The Securities and Exchange Board of India (SEBI) on Monday proposed to include hotels, hospitals and convention centres under its definition of real estate as part of efforts to ease norms related to real estate investment trust (REITs) and make the investment vehicles attractive for investors and developers.
The proposal is one of many measures the capital markets regulator suggested in a consultation paper released on Monday to seek public feedback before it finalises the revised norms.
Hotels, hospitals and convention centres fall under the domain of infrastructure as defined by the Ministry of Finance. But SEBI said large townships and commercial projects often offer business parks, hospitals and hotels as part of the projects and that each of these are rent-generating completed assets. So, such assets should fall within the definition of ‘real estate’ or ‘property’ under REITs as the intention is to include rent-generating properties, it said.
SEBI had put in place rules for REITs in September 2014 but these trusts haven’t generated investors’ interest, and industry players have been seeking more steps to make them attractive. The government had earlier announced tax sops for REITs. The consultation paper comes almost a month after SEBI said it planned to bring about these changes.
In the paper, SEBI also recommended removing restrictions on special purpose vehicles that are holding companies to invest in other SPVs that own the assets, increasing the number of sponsors and allowing a higher proportion of investment in under-construction properties.
Real estate assets are held through multiple layers of investments and also through multi-level holding structures. So, the requirement of having all assets under one vehicle or under multiple vehicles at the same level for listing would involve significant restructuring, leading to significant costs in terms of stamp duty on asset transfer and issues relating to tax on dividend distribution/buyback, the paper said.
Another change on the cards is an increase in the number of sponsors from three to five. This is to ensure that various parties in a holding structure (joint venture partners, developers and multiple schemes/funds of private equity firms) may participate in the REITs and are collectively identified as sponsors. SEBI also plans to introduce the concept of a “sponsor group", which may comprise multiple schemes/ funds/affiliates under common control.
The proposed changes also include aligning minimum public holding requirements with Securities Contracts (Regulation) Rules (SCRR). The paper said that given the nature of REITs and the asset base involved, marketing and selling an issue size of 25% at one instance may not be plausible. It, therefore, proposed to ease the restriction.
The other significant amendment proposed in the paper is allowing REITs to invest up to 20%, up from 10%, in under-construction properties. The move is aimed at providing greater flexibility to REIT managers in determining the composition and also help widen the portfolio.
To rationalise compliance with respect to related-party transactions, the regulator plans to do away with the requirement of approval from 60% of unit holders for passing-related party transactions and 75% in case of special resolutions. The aim is to bring the requirement of unit holder approval for related-party transactions in line with the Companies Act. Among other key changes, the paper has sought to clarify the definition of associates so that entities that have no connection to the investment manager or sponsor don't get included.
SEBI has sought comments on the proposals by 7 August, 2016.
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