Introduction of real estate investment trusts in India

On 10th October, 2013, SEBI had issued draft regulations on SEBI (Real Estate Investment Trusts) Regulations, 2013 (Draft Regulations) by way of a consultative paper inviting public comments. The SEBI Board has recently issued a few changes in the Draft Regulations (Final Guidelines). The Budget 2014-15 has introduced tax incentives and has also provided for relaxations in the FDI regime. With the aforementioned in place now, SEBI is likely to notify the proposed regulations soon. This Article does not examine the tax implications of REIT structures but, however, discusses a few important aspects of REITs as per the Draft Regulations and the Final Guidelines.

Eligibility criteria
The REIT shall be set up as a trust and a trust deed shall be registered under the provisions of the Registration Act, 1908. The REIT shall have parties such as trustee, sponsor, manager and a principal valuer. The trustee shall hold REIT assets in the name of the REIT for the benefit of the investors. To ensure that the activities of the REIT are managed professionally, it has been specified that the manager needs to have at least 5 years of related experience together with other requirements such as minimum net worth of INR 5 crore. The sponsor needs to have at least INR 20 crore net worth and experience of at least 5 years in the field.

Raising of Funds and Listing of Securities of REIT
The trust shall be registered with SEBI post which it can raise funds through an initial offer and once listed, may subsequently raise funds through follow-on offers. The value of REIT assets shall not be less than INR. 500 Crores. This is to ensure that only established players enter the market. The minimum initial offer size and minimum public float of INR 250 crore and of 25 percent respectively has been specified in order to ensure adequate public participation and float in the units. Further, minimum size of one unit of REIT shall be INR 1 lakh and minimum subscription size shall be INR 2 lakhs. It shall be mandatory for all units of REIT to be listed on the exchanges and shall continue to be listed on the exchange unless delisted under the Draft Regulations. Further, the funds may be raised by REITs from resident or foreign investors.

Investment conditions and dividend policy
It has been mandated that 80 percent of the value of the REIT assets shall be in completed and rent generating properties and 20 percent can be invested in other assets as specified under the Draft Regulations. The investment by a REIT shall only be in assets in India. The REITs are not permitted to invest in vacant land/ agricultural land/ mortgages other than mortgage backed securities. REITs have been allowed to invest in properties directly or through a SPV. REIT shall invest in atleast 2 projects with not more than 60 percent of the value of assets invested in one project. Further, to ensure regular income to the investors, it has been mandated to distribute 90 percent of the net distributable income after tax of the REIT to the investors atleast on a half yearly basis.

Conclusion
REITs will provide investors an opportunity to invest in income generating and completed properties. This will be less risky as compared to under-construction properties as the investment will provide a safety net to investors against any delay in project completion and disputes. It will provide guaranteed returns in the form of dividends to the investors from rental income earned. Further, it will offer the advantage of liquidity and reduced transaction costs of owning real estate assets in India. The process of buying or selling a REIT will be transparent and flexible.