Security and Exchange Board of India (Real Estate Investment Trusts) Regulation, 2014:

An Analysis of the present sitiuation and a Roadmap Ahead

Vikash Kumar Bairagi*1

REITs allow any investor, no matter what their financial resources are, to secure all of the
advantages of investing in real estate -U.S. Senator Johnny Isakson (R-GA), On 50th
Anniversary of Real Estate Investment Trusts

Introduction

India’s real estate sector has witnessed rapid growth in recent years fuelled by robust
economic growth in the country. The rapid growth of the business of the Indian corporate
houses has increased the demand for commercial buildings, residential properties and spaces
including warehouses and shopping centres. A little more explanation is needed with real
authorities Taking into the account of such growth and requirement of the market, SEBI on
26th September 2014 notified the REIT’s with many objectives as firstly to provide a
relatively novel, commercially viable and regulated mechanism of investment in completed,
rental and income generating real estate properties, secondly to instill confidence in the
consumers.

Nature

REITs in India are in the nature of private trusts registered with SEBI, to be listed on the
stock exchange REITs shall be governed by the ‘Trust Deed’, the SEBI (REITs) Regulation,
2014 and Indian Trust Act, 1882.REITs can only invest in real estate assets or properties,
securities, Transferable Development Rights (TDTs) in India or indirectly in of the above
through Special Purpose Vehicles (SPVs). REIT is prohibited to invest in other REITs,
vacant land, agriculture, land, and mortgage. REITs will have to invest in a minimum of two
projects with 60% asset value in a single project. This makes the portfolio fairly diversified
looking at the nature of the underlying asset, i.e. real estate.

*4th Year Student, National University of Study and Research in Law, Ranchi
Benefits of REITS under a separate head:

Limitations of REITS under a separate head:

The stakeholders raised the concern over the strict structure norms, tax complexity, no
concession on stamp duty.

What SEBI did to improve the situation?

Later SEBI had to allow some relaxation in the norms. After taking in the grievances of the
entire stakeholders Security and Exchange Board of India in order to solicit the views from
the public released a consultation paper for amendments to the SEBI (REITs) Regulation,
2014 and subsequently the amendments were notified on November 30, 2016, which follows
as

First,the definition of ‘Real Estate’ or ‘property’ widened to include hotels, hospitals, and
convention centres, forming part of composite real estate projects, whether rent-generating or
income generating because one of the purposes of the REITs is to generate rent regardless of
the assets class it belong to.

Second, the concept of holding company was introduced. Hold Co defined to mean a
company or a limited liability partnership in which the REIT holds or proposes to hold a
controlling interest and minimum 51% of the equity share capital/ interest and which is not
engaged in any activity other than holding of underlying SPVs/ real estate assets.

Third, introduced the concept of ‘sponsor’ groups and allowed the maximum number of
sponsors from three to five. In real estate sector the assets are usually held by the developer
or through its group companies/individuals. Therefore, to ensure that various parties in a
holding structure (joint venture partners, developers and multiple schemes/funds of private
equity fund) may participate in the REIT and are collectively identified as sponsors, it has
been represented that the number of sponsors be increased from the current level of
maximum. Further, it has been represented that the concept of sponsor group be introduced,
where such “sponsor group" may comprise of multiple schemes/ funds/affiliates which are
under common ‘control’. Fourth, Definition of “valuer” was broadened to also include
“financial” and “technical” valuation of the REITs assets (not clear).

Country went through with major economic changes as demonetisation, Goods and Service
Tax Act, 2016, Real Estate (Regulation and Development) Act, 2016 which stalled the
implementation of REITs in its true spirit and letter and again further relaxation was provided
by the SEBI through a notification dated September 18, 2017( further description)

First, the definition of strategic investor has been introduced for example scheduled
commercial banks and non-banking finance companies, international multilateral financial
institutions to invest in REITs. It will raise the money by mitigating the risk and give
confidence to the investors. Second, amended the eligibility criteria of the “valuer” where
earlier “valuer” and its “related party” were required to disclosure of the list of disciplinary
proceedings initiated by SEBI them but in amendment list of disciplinary action against the
REIT or the parties to the REIT or their directors/members of the governing board need to
declare. Purpose of this clause is to check the whether there are any pending issues against
the REIT. Third, Allowed the single assets REITs, permitting a single asset would enable
owners of large value assets to explore REITs. Earlier REITs were required to hold at least
two projects not more than 60 per cent of the value of the assets. Fourth, Allowed REITs to
lend to underlying Holco and SPL, this will allow REITs to lend to non-corporate entities
such as LLPs, partnerships etc. Fifth, to raise debt capital by issuing debt security, Prior to
this REITs could only raise External Commercial Borrowings (ECB), which had restrictions
of usage for end users.

To provide ‘Housing for all’ govt. permitted 100% Foreign Direct Investment in
Construction- Development Projects under automatic route and even provide the
liberty to exit the project even before its completion or development of basic
infrastructure subject to lock-in period of 3 years. Not clear??

Suddenly tax complexity is coming? How is connected ? explain The problem with the tax
complexity is that First, when the sponsor is transferring the shares of the special purpose
vehicle (SPV), there is rescheduling of the tax for the sponsor but at the same time the
sponsor is going to get taxed when he sells the units of the REIT at a later point in time.
Which is not the case for normal unit holder when he transfers the units of the REIT on the
exchange, there is no tax. The second, no exemption for dividend distribution tax when the
SPV plays dividend to the REIT. Where in case of listed companies there is no compulsion to
pay dividend and it is at the boards discussion to decide whether to pay dividend or not.

The stamp duty rates for transfer of properties across the major cities in India range from 4-
8%. Providing one-time exemptions for the initial transfer of properties to REITs could
encourage more developers to adopt the REIT investment mechanism
SEBI recently allowed the Strategic Investors to invest not less than 5 per cent and not more
than 25 per cent of the total offer size.

Whereas SEBI has clarified the most of the issues of the stakeholders through various
amendments notification. But there is no enthusiasm in the Indian real estate market
regarding the REITs. As such The Blackstone-Embassy REIT is the first and only REIT to
get registered with SEBI and no listing with stock exchange so far. Why no enthusiasm

Before to take part, the author would sincerely make a case before the investors that REITs in
India is not a new structure of investment. Rather this concept was first introduced in the
USA in the year of 1960, and almost 30 countries have operating REITs market effectively
and successfully, a key generator of jobs and other economic activities. We have seen the
successful implementation of the REITs in many countries and SEBI has enforced the same
standard of operation and governance on Indian REIT. It will bring in professionalism,
transparency, and accountability in the real estate sector in a fruitful manner. The word ‘trust’
in the name of regulation will be enshrined by the Indian investors and REIT will become
real estate reality in India.

Suggestions:

Frame it properly

There is no central idea

No proper structure

Like benefits of REIT

Loopholes

To what extent is it implemented properly in India and how the implementation in other
countries

Take hints from other countries

No research at all; only copy paste

Do it properly and then send