While giving property players enough room to float Real Estate investment Trusts (REITs), the final guidelines for these listed investment vehicles, announced by the capital markets regulator on Sunday, also build in adequate safeguards for investors. As such, the minimum size of assets that a REIT must have, to be able to float an initial offer, has been halved to Rs 500 crore from the originally envisaged R1,000 crore; the lower threshold is expected to encourage mid-sized developers to participate.
At the same time, however REITs have been made accountable and, if they choose the special purpose vehicle (SPV) route, they must have a controlling interest of at least 50% in commercial real estate. Further, the SPV must hold at least 80% of the assets directly in properties and cannot invest in other SPVs, a move probably aimed at preventing funds from being funnelled into numerous entities.
The regulator, on Sunday, also announced guidelines for Infrastructure Investment Trusts (InvITs), to attract funds to the space, most of which appear reasonable. However, as infra projects are capital intensive, with a debt-equity ratio of 3:1, it could be a challenge to comply with the condition that consolidated borrowings should not exceed 49% of the value of the InVit’s assets, experts said. Also, as Hemal Mehta, Senior Director, Deloitte Touche Tohmatsu India, pointed out, the flexibility given to the business trust to acquire the assets directly is virtually theoretical in the absence of corresponding fiscal benefits. “The benefits, in the nature of deferred taxation, in the hands of the developer are linked to the transfer of shares of the SPV and not the assets. So, if the trust acquires assets directly, the sponsor won’t get the benefits,” Mehta observed.
Ashok Tyagi, Group CFO, DLF, told FE he would await clarifications on the tax structure.
“Even if the tax is levied at the time of sale of REITs, we need to understand whether the tax treatment will be like that for equity shares or the way it is for mutual funds,” Tyagi said.
The government, via the Finance Bill, cleared the way for the introduction of the REITs and InvITs in May. REITs and InvITs were allowed tax pass-through status, implying they don’t have to pay income tax if the income is allocated among unit owners as taxable dividends, which flagged their utility as “instruments of investment pooling.”
SEBI chairman, UK Sinha, observed that when the SPV is transferred