Global investors are certainly excited by the possibilities of the Indian market: according to research from Venture Intelligence, private equity firms made 90 investments in Indian real estate companies and projects during 2015, with an announced value of over $5 billion. This was the highest activity level in the market since the 2008 financial crisis, and reflected a 20 percent increase over the 75 real estate-related investments made in 2014, according to the study. Yet, investing in Indian real estate requires navigating a complex web of opportunity, unpredictable regulatory hurdles, and significant anti-corruption risk factors.
In 2015, the World Economic Forum identified corruption among the top five most problematic factors for doing business in India. Additionally, non-governmental organization Transparency International ranked India 76 out of 168 countries in its 2015 global corruption rankings: on a scale of 0 (most corrupt) to 100 (very clean), India earned a raw score of only 38. These corruption risks are pronounced in the real estate sector. A 2005 study conducted by Transparency International's India affiliate further found that an estimated $700 million worth of bribes are paid annually by users of India's land administration services, with 63 percent of those surveyed admitting to having paid bribes relating to buying, selling, renting, or inheriting property.
As is true in other high-risk jurisdictions, some of the most significant challenges in the Indian real estate market are the extensive government permit and approval requirements, along with what is often a corresponding need to rely on third parties when obtaining those approvals. The complexity of any one development project can increase dramatically due to the involvement of multiple government agencies.
While the Indian federal government implements overall infrastructure policy, individual state governments oversee land, energy, and water supplies, and various municipal corporations issue project-specific construction permits and other procedures. For example, in the Indian state of Maharashtra, it is estimated that 40 different procedures must be completed to gain construction permits for a single warehouse, with large projects potentially requiring over 100 different approvals, according to the World Bank Group's Doing Business report. On average, larger projects also require Indian builders to produce about 175 unique documents and interact with 40 different central, state, and local government departments, as per a BBC News report. It may take three to four years to complete the official paperwork and get all the requisite bureaucratic clearances.
It is not hard to perceive then the risk that government officials may demand corrupt payments to expedite any of these processes, or that companies may feel tempted to pay them. Additionally, overseas investors often work with Indian third-party property managers to handle the day-to-day management and development of projects, and property managers themselves often outsource certain government interactions or regulatory approvals to third- party consultants, some of whom are paid only after they have obtained the particular approval in a timely manner. This can make it more difficult for investors to monitor and control activities on the ground in India. At the same time the Foreign Corrupt Practices Act (FCPA) and other global anti-corruption laws may deem a controlling investor liable for any misconduct committed by a third-party acting on the investor's behalf.
Accordingly, investors interested in Indian real estate projects should perform risk-based anti-corruption due diligence not only on a particular investment opportunity, but also on local partners or third parties that will be engaged in the property's development and management or that may have identified the potential investment opportunity. With respect to any outstanding or ongoing permitting or approvals, investors should understand who specifically will be responsible for obtaining the approvals and may want to include that party in the due diligence scope.
Depending on the transaction, appropriate diligence measures might include searches of public media, due diligence questionnaires, a review of financial records and other corporate documents, background checks, or management interviews. Investors should also evaluate the strength of their ongoing anti-corruption policies, trainings, and monitoring program post-investment. These steps can help ensure that investors are able to achieve both profitable development and anti-corruption compliance in the thriving Indian market.