Sebi notifies norms for REITs, infrastructure investment trusts

The Securities and Exchange Board of India (Sebi) on Friday firmed up regulations that will govern real estate investment trusts, or REITs, and so-called infrastructure investment trusts (InvITs) that the market regulator decided to allow last month. Following a board meeting in August, Sebi had cleared a long-pending proposal to allow Indian firms to launch REITs —a move that will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net worth individuals, and ultimately ordinary investors. All REIT schemes, to start-off with, will be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unit holders. The returns will be derived mainly from rental income or capital gains from real estate. REITs, Sebi said, will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs).

In separate 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 the case of PPP projects, money can be put in only through SPV. The minimum public holding in REITs 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.

Bhairav Dalal, associate director, PwC India , said reduction in the minimum asset value to Rs 500 crore for REIT IPO will enable more sponsors to enter into the REIT market. REITs can invest in SPVs which are set up as LLPs. Single asset REIT concept was withdrawn thereby reducing the concentration risk. Investment in completed and rent generating assets has been reduced from 90 per cent to 80 per cent and allowing additional 10 per cent in other specified assets will provide additional flexibility and diversify the risk profile.”

Under both the initial offer and follow-on public offer, the REIT should not accept subscription of an amount less than Rs 2 lakh 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.

While the concept of REITs has been in existence in developed markets for several years now, it is a new concept in India and investors need to know what it is and how it works before they put in their hard earned money to invest in them.