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Sebi clears decks for REIT launch

The Securities and Exchange Board of India (Sebi) on Sunday set the stage for launch of Real Estate and Infrastructure Investment Trusts, commonly referred to as REITs and InvIT.

In the final regulations, the market regulator has made some major changes to what it had proposed earlier. These include allowing foreign institutional investor (FII) participation and reducing the minimum asset size for a REIT. Those in the sector said these two new instruments had the potential of attracting nearly Rs 1 lakh crore to the cash-starved real estate and infrastructure sector.

The proposals were cleared at a meeting of the Sebi board, which was addressed by Finance Minister Arun Jaitley. In Budget 2014-15, the finance minister had announced giving a pass-through status to these trusts.

In his first interaction with Sebi’s board after assuming charge as finance minister, Jaitley asked the regulator to be vigilant about possible violations in the marketplace and to come up wit measures to attract retail investors and address their grievances. Sebi Chairman U K Sinha said after the meeting that these trusts would help in the progress of the real estate and infrastructure sectors.

While the draft guidelines did not give a clarity on foreign investments in these trusts, the final norms have permitted foreign entities to invest in REITs. These investments, however, will be subject to certain guidelines, which will be issued by the Reserve Bank of India.

Among other changes, the minimum asset size of REITs, fixed at Rs 1,000 crore in the draft guidelines, has been reduced to Rs 500 crore. This is expected to bring in more assets under these trusts.

The final guidelines have also liberalised norms related to sponsors of REITs. It has increased the number of sponsors to three (from one), provided an individual owns at least five per cent of the fund.

The final guidelines have also relaxed investment norms. Now, investment of up to 20 per cent is allowed under construction assets, shares, debts of real estate companies, mortgage-backed securities, against 10 per cent proposed in under-construction assets.

“Reducing asset size to Rs 500 crore is a significant move, as it will allow more players to access this platform. Allowing REITs to invest up to 20 per cent in real estate equity and debt, will give room to diversify investment portfolio,” said Bhairav Dalal, associate director, PwC India.

A STEP AHEAD
Sebi’s final REIT framework has more relaxations than those proposed in the draft norms. A comparison
INVESTMENTS BY FOREIGN ENTITIES
Draft: Lacked clarity
Final: REITs allowed to raise funds from foreign investors, subject to guidelines to be issued by RBI
Benefit: Boost in investor participation, especially of global pension funds and insurers
MINIMUM SIZE OF REIT ASSETS
Draft: Rs 1,000 cr
Final: Lowered to Rs 500 cr
Benefit: More assets will come under the REIT fold
NUMBER OF SPONSORS
Draft: A REIT could have only one
Final: Up to three allowed, provided individual holding is at least 5%
Benefit: Crucial as industry had expressed concern over sole sponsorship norm
INVESTMENT IN UNDER-CONSTRUCTION ASSET
Draft: Up to 10%
Final: Up to 20% in under-construction assets, shares/debt of real estate companies, mortgage-backed securities
Benefit: Greater flexibility for investment

The regulator has, however, decided against reducing the requirement for the mandatory continuous holding by sponsors to ensure alignment of their interest with the trust’s. The minimum initial offer size would be Rs 250 crore, with a minimum public float of 25 per cent. The sponsors would need to have mandatory holding of 25 per cent in REIT units for three years and continuous holding of 15 per cent thereafter. Multiple sponsors would be allowed to own the mandatory holding together.

However, small investors would have to wait for some time before they are allowed to invest in these new products, as minimum investment amount has been fixed at Rs 2 lakh for REITs and at Rs 10 lakh for InvITs, given the complex nature and potential risks associated with these.

The minimum net worth of the manager would be increased to Rs 10 crore from the Rs 5 crore proposed in draft guidelines. For InvITs, too, trustees would need to be independent and not associates of sponsors or managers.

For InvITs proposing to invest in public-private partnership (PPP) projects, where the sponsor needs to hold a certain minimum proportion in the special purpose vehicle under a regulatory requirement or a concession agreement, the sponsor holding norms have been relaxed.

The minimum net worth requirement of an InvIT sponsor has been set at Rs 100 crore, against Rs 10 crore proposed in draft guidelines. The net worth for investment manager has been raised from Rs 5 crore to Rs 10 crore.

The requirement of at least two assets for publicly offered InvITs has been done away with. But industry’s demand to allow such trusts to invest in holding companies of the SPVs has been rejected.

The new guidelines are expected to enable a new investment avenue in India, on the lines of developed markets like the US, the UK, Japan, Hong Kong and Singapore. These would allow trading in units of REITs and InvITs like any other security on stock exchanges.

In his Budget speech, Jaitley had announced tax incentives for these products; those have been incorporated in the new norms, expected to come into force in a couple of months after necessary notifications.

Industry and experts have welcomed the guidelines and said it would help attract investments to the tune of Rs 15-20 billion (over Rs 1 lakh crore), from foreign as well as domestic investors, through such trusts.

Neeraj Bansal, partner & head of real estate and construction, KPMG in India, said: “After the Sebi approval, expediting notification of REIT and InvIT norms will facilitate infusion of an estimated $ 15-20 billion in the sector.”

The government feels these new investment avenues will reduce the pressure on the banking system and also make available fresh equity in the form of long-term finance from foreign and domestic sources, including non-resident Indians.

“These initiatives have opened up an additional window of funding support to the infra and real estate sector, for their complete and revenue-generated projects. This will also free exposure limits of public-sector banks in these sectors,” said Nirmal Gangwal, founder & managing director, Brescon Corporate Advisors.

Through InvITs, the government is aiming to create a new avenue for raising funds to meet infrastructure investment requirements to the tune of Rs 65 lakh crore during the 12th Five-Year Plan (2012-17).

Despite significant tax benefits for the sponsors of these business trusts, these new regulations would also be “revenue accretive” for the government in the form of taxes.

Among other exemptions, any capital gains tax on units of InvITs would be levied only at the time of ultimate disposal of the units of the sponsor under the new norms, sources said. However, the sponsor would not be entitled to the concessional securities transaction tax-based capital gains tax regime at the time of ultimate disposal of the units of the business trust.

In another benefit, any dividend would be tax exempt in the hands of the business trust and the dividend component of the income distributed by the business trust would also be exempt in the hands of the unit holder. But the portfolio SPVs distributing dividend to business trusts will be subject to dividend distribution tax.

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