SEBI drafts regulation allowing REITs
Recently, Securities and Exchange Board of India (Sebi) the Indian market regulator issued draft regulations for establishing Real Estate Investment Trusts (REIT) within the country. With the aim of raising capital via an initial offer prior to which subsequent funds would be raised via follow-on offers, the Sebi proposed REITs after five years of initially withdrawing similar proposals.
Previously, Sebi unsuccessfully attempted twice to introduce REITs as a real estate investment vehicle. In 2008, draft regulations were issued by SEBI only to be withdrawn later. Further, the framework for Real Estate Investment Management Company (REIMC) too was unable to lure the interest of any takers.
Definition of REITs:
Almost like real estate mutual funds, in REITs, money or investments are pooled by investors to purchase realty assets; and investors then earn dividends generated through rental income.
REITs, which are eligible to be listed on stock exchanges, can take advantage of tax benefits as the bulk of their profits is distributed as dividend to shareholders.
REITs draft guidelines:
As per the draft guidelines issued by SEBI, REITs would be permitted to be list on stock exchanges via Initial Public Offer (IPO) and it can further raise funds through Follow-On Offers.
Although, REIT would be established as a Trust covered by the provisions of the Indian Trusts Act, 1882, it wouldn’t be permitted to launch any schemes.
Only entities that possess at least ninety per cent investment within completed revenue generating projects would be accepted.
SEBI has mandated that REITs would have to distribute at least ninety per cent of the net distributable income after the respective taxes are deducted to the investors in order to ensure that investors receive a regular income.
Similar to the way issuance and listing of shares take place during an IPO, REITs too can issue units of their respective investment schemes via a public offer and thereafter list them on a stock exchange.
REITs with assets amounting to a minimum of Rs 1,000 crore alone would be eligible of issuing IPO’s. As per SEBI, this step is being taken to initially allow established players and large assets alone enter the market.
Initially the Trust would be required to apply for registration with Sebi as a REIT within the specified format. Prior to satisfying all the eligibility conditions, SEBI would grant registration to the trust.
Advantages of SEBIs initiative:
SEBIs approach towards regulations pertaining to REIT is a very commonsensical and idealistic as the major prominence has been provided to disclosures and transparency. An additional investment opportunity would be proffered to Indian investors to invest within the real estate sector. This would also be advantageous to realty developers as they would be capable of transferring their developed assets into a REI.
REIT comes as the best possible package that provides established revenue streams through regulated asset-backed investment.
Additionally, REITs would assist in boosting investments within the real estate sector as well as bring institutional credibility in the long term.
