Wednesday, August 13, 2014

SEBI relaxations to boost infrastructure

The Securities and Exchange Board of India (SEBI) set the stage for launch of Real Estate and Infrastructure Investment Trusts, commonly referred to as REITs and InvIT. In the final regulations, the market regulator has made some major changes to what it had proposed earlier. These include:

Allowing foreign institutional investor (FII) participation and reducing the minimum asset size for a REIT. Those in the sector said these two new instruments had the potential of attracting nearly Rs 1 lakh crore to the cash-starved real estate and infrastructure sector.

SEBI Chairman U K Sinha said that would help in the progress of the real estate and infrastructure sectors.

While the draft guidelines did not give clarity on foreign investments in these trusts, the final norms have permitted foreign entities to invest in REITs. 

These investments, however, will be subject to certain guidelines, which will be issued by the Reserve Bank of India.

The minimum asset size of REITs, fixed at Rs 1,000 crore in the draft guidelines, has been reduced to Rs 500 crore. 

Norms related to sponsors of REITs also liberalised. It has increased the number of sponsors to three (from one), provided an individual owns at least five per cent of the fund.

Investment of up to 20 per cent is allowed under construction assets, shares, debts of real estate companies, mortgage-backed securities, against 10 per cent proposed in under-construction assets.

The regulator has, however, decided against reducing the requirement for the mandatory continuous holding by sponsors to ensure alignment of their interest with the trust's.

The minimum initial offer size would be Rs 250 crore, with a minimum public float of 25 per cent. The sponsors would need to have mandatory holding of 25 per cent in REIT units for three years and continuous holding of 15 per cent thereafter. Multiple sponsors would be allowed to own the mandatory holding together.

The minimum net worth of the manager would be increased to Rs 10 crore from the Rs 5 crore proposed in draft guidelines. For InvITs, too, trustees would need to be independent and not associates of sponsors or managers.

For InvITs proposing to invest in public-private partnership (PPP) projects, where the sponsor needs to hold a certain minimum proportion in the special purpose vehicle under a regulatory requirement or a concession agreement, the sponsor holding norms have been relaxed.

The minimum net worth requirement of an InvIT sponsor has been set at Rs 100 crore, against Rs 10 crore proposed in draft guidelines. The net worth for investment manager has been raised from Rs 5 crore to Rs 10 crore.

The requirement of at least two assets for publicly offered InvITs has been done away with. But industry's demand to allow such trusts to invest in holding companies of the SPVs has been rejected.

Among other exemptions, any capital gains tax on units of InvITs would be levied only at the time of ultimate disposal of the units of the sponsor under the new norms. However, the sponsor would not be entitled to the concessional securities transaction tax-based capital gains tax regime at the time of ultimate disposal of the units of the business trust.

In another benefit, any dividend would be tax exempt in the hands of the business trust and the dividend component of the income distributed by the business trust would also be exempt in the hands of the unit holder. But the portfolio SPVs distributing dividend to business trusts will be subject to dividend distribution tax.

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