After deliberations on the structure for introducing real estate mutual funds (REMFs) in India, the sub-committee has recommended the Pooled Managed Vehicles (PMVs) system followed in the United Kingdom (UK) as appropriate for such funds. The sub-committee was set up to recommend detailed guidelines following a report by the Deepak Satwalekar committee on the subject.
The sub-committee found the PMVs to be in the form of Trusts and similar to mutual fund (MF) schemes regulated by the Securities and Exchange Board of India (Sebi).
According to the report, in the UK, real estate investments are done through PMVs which are different from open-ended investment companies (OICs). The regulator for these PMVs is the Financial Services Administrator (FSA) and the PMVs have a variable capital and are similar to open-ended funds. PMVs get tax benefits based on investor profile, with offshore funds and pension fund investors qualifying for the benefits. However, there are no tax benefits for the regular PMVs, like in case of OICs. Also, the PMVs have the ability to delay redemption if there is excessive pressure to exit the fund.
The Real Estate Investment Trusts (REITs) structure followed in the United States, which allows the flexibility to raise funds by leveraging the balance sheet, was deemed inappropriate by the sub-committee.
The sub-committee was headed by Milind Barve, managing director of HDFC Mutual Fund and had S V Prasad of Zurich Mutual Fund and K N Atmaramani, formerly of Tata Mutual Fund, as its members. Besides, the sub-committee also had A D Rebello and T P Ostwal of Tata Housing Development Co Ltd and Neel Raheja from K Raheja Corporation as invitees.
Speaking to FE, A P Kurian, chairman of AMFI said: The report has been currently circulated among AMFI members for their comments and will be up for discussion in the board meeting scheduled next week.
The sub-committee report recommended that the Sebi Regulations, 1999 (Collective Investment Schemes or CIS) can be modified to include real estate as an investment objective. However, a creditable track record of the sponsor, incorporation of several checks and balances for investor protection and investment restrictions need to be considered.
Further, the sub-committee strongly believes that there should be no maximum limit on subscription as it would disadvantage small investors desirous of taking exposure to the real estate sector. In case of PMVs in the UK, valuations of properties is done on a quarterly basis and the NAV reported on a daily basis. The CIS regulations do not necessitate the calculations of net asset values (NAVs) but, NAV calculations must form a central concept of REMFs, states the report. Also, tax benefits should be accorded to REMFs as they are a vital determinant of the success of the domestic MF industry.
In terms of investments, the sub-committee report recommends investments in equity shares, bonds, debentures of listed companies dealing in properties and property development and mortgage-backed securities like securitisation of housing loans. Also, undertaking or financing ready buildings where the lease rentals can be a regular income to the MF and direct estate project financing, construction finance, purchase or option to purchase buildings under construction with a view to sell it again and investment in debt securities issued by development and construction companies (placed privately) can also be considered for investments.
The report has suggested that for risk management, investment in one corporate should be restricted upto 10 per cent of the corpus and investment in properties owned and managed by sponsor should be restricted up to 25 per cent of the corpus. Investment restrictions based on a project, a promoter group and a geographical area was deemed appropriate by the sub-committee and registered valuers approved by Sebi for valuing properties held by REMFs was mooted in the report.
Legal areas to be considered later by Sebi, according to the sub-committee were issues pertaining to no levy of stamp duty, exemption from property taxes, computerisation of Land Records and dematerialisation of property transactions and uniform amendment of the Rent Control Act throughout all Indian states.