Proposed Regulatory Framework for REITs

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Considering the important role that REITs play, a separate regulatory framework under draft SEBI (Real Estate Investment Trusts) Regulations, 2013 has been proposed for introducing REITs in India. Salient features of the proposed framework are as under:

A. Structure of the REIT

  1. The REIT shall be set up as a Trust under the provisions of the Indian Trusts Act, 1882. REITs shall not launch any schemes.
  2. The REIT shall have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer.

B. Registration of REIT

  1. The Trust shall initially apply for registration with SEBI as a REIT in the specified format. It shall fulfil eligibility criteria as specified in the draft Regulations.
  2. SEBI, on being satisfied that the eligibility conditions are satisfied, shall grant the REIT certificate of registration.

C. Offer of units to the public and listing of units

  1. After registration, the REIT shall raise funds initially through an initial offer and once listed, may subsequently raise funds through follow-on offers.
  2. Listing of units shall be mandatory for all REITs. The units of the REIT shall continue to be listed on the exchange unless delisted under the Regulations.
  3. For coming out with initial offer, it has been specified that the size of the assets under the REIT shall not be less than Rs. 1000 crore which is expected to ensure that initially only large assets and established players enter the market.
  4. Further, minimum initial offer size of Rs. 250 crore and minimum public float of 25% is specified to ensure adequate public participation and float in the units.
  5. The REIT may raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of the REITs may be offered only to HNIs/institutions and therefore, it is proposed that the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh.

D. Investment conditions and dividend policy

  1. In line with the nature of the REIT to invest primarily in completed revenue generating properties, it has been mandated that at least 80% of the value of the REIT assets shall be in completed revenue generating properties. In order to provide flexibility, it has been allowed to invest the remaining 20% in other assets as specified in the proposed Regulations.
  2. To ensure regular income to the investors, it has been mandated to distribute atleast 90% of the net distributable income after tax of the REIT to the investors.
  3. REITs have been allowed to invest in the properties directly or through special purpose vehicles, wherein such special purpose vehicles (SPV) hold not less than 90% of their assets directly in such properties. However, in such cases, it has been mandated that REIT shall have control over the SPV so that the interest of the investors of the REIT are not jeopardised.
  4. The REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities.
  5. REIT shall only invest in assets based in India.
  6. Investment up to 100% of the corpus of the REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than Rs. 1000 crore.

E. Borrowings and deferred payments

  1. To avoid excessive leverage, the aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50% of the value of the REIT assets. If the same exceeds 25%, requirement of credit rating from a credit rating agency and approval of majority of investors has been specified.

F. Valuation of assets

  1. To ensure that the underlying assets of REIT are valued accurately, requirement of a full valuation including a physical inspection of the properties has been specified at least once a year.
  2. A six monthly updation in the valuation capturing key changes in the last six months has also been specified. Consequently, the NAV shall be declared at least twice in a year.
  3. Further, for any purchase of a new property or sale of an existing property, it has been required that a full valuation be undertaken and the value of the transaction shall be not less than 90% & not more than 110% of the assessed value of the property for sale/purchase of assets respectively.

Source: Consultation paper on draft SEBI (Real Estate Investment Trusts) Regulations, 2013

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