When Foreign Investors Exit: Why India's Real Estate Governance Fails Minority Shareholders

~By Srijan Solanki, National Law University, Delhi

Imagine standing helplessly in front of your own company's half-finished tower as the foreign partner walks away with their share of the profits. According to India's FDI rules, such a scenario is not only legal but also, gradually, becoming the new normal. It means that a foreign investor can repatriate capital 3 years to the day after municipal approval, irrespective of whether the construction is 30% or 80% complete. The time difference between the lock-in period and projection completion creates a sudden and undesirable governance vacuum. This makes the Indian minority stakeholders vulnerable to capital withdrawal without due recourse or remedy.

This blog focuses on the governance failure behind the manner in which FDI exit mechanisms in real estate joint ventures facilitate capital flight in the middle of the project, thus leaving minority shareholders without any way of addressing their grievances

1. The FDI Framework: How Press Note 10 Creates the Problem

1.1 Defining "Project Commencement"

According to Press Note 10 (2014) of the Ministry of Commerce and Industry, construction and development can have 100% FDI through the automatic route. The note characterizes "project commencement" as "the date of approval of the building plan/lay out plan by the relevant statutory authority." This explanation is very misleading. Municipal or state approval is a binary administrative verification of zoning compliance and does not certify either construction readiness or project viability.

The difference between when the approval is given and when the actual construction will start is huge: usually, 12-18 months pass while developers obtain the environmental clearances, complete the land acquisition, hire contractors, and prepare the equipment. Nevertheless, the regulatory lock-in clock already starts ticking from the point of approval, not the actual commencement. This gives leeway to a kind of arbitrariness, which, is explored further in this blog.

1.2 How the Lock-In Period Enables Exit

Suppose the building plan is approved in January 2022 and actual construction starts in June 2023. The investor's three-year lock-in period will end in January 2025. At that time, the construction work will only have been going on for 19 months (from June 2023), and the project might be only 30-40% complete. The investor is thus allowed to exit the investment according to the regulatory requirements, although the real construction is still in its very early stages.

This leads to investor incentive misalignment, wherein the investor's capital withdrawal window is at peak execution risk, owing to which projects need a maximum capital infusion for completion of the foundation, structural work, and facade installation.

This is a critical loophole, within which foreign investors may get away with the three-year lock-in by handing over the equity stake to someone else, instead of capital repatriation (which is restricted). In other words, a foreign investor who initially puts 50 crores into a project at the time of approval can, within 2-3 years, sell his/her stake to an Indian buyer at a higher price (that is pushed up by pre-sale customer advances) without any regulatory lock-in restrictions. This results in a mere change of ownership, with no money going outside India’s domestic economy. The investor’s earning is not from the completion of the project, but rather, from pre-sale bookings and stake appreciation.

2. Why​‍​‌‍​‍‌​‍​‌‍​‍‌ Corporate Governance Protections Fail

2.1 The Assumptions Underlying Sections 241-246

Sections 241-246 of the Companies Act, 2013 allow minority shareholders to directly move the NCLT for relief from oppression and mismanagement of the company by the majority shareholders. These provisions assume that harmful actions result from discretionary management decisions, the board taking actions, dividend policies, and appointment decisions, subject to governance review.

However, FDI exit is quite different, being a regulatory-automatic process. In this case, the expiry of the investor's three-year lock-in period automatically triggers the repatriation of funds; the board has no discretion to intervene, there is no voting authority that approves the exit, and no governance mechanism can stop the withdrawal.

When injury arises from a regulatory action rather than a management decision, Sections 241-246 of the Companies Act merely serve a theoretical relief and are practically useless. The NCLT could have looked into whether the majority (foreign investor) "oppressed" the minority by the exercise of repatriation rights, but this has not been realized in practice.

2.2 Minority Shareholder Isolation in FDI Structures

Typically, joint ventures between foreign investors and Indian co-promoters provide for proportional board representation corresponding to the equity stake. For instance, if an investor has 60% equity, they will have 60% board representation. Once the board decides to withdraw capital for their benefit, the investor-controlled board faction will be the one that blocks the protective actions.

