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Real Estate Investment Trust in India

This note is only intended as a general overview and is not to be viewed as a substitute for legal advice. Brands & Bonds shall not be liable for any actions taken or not taken on the basis of this note.

What is REIT

Real Estate Investment Trust commonly referred as REIT has its structure similar to mutual fund structure. Identical to mutual funds, REITs will also pool money from public/investors and issue ‘Units’. REIT is essentially a Trust and the Units issued essentially imply the proportional beneficial interest of the assets of the Trust. REIT should be professionally managed as investors are able to invest in a professionally-managed portfolio of real estate properties. Precisely a real estate mutual fund can be called as a REIT.

Evolution

The process of introducing REIT in India commenced when Chapter VIA was introduced to Mutual Fund Regulation, 1996. Further SEBI (Mutual Funds) Regulations, 1996 was amended vide Notification dated April 16, 2008 so as to permit mutual funds and launch Real Estate Mutual Funds. In consequence SEBI for the third time brought Draft Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2013 and finally SECURITIES AND EXCHANGE BOARD OF INDIA (REAL ESTATE INVESTMENT TRUSTS) REGULATIONS, 2014 was notified on September 26, 2014. The Finance Act, 2014 has finally provided tax pass through for the REIT.

This has initiated the process of REIT regime in India.

Salient features of SEBI (REIT) Regulations 2014 are:

Investment of REIT

The Investment by a REIT shall only be in (i) SPVs or (ii) properties or (iii) securities or (iv) Transferable Development Rights (TDR).

SPV Mode of Investment

REIT should hold not less than 50% equity share capital or interest and the SPV shall hold not less than 80% of its assets directly in properties and further shall not invest in other SPVs. Such SPV should not be engaged in any activity other than holding and developing property.

The REIT may invest in properties through SPVs subject to the following,-

Direct Investment

Parties of the Trust

I. Sponsors

Sponsor is the person who sets up the REIT. (Equivalent to Author of the Trust) The REIT may have a maximum of three (3) Sponsors and each such Sponsor is eligible to hold 5% respectively. All Sponsors collectively should have a collective Net worth (NW) of 100 Crore and individually 20 Crore of NW. The Sponsors should hold not less than 25% of the Units of REIT for a period of 3 years from the date of first listing and after 3 years they shall hold 15% throughout the life of the REIT.

The Sponsor should have a minimum of 5 years’ experience in real estate.

II. Trustee

The Trustee is to hold the assets in trust for the Unit Holders. The Trustee of REIT shall be a SEBI registered Debenture Trustee as per the (Debenture Trustee) Regulation 1993.

The Trustee is an Independent body not be an associate of the sponsor/manager. The Roles and responsibilities of the Trustee should be governed by Investment Management Agreement.

The Trustee is entrusted with the supervisory role to ensure the activities of REIT be in accordance with SEBI regulations. The Trustee shall make ensure that the real estate held by REIT have a proper and marketable title.

III. Manager

The Manager has operational responsibilities and should have a minimum of five year experience in Real Estate. He should also have skills in property development, redevelopment, acquisitions, leasing and management.

IV. Principal Valuer

The Principal Valuer is expected to conduct full valuation at least once in a year and the Net Asset Value of REIT shall be declared at least twice in a year.

TAX

Under section 10(23FD), the dividend received from business trust is exempt in the hands of the Unit holders. Distribution of capital gain component to unit holders, by the Trust is exempt in the hands of the unit holders.

It is reported in March first week of 2015 that Finance Minister Mr. Arun Jaitley rationalised capital gain tax regime for the sponsors of newly-created business structure REITs. Further, the Budget also proposed that the rental income arising from real estate assets directly held by the REIT would be allowed to pass through and to be taxed in the hands of the unit holders of the REIT.

Author - Vineed Abraham & Varghese K Paul

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