment vehicle, including eligible investment conditions and distribution requirements wherein the REIT is required to, inter alia, distribute at least 90 percent of the net distributable cash flow.

Private equity funds

Are there particular legal considerations that shape the formation and activities of real estate-focused private equity funds? Does this vary depending on the target assets or investors?

As per the Foreign Portfolio Investors Regulations 2019 (the FPI Regulations), FPIs can comprise:

Category I FPIs (e.g, government-related investors, central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75 percent directly or indirectly owned by the government and government-related investor, pension funds and university funds, appropriately regulated entities such as insurance or reinsurance entities, entities from the Financial Action Task Force member countries); and
Category II FPIs (e.g, appropriately regulated funds not eligible as a Category I foreign portfolio investor, endowments and foundations, charitable organizations, corporate bodies, family offices, individuals, appropriately regulated entities investing on behalf of their client and unregulated funds in the form of limited partnership and trusts).

FPIs can invest in varied instruments, such as:

listed or to be listed shares, debentures and warrants issued by a body corporate;
units of schemes launched by mutual funds;
units of schemes floated by collective investment schemes;
derivatives traded on a recognized stock exchange;
units of real estate investment trusts, infrastructure investment trusts and units of Category III Alternative Investment Funds registered with SEBI;
Indian depository receipts; or
any debt securities or other instruments as permitted by the Reserve Bank of India.

Concerning equity instruments (e.g, equity shares, convertible debentures, preference shares and share warrants), the NDI Rules stipulate that the total holding by each FPI shall be less than 10 percent of the total paid-up equity capital on a fully diluted basis or less than 10 percent of the paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company, and the total holdings of all FPIs put together shall not exceed the sectoral caps, prescribed in Schedule I(3)(b) of the NDI Rules, of paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or share warrants. However, companies may increase or decrease these FPI aggregate limits in accordance with the conditions prescribed in Schedule II of the NDI Rules. Furthermore, in prohibited sectors such as real-estate business, the aggregate limit of FPI investments is 24 percent.

However, under the Debt Regulations, no such limits were prescribed concerning investments in debt instruments, including non-convertible debentures, by an FPI.

Private equity funds can also be set up as domestic funds under the ambit of the SEBI (Alternative Investment Fund) Regulations 2012 (the AIF Regulations), as Category II alternative investment funds (AIFs). However, the AIF Regulations prescribe that Category II AIFs should primarily invest in unlisted securities of an investee company or units of other AIFs.

Therefore, while evaluating the options and structure for a private equity fund making construction and development-oriented investment in India, certain aspects such as the extent of liability on investors and managers, tax treatment of the returns accruing to the investors, and the legal obligations and benefits accruing on account of the choice of fund vehicle will have a bearing on the resultant private equity fund.

UPDATE AND TRENDS IN REAL ESTATE M AND A

Key developments of the past year

Are there any other current developments or emerging trends that should be noted?

Increasing acceptance and operation of REITs in India

Recently, SEBI has also introduced ‘Governance Norms’ applicable to REITs in Schedule VIII to the REIT Regulations. The Governance Norms impose mandatory requirements of providing certain minimum information; and a compliance certificate that is to be furnished by the compliance officer, chief executive officer and chief financial officer before the board of directors of the manager of a REIT.

Another noteworthy development in relation to the governance of the board of directors of a manager of a REIT is the introduction of the requirement on the manager of a REIT in formulating a vigil mechanism, providing inter alia for a whistle-blower policy for employees as well as directors to report concerns and to provide for direct access to the chairman of the audit committee in exceptional cases.

At present there are five REITs that are operational, however after recent amendments to the REIT Regulations, the demand for REITs as investment vehicles is anticipated to increase exponentially since it allows advantages to retail investors to be able to diversify their portfolio and invest in income-generating assets as well as providing real estate conglomerates with access to capital and enable them to increase their business or market share.

At present, there are five REITs that are operational; however, after recent amendments to the REIT Regulations, the demand for REITs as investment vehicles is anticipated to increase exponentially, since they allow advantages to retail investors in being able to diversify their portfolio and invest in income-generating assets, as well as providing real-estate conglomerates with access to capital enabling them to increase their business or market share.

Real estate acquisitions under the Insolvency and Bankruptcy Code 2016 (Insolvency Code)

A large number of real-estate entities have been acquired and taken over by virtue of the corporate insolvency resolution process (CIRP) or the liquidation process provided under the Insolvency Code. Real estate companies were subject to many insolvency claims from allottees/homebuyers subsequent to homebuyers being given the status of ‘financial creditors’ under the Insolvency Code. This resulted in a number of CIRPs being initiated against project-specific companies held by real-estate groups such as Jaypee, Ireo, Amrapali and Supertech. In accordance with the provisions of the Insolvency Code, these companies were acquired by successful resolution applicants or via a successful liquidation plan (where all resolution applicants were rejected by the committee of creditors). In this manner, the Insolvency Code has emerged as an instrument to acquire real-estate companies in financial distress and revive them by injecting capital and completing pending projects in an effort to realize the value of the underlying assets to their maximum potential.

* The information in this chapter was accurate as of October 2023.

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