However, minority shareholders hold such small stakes that they cannot block repatriation under shareholder agreements (which usually require 75-90% consent for major transactions). There is no help from sections 241-246, as this repatriation is a regulatory one. Therefore, there exists a dual governance void: the exit is regulatory-automatic, and the stall is operationally opaque. Minority shareholders are exposed to risks that they did not cause and cannot be remedied through the existing corporate law framework.

3. The Supreme Court's Oversight

The Supreme Court’s September 2025 ruling in Mansi Brar Fernandez v. Subha Sharma recognized housing as a basic human right under Article 21 and facilitated RERA and NCLT support for homebuyers.

However, the Court failed to see another house of cards: the shareholders of real estate companies are the ones most vulnerable, not the homebuyers. These shareholders are the equity investors and co-promoters who face capital withdrawal by foreign partners without any statutory or contractual remedy. The aforementioned “landmark” judgement, that aims to set the transformation in motion for the homebuyers, still leaves the problem of shareholder governance untouched.

4. Three Structural Remedies

The remedies suggested below target the issue through different layers: statutory intervention, administrative regulation, and contractual governance, through which the rights of India's minority real estate shareholders can be addressed.

4.1 Solution 1: Redefine Project Commencement

The first step is to rewrite the definition of “project commencement” so that the starting point of the three-year lock-in period is more accurate. Presently, this is counted from the time the municipal building plan is approved. This hiatus provides the investors with an opportunity to attain exit eligibility while the projects are still very early in execution. The remedy spells out that project commencement means the day when construction actually starts, and the 5% physical progress verified by a certified architect would be the yardstick. This would ensure that the lock-in period includes the critical phase of construction, when investor capital is genuinely needed, rather than the phase of preliminary approval.

4.2 Solution 2: Require Independent Director Approval for Exit

The second solution to the problem brings in the necessity of oversight at the board level of the significant investor exits. Currently, once the regulatory lock-in period is over, the repatriation of equity can be done automatically without any regard to the project status or the interests of the remaining shareholders. The measure calls for SEBI and RBI to release joint instructions that protect board-level independent directors against arbitrary reductions in shareholding. For instance, Rs. 10 crore may be considered as the maximum threshold of any unilateral reductions in shareholding, above which the independent director’s approval would act as a check against arbitrary exit. This quantum may be subject to other policy considerations. Before giving the nod, independent directors should ascertain the project's completion status, whether the remaining capital suffices for contractual homebuyer obligations, and whether the continuing shareholders are capable of completing the project.

4.3 Solution 3: Tie Investor Exit to Construction Milestones

The third solution is the usage of legally binding clauses that align investor payouts with actual construction progress. The foreign investors should only be allowed to withdraw their capital in tranches: one-third when the trunk infrastructure work is done (roads, water, sewerage, certified by the municipal authority, and auditor), one-third upon completion at 75%, and one-third upon completion of the project. Prior to any of these milestones, early exit would require the unanimous consent of the minority shareholders. This directly ties the capital withdrawal to the project advancement rather than the time passage. Section 58(2) of the Companies Act, 2013, allows such contractual agreements via shareholder agreements. The industry associations can have ready-made template agreements within 4-6 months for the institutional standard adoption, requiring no regulatory or legislative action.

Together, these may aid to eliminate a structural incentive against premature exit by aligning investor interests with project completion, introducing oversight, and creating enforceable exit conditions.

Conclusion

The FDI exit regime has given rise to vulnerabilities in corporate governance that have not been acknowledged in the recent Supreme Court housing rights judgment. While there is no doubt about the importance of homebuyer protection, minority shareholders in real estate joint ventures need statutory intervention, regulatory facilitation, and contractual safeguards to prevent capital dumping mid-project.

The remedies here target different layers, which include statutory intervention, administrative regulation, and contractual governance, that can thus undertake their course independently without a legislative amendment. Together, they pave the way for minority shareholders to have FDI exit decisions held to account and to be able to turn to procedural and contractual recourse. The aim is to stop pre-mature exists from happening in the first place, and support the formation of joint ventures in a way that would not allow mid-project exit incentives to abandon ​‍​‌‍​‍‌​‍​‌‍​‍‌capital.