The norms were cleared by Sebi's board at a meeting, which was also addressed by Finance Minister Arun Jaitley, and takes forward the government's proposals in this regard as outlined in the Union Budget presented last month.
Talking to reporters after the meeting, Sebi Chairman U K Sinha said that the proposals with respect to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) were cleared by the board.
The other proposal cleared by the board was about a simplified one-time procedure for registration of brokers.
Jaitley had said in his budget speech last month that "REITs have been successfully used as instruments for pooling of investment in several countries" and necessary tax incentives would be given for these products, as also for InvITs.
"These structures would reduce the pressure on the banking system while also making available fresh equity. I am confident these two instruments would attract long term finance from foreign and domestic sources including the NRIs," Jaitley had said.
Infrastructure and construction sectors have a significant role in the economy and the government feels that growth in these sectors is necessary to revive the economy and generate jobs.
Along with foreign investors, domestic institutions like insurers, pension funds and provident funds would also be allowed to invest in these trusts.
Through InvITs, the government is aiming to create a new avenue for raising funds to meet infrastructure investment requirements to the tune of Rs 65 lakh crore for the 12th Five Year Plan (2012-17).
The new norms would enable listing and trading of REITs and InvITs as any other security on the stock exchange platforms and also help create new platforms for raising of funds by real estate and infrastructure companies, respectively.
Despite significant tax benefits for the sponsors of these business trusts, these new regulations would also be "revenue accretive" for the government in form of taxes.
The new norms would help in channelising domestic investments into real estate and infrastructure sectors, and also help attract foreign capital for these fund-starved segments of the economy.
Certain changes or amendments and additional guidelines would be required the government and other regulators for development of REITs and InvITs in India.
These include allowing foreign investment into the units of REITs and InvITs at the time of IPO and for acquisition from secondary markets, and for allowing insurance companies, pension funds and provident funds to invest.
Sebi would take up the relevant issues with the concerned regulator or the government department for necessary action.
The draft guidelines for REITs and InvITs were earlier put in public domain for comments by all stakeholders and the final norms have been prepared after incorporating them.
Among others, comments were received from 65 entities, running into over 450 pages, for REIT guidelines. For InvITs, comments were received from the Finance Ministry, companies, merchant bankers and asset management companies.
Sebi has agreed to industry demand for reducing the minimum asset size for REITs from Rs 1,000 crore to Rs 500 crore, while it has also decided to allow multiple sponsors.
However, the regulator has decided against reducing the requirement of mandatory continuous holding by sponsors to ensure alignment of their interest with that of the Trust.
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 of REIT units for three years and continuous holding of 15 per cent thereafter. Multiple sponsors would be allowed to hold the mandatory holding together.
On whether retail investors would be allowed to invest, Sebi feels that the market is still in a nascent stage and therefore it is necessary to keep the minimum investment thresholds at relatively higher levels.
The new norms would also ensure that excessive leverage is not undertaken through REITs, while the Trustees would be required to be independent and not an associate of the sponsor or the manager of the Trust.
The minimum networth of the manager would be increased to Rs 10 crore, from Rs 5 crore proposed in draft guidelines.
For InvITs also, Trustees would need to be independent and not an associate of sponsors or the managers.
For InvITs proposing to invest in PPP projects, where a regulatory requirement or concession agreement requires the sponsor to hold a certain minimum per cent of the Special Purpose Vehicle, the sponsor holding norms have been relaxed.
The minimum networth requirement of an InvIT sponsor would be Rs 100 crore, as against Rs 10 crore proposed in draft guidelines. The networth of investment manager has also been raised from Rs 5 crore to Rs 10 crore.
The minimum investment size for InvITs would remain at Rs 10 lakh. The minimum requirement of two assets for publicly offered InvITs has been done away with, but the industry demand has been rejected for allowing such trusts to invest in holding company of the SPVs.
The majority directors of the Investment Manager would need to be independent, while it would not be required to have credit rating for non-PPP projects.
The associates of trustee would not be allowed to invest in the units of InvITs to avoid conflict of interest.
The InvITs would invest in infrastructure projects, either directly or through SPV. The proposed holding of an InvIT in underlying assets can not be less than Rs 500 crore and the minimum initial offer size would be Rs 250 crore.
The aggregate consolidated borrowing of the InvITs and the underlying SPVs cannot exceed 49 per cent of the value of the Trust assets, same as the case for REITs.
An publicly offered InvIT would need to distribute at least 90 per cent of its net distributable cash flows to investors. Listing would be mandatory for both publicly offered and privately placed InvITs.
The unit holders can remove trustee and the manager with approval of 75 per cent unit holders, but votes of any related party or associates would not be considered.
The norms that might need changes due to REIT and InvIT guidelines include FDI policy and the FEMA Regulations.
The proposed tax exemptions and benefits notwithstanding, these new investment instruments would still be 'revenue accretive' for the government in the form of additional taxes.
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, sources said.
However, the sponsor would not be entitled to the concessional STT-based capital gains tax regime at the time of ultimate disposal of the units of the business trust.
STT refers to Securities Transaction Tax, a small tax amount applicable to all transactions in securities markets.
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 unit holder.
The portfolio SPV distributing dividend to business trusts, however, will be subject to Dividend Distribution Tax.
The interest received by REITs or InvITs from portfolio SPV (Special Purpose Vehicle) would be given a complete tax pass-through, while the portfolio SPV would also be exempted from withholding tax on interest paid to the business trust.
Also, the interest from portfolio SPV would not be taxable in the hands of the business trust.
With regard to capital gains made by the business trust, it would be taxable on any capital gains earned by it on disposal of any assets, depending on whether the gains are short of long term in nature.
However, the capital gains component of the distributed income would be exempt in the hands of the unit holders.
The tax treatment for any transfer of listed units of the business trusts by investors on an exchange would be on the lines of the listed equity -- that is long term capital gains on such transfers would be exempt and the short-term capital gains would be taxable at the rate of 15 per cent, provided STT is paid on the transfer of such units.
For any external commercial borrowing by the business trust, a withholding tax of 5 per cent on interest payments to non-resident lenders would be levied.