In order to help the cash starved real estate and infrastructure sector, especially players with a majority of completed projects, the market regulator, Securities and Exchange Board of India (Sebi) is all set to permit the real estate investment trust (Reit) and Infrastructure Investment Trusts (InvITs) to invest assets in shares and debentures of realty and infra companies and an announcement to this effect is expected very shortly. The trust structures have been aimed at creating a framework of fast-track, investment-friendly and predictable public private partnerships (PPPs) to build large-scale projects that are of vital importance for India. To raise long-term capital, the new guidelines will incentivize the creation of such trusts so that investors have a lower tax burden, apart from avoiding multiple taxes at different levels.
In this connection, the board is likely to approve key changes to the draft regulations issued late last year. Under the erstwhile system, a real estate firm had to transfer an asset into a special purpose vehicle (SPV) to enable Reit investment. As a matter of fact, increasing the investment limit to 20% in real estate equity doesn't come across as an investor-friendly move, as it could increase the level of risk. In addition, enabling more issuers to tap this product, Sebi might also revise downward the minimum asset criteria for a Reit to Rs 500cr from the earlier proposed Rs 1,000cr.
However, experts opined that certain other critical issues also need ironing out to ensure success of this instrument. The requirement that a sponsor needs to have real estate infra building experience has to be done away with as there are a lot of entities with real estate holdings but no real estate experience, which will be left out due to this. In its draft regulation Sebi had prescribed a minimum experience of at least five years in property or fund management in development of real estate and infrastructure projects. In fact, the regulator is likely to retain the experience criteria for managers. They also added that the delisting framework for a Reit and InVITs has to be put in place so that a sponsor has clarity on the exits. A source said the Sebi board is likely to keep the investment limit for investors unchanged at Rs 2 lakh. As also the other requirement that a sponsor will be required to mandatorily hold up to 25% as initial holding for three years and 15% thereafter.