Union Budget 2021 India: The trusts can now raise debt capital at competitive rates, while dividend payment to REITs and InVITs have been exempt from tax deducted at source (TDS).
Debt financing of InVITs and REITs by foreign portfolio investors (FPIs) will be enabled by making suitable amendments in the relevant legislations.
Indian Union Budget 2021-22: Investments made in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs) have been made more attractive, while deepening their capital raising avenues. The trusts can now raise debt capital at competitive rates, while dividend payment to REITs and InVITs have been exempt from tax deducted at source (TDS). Debt financing of InVITs and REITs by foreign portfolio investors (FPIs) will be enabled by making suitable amendments in the relevant legislations. So far, FPI regulations allow them to invest in non-convertible debentures (NCDs) issued only by a corporate entity. Since InVITs and REITs are trusts, FPIs could not subscribe to debt instruments issued by them a couple of years ago, despite Sebi (Securities and Exchange Board of India) allowing InVITs and REITs to start issuing NCDs.
Experts say the announced measures have addressed an anomaly between the FPI regulations and Sebi’s REITs and InVITs regulations, which had led to many of the FPIs not being able to subscribe to NCDs issued by these entities. While FPIs were willing to provide debt capital, there was no avenue for that. Shagoofa Rashid Khan, investment and advisory head (funds), Cyril Amarchand Mangaldas, told FE that even when Embassy REIT wanted to issue NCDs, FPIs could not invest because there was no enabling regulation under the FPI regulations for them to invest. Khan added that this will open up the route of debt capital for REITs and InVITs and they will get the ability to raise competitive capital from large investors who need not necessarily take the equity exposure. “Some of the pension and sovereign funds who want to do debt financing for infrastructure can now actually get bouquet of stabilised assets under an InVIT or REIT,” she said.
As for the trusts, they can replace expensive debt with cheaper debt. “It opens up opportunities for refinancing or restructuring the underlying portfolio,” Khan said. Chintan Patel, partner and head, (building construction and real estate), KPMG India, called it an important step which will enable monetisation and give fillip to creating more InVITs and REITs. Vikas Chaturvedi, CEO, Xanadu Realty, said, “The expected influx of funding will accelerate the momentum for commercial real estate and establish it as a lucrative asset class.”
The Budget has also proposed that in order to provide ease of compliance, dividend payment to REIT and InVIT will be exempt from TDS.
Gaurav Karnik, national leader (real estate practice), EY, explained that in a REIT and InVIT structure, there is a trust, below which there is a special purpose vehicle or SPV which owns the assets. Because of an anomaly in the law, when the SPV would pay dividend to the InVIT or REIT, there would be a withholding tax, which would then have to be claimed as a refund. “Today, they have clarified that to make it simple, any dividends credited or paid to the InVIT or REIT will not be subject to any tax withholding at source,” Karnik said. The withholding tax rate is 10% plus surcharge. The industry has welcomed the move. Shishir Baijal, chairman and managing director, Knight Frank India, said, “The relaxation on tax compliance for REIT investors will further improve the marketability of such products considering we are likely to witness new REITs this year”. Jaxay Shah, chairman, CREDAI National, said that the exemption from TDS shall encourage retail individual investors to explore investment opportunities in REITs.
According to Manish Gupta, senior director, CRISIL Ratings, the proposal to enable debt financing by foreign portfolio investors will ease access to finance for InvITs and REITs. Furthermore, abolishment of TDS on dividend payments to InvITs and REITs should ease compliance and enhance efficiency of these channels. InVITs and REITs are gaining currency in India, with their combined assets under management (AUM) reaching Rs 2 lakh crore. CRISIL Ratings expects their AUM to reach Rs 10 lakh crore in the next five years.