The capital markets regulator Securities and Exchange Board of India (SEBI) has given its consent to set up real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs) and, in a move that would provide the cash-strapped sectors an additional channel to raise fresh capital.
SEBI issued final guidelines on REITs and InvITs after a board meeting on Sunday, which was addressed by Finance Minister Arun Jaitley.
The capital markets watchdog had announced draft guidelines to launch REITs in October last year and had also floated a consultation note for InvITs around the same time. However, it had kept the final approval at bay due to uncertainty about the taxation structure. In the Budget 2014-15, the finance minister had announced giving a pass-through status to these trusts.
Pass-through status means that the return from investments through these instruments will be taxed only in the hands of investors and the trusts will not have to pay tax on income.
For InvITs the final norms are much in line with the revised guidelines floated by SEBI last month (more on that here). However, there are a string of changes for REITs.
Some provisions are as per original draft norms such as a minimum initial offer size of Rs 250 crore and minimum public float of 25 per cent to ensure adequate public participation and float in the units. But there are many minor changes in the norms from what SEBI had initially proposed.
For instance, the minimum asset size that REITs need to hold has been brought down to Rs 500 crore against Rs 1,000 crore.
Also, the guideline says at least 80 per cent of the value of the REIT assets shall be in completed and revenue generating properties, compared with original requirement of having at least 90 per cent of the value of the assets in such completed properties.
Accordingly, the ceiling for other assets- developmental properties, mortgage backed securities, listed/unlisted debt of realty companies, equity shares of listed companies in India which derive at least 75 per cent of their operating income from real estate activity, government securities, money market instruments or cash equivalents, has been raised to 20 per cent. But another rider is that investments in developmental properties shall be restricted to 10 per cent of the value of the REIT assets as originally proposed.
SEBI has also limited the exposure to any single project. As against the original plan, which allowed investment up to 100 per cent of the corpus in one project subject to the condition that the minimum size of such asset is not less than Rs 1,000 crore, the final norm says REITs shall invest in at least two projects with not more than 60 per cent of value of assets invested in one project.
The regulations say REITs shall invest in commercial real estate assets, either directly or through SPVs. In such SPVs a REIT shall hold or propose to hold controlling interest and such SPVs shall hold not less than 80 per cent of its assets directly in properties and shall not invest in other SPVs. Earlier SEBI had proposed 90 per cent as a floor for such assets.
SEBI has allowed REIT having multiple sponsors but not more than three, subject to each holding at least 5 per cent of the units of the REIT. Such sponsors shall collectively hold not less than 25 per cent of the units of the REIT for a period of not less than three years from the date of listing. After this period, the sponsors, collectively, shall hold minimum 15 per cent of the units of REIT, throughout the life of the REIT, as originally proposed.
(Edited by Joby Puthuparampil Johnson)