SEBI’s Proposed Real Estate Investment Trusts Regime

By Advocate Sushant Shetty

Image for TaxThe Securities and Exchange Board of India (SEBI), India’s Market Regulator, has recently released a press note to revive a five year old proposal that will allow real estate investment trusts, (REIT), in India.

REITs are investment vehicles that invest into real estate assets to generate income, which is passed on to investors. REIT units are similar to stock, in the sense that even REIT units are listed and traded on a stock exchange.

SEBI has stated that the REITs may raise funds from both, resident and foreign investors. However, SEBI has proposed that initially the units of the REITs may be offered only to high net worth individuals and institutions and thus, it was also proposed that the minimum subscription size should be INR 2 lakhs and the unit size should be INR 1 lakh.

According to the draft Regulations, for launching an initial offer, the size of the assets under the REIT would have to be at least INR 1,000 crore. Also, the initial offer size must be at least INR 250 crore, with a minimum public float of 25%. These limits ensure adequate public participation and also ensure that only well-established companies with large assets enter the market.

The regulator has proposed that a minimum of 90% of the value of the REIT assets would have to be in completed revenue-generating properties and the balance 10% can be invested in other assets. REITs will be able to invest in properties directly or through special purpose vehicles.

REITs have also raised several concerns in relation to taxation of REITs, foreign investments in REITs and stamping of agreements relating to transfer of property to the REITs.

Taxation Aspect

The draft Regulations are silent on taxation of REITs, as the law currently stands, REITs would currently attract multiple level of taxes viz., 30% tax on yield and 15% dividend distribution tax which would make REITs unappealing to investors. Though SEBI has already sought the Income Tax department’s approval for getting a ‘pass through’ status by amending the Income Tax Act, the Finance Ministry has ruled out any such amendments before India’s 2014 general elections.

Stamp Duty Aspect

The initial transfer of immovable property by a sponsor to the REIT could attract stamp duty on conveyance under Article 25 of the Bombay Stamp Act which is currently 5% of market value.

Foreign Investment Aspect

Since, currently no mechanism to permit foreign investment in REITs has been recognized, as these units do not fall under the category of securities, relevant amendments would have to be made in the SEBI’s Securities Contract Regulation Act, 1956, and in RBI’s regulations, in order to allow Foreign Institutional Investors to invest in REITs.

SEBI will have to address the above lacunae and make suitable amendments in the draft Regulations and amendments will have to be made in allied laws before implementing the REIT regime.

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