While the draft REIT regulations do lay down well-built parameters and conditions with a complete picture of risks and rewards involved, Sebi will need to take into account some of the concerns plaguing the real estate sector. Foremost among these are the sponsor-commitment-related requirements. According to the draft regulations, a sponsor shall have a stake of at least 25% (i.e. minimum R250 crore) in the REIT for the first three years after listing. Thereafter, a minimum of 15% stake in REIT should be held by the sponsor at all times. This makes the sponsor commitment onerous in comparison to the other regimes or international practices. For instance, the Alternative Investment Fund (AIF) regulations require a sponsor commitment of 2.5% of the fund corpus or R5 crore (whichever is less). Mutual fund regulations have no such requirement of minimum sponsor commitment to the fund, and so on. Further, there is no differentiation made with respect to sponsor commitments between a financial sponsor (such as fund houses, which manage/own fully-developed real estate assets) and developers (who develop and then transfer developed assets).
Industry bodies have also opined that there should be a stronger regime and governance in terms of accountability of the management of REIT, in line with some of the requirements laid down for a sponsor.
From a foreign investor perspective, while foreign investment is permitted under the REIT regulations, it is imperative that necessary amendments be made to the existing foreign exchange control regulations. Also, in order to increase the investor base, amendments are required to enable pension funds, mutual funds and insurance companies to invest in REITs. This will not only attract long-term capital but would also create liquidity in the units which would be listed on the Indian exchanges.
In the past, REITs have not been very successful in the Indian markets because of lack of tax incentives and the arduous stamp duty implications on transfer of properties by developers to REIT. While the REIT regulations are silent on the tax framework, it is essential to have a tax efficient framework in place for REIT to be successful. Although Sebi cannot amend the tax laws, it could provide necessary influence to the ministry of finance to ensure implementation of tax law changes.
The REIT regulations were open for public comments till October 31, 2013. Hopefully, with adequate tweaking to the regulations from an Indian economic perspective, the REIT regime would go a long way in strengthening the maturity of the Indian real estate market.
With inputs from Bhakti Khemani, associate, PwC India
The author is associate director, Regulatory Practice, PwC India