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Real estate investors renegotiating existing contracts fearing two regulatory changes

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Real estate investors renegotiating existing contracts.

MUMBAI: Fearing that their investments in some of the real estate companies and projects would be adversely impacted due to two new regulations many private equity and strategic investors are renegotiating their existing contracts.

The fear is that the thin capitalization introduced in the budget combined with the Real Estate Regulation and Development Act (RERA) would mean an increased tax and other legal liabilities beginning April this year.

Thin capitalization will not allow companies to claim tax deduction for interest paid on foreign debt above 30% of their EBITDA (earnings before interest, tax, depreciation and amortization). Experts say the most hit would be real estate and infrastructure companies that have large chunk of international debt at project level or in their special purpose vehicles (SPVs). The government is expected to categorize investments through non-convertible debentures (NCDs) and the dividend paid on that also as debt.

Thin capitalization concept would apply to all companies operating in India beginning April 2017, in line with the Base Erosion and Profit Shifting (BEPS) framework, a global agreement with 15 action points to check tax avoidance by multinationals. India has already adopted some of these points.
The fear is also that under RERA investors can be labeled a developer and may have to face strict penalties for any violation of rules by the projects they fund. The responsibility of compliance under the RERA is on the promoter. And the term has a wide definition to cover, not only the developer, but also a landlord and private equity or strategic investor, if they actively participate in the project. Many private equity as well as strategic investors, who have invested in real estate, mainly at the project level, is renegotiating their contracts, with the developers fearing litigation and fines once the new real estate regulations come in to force, said experts

Source: Economic Times

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