Looking to attract more investments into the capital market, Sebi today proposed listing of Real Estate Investment Trusts (REITs), a popular instrument for raising funds in the realty sector.
Issuing draft norms for REITs, the capital market watchdog said the evolution of such investment vehicles is "crucial" for the rapidly growing real estate industry.
REITs would be allowed to list on stock exchanges through Initial Public Offer (IPO) and can raised funds further through Follow-On Offers, according to the consultation paper and draft norms issued by Securities and Exchange Board of India (Sebi).
"REIT shall be set up as a Trust under the provisions of the Indian Trusts Act, 1882," it said.
However, REITs would not be allowed to launch any schemes.
As per draft rules, only such entities that have at least 90 per cent investment in completed revenue generating projects.
The move is aimed at providing investment avenues for investors by way of trading units of REITs, similar to mutual fund and Exchange Traded Fund structures for stocks, bonds and other securities.
"The REIT shall have parties such as trustee (registered with Sebi), sponsor, manager and principal valuer," it added.
The Trust needs to initially apply for registration with Sebi as a REIT in the specified format. After being satisfied on the eligibility conditions, the regulator would grant registration to it.
According to Sebi, REITs can issue units of their investment schemes through a public offer and list them thereafter on a stock exchange in a way similar to the issuance and listing of shares during an IPO.
Thereafter, the units can be traded on the stock exchange platform just like shares. It further said that listing of units will be mandatory for all REITs.
The regulator said that REIT may raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of REITs may be offered only to HNIs /institutions.
Consequently, it is proposed that the minimum subscription size would be Rs 2 lakh and unit size shall be Rs 1 lakh.
For coming out with an IPO, Sebi said that the size of the assets under the REIT need to be at least Rs 1,000 crore, in a bid to ensure that initially only large assets and established players enter the market.
Further, minimum initial offer size of Rs 250 crore and minimum public float of 25 per cent is specified to ensure adequate public participation and float in the units.
The regulator has sought public comments on draft REIT Regulations by October 31, 2013.
The draft norms comes as the Indian real state sector witnessed rapid growth in recent years underlined by robust economic growth in the country.
The growing scale of operations of the corporate sector has increased the demand for commercial buildings