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Real estate sharks hail Sebi’s REITs norms, say it will please US investors

Industry body CREDAI, however, demanded that government should remove capital gain tax and dividend distribution tax on transactions under REIT to make this instrument attractive. Sebi on Friday notified norms for listing of business trust structures, REITs and InvITs, that would help attract more funds ‘in a transparent manner’ into realty and infrastructure. ‘It's a good decision at a time when the Prime Minister is visiting the US. This is a good signal to US investors who can look at India positively,’ Credai Chairman Lalit Jain said.

Commenting on the development, CBRE South Asia Chairman & Managing Director Anshuman Magazine termed it as a fantastic step by Sebi and the Government. ‘Both REITs and InvITs have potential to bring $50 billion over the next few years. However, I hope the government look at the tax issues raised by the industry to enable formation of REITs and InvITs,’ Magazine said. Magazine said the issue of capital gain tax and dividend distribution tax on these two structures needs to be resolved.

Global property consultant JLL India Chairman & Country Head Anuj Puri said the REIT would be able to address a major concern of the industry related to liquidity. ‘REITs will render the entire real estate funding process more institutionalised, and therefore transparent. This is a big positive, and
we look forward to Indian real estate attracting a sizeable amount of investments...,’ Puri said.

Listing out benefits of REITs, JLL India said that for developers, the trust bring the benefits of liquidity and faster monetisation of leased assets. ‘For investors, the benefits are faster partial or full exit from project, and better valuations. To unit holders, they bring regular income, hedge against inflation, the option to invest in real estate with limited investment and a share of the upside in capital values,’ JLL said.

PWC India Associate Director Bhairav Dalal said this is an extremely positive move for the Indian Capital Markets. ‘It could free up some liquidity for large real estate and infrastructure players. It would provide investors an opportunity to invest in Indian stabilised assets through an Indian listed platform,’ Dalal said. Walker Chandiok & Co LLP Partner Neeraj Sharma said it is a good attempt by Sebi by ensuring detailed and quality disclosures in the REITs guidelines.

Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvITs), whose norms were approved by the regulator in August, would get tax incentives. For both trusts, the minimum initial offer size should be Rs 250 crore with a public float of at least 25 per cent, according to the Securities and Exchange Board of India (Sebi). The minimum asset base for these trusts to get listed is Rs 500 crore.

To ensure transparency, these trusts would be subject to stringent norms on disclosure as well as related party transactions. In separate but similarly-worded regulations for the two trusts, Sebi said that all related party transactions should be at ‘arms-length’ in accordance with relevant accounting standards.

REIT and InvIT are required to make investments either directly or through Special Purpose Vehicles. In case of PPP projects, money can be put in only through SPV. In the case of REITs, the minimum public holding should be 25 per cent while the total number of outstanding units at all times as well as the number of unit holders — who are part of the public — should be 200.

Under both the initial offer and follow-on public offer, the REIT shall not accept subscription of an amount less than two lakh rupees from an applicant, as per the norms. Sebi has said that at least 80 per cent of the value of REIT assets should be invested in completed and rent generating properties.

REIT is barred from investing in vacant land or agricultural land or mortgages other than mortgage backed securities. ‘Not less than seventy five per cent of the revenues of the REIT and the SPV, other than gains arising from disposal of properties, shall be, at all times, from rental, leasing and letting real estate assets or any other income incidental to the leasing of such assets,’ Sebi said. At least two projects should be held by a REIT, either directly or through SPV. Out of that, only up to 60 per cent of the asset value can be invested in one project.

With regard to InvITs, the regulator said they should put in at least 80 per cent of the value of the assets in completed and revenue generating infrastructure assets should, among others, raise funds only through public issue of units. In this case, minimum subscription from any investor in initial and follow-on offer would have to be Rs 10 lakh. ‘The units proposed to be offered to the public not less than 25 per cent of the total of the outstanding units of the InvIT and the units being offered by way of the offer document,’ Sebi added.

A investment manager of InvIT can apply for delisting if among others, there are no projects or assets remaining under the trust for more than six months and it does not propose to invest in any project in future. For trusts, that propose to invest over ten per cent of its asset value in under construction projects, funds can be raised only through private placement to Qualified Institutional Buyers and body corporates.
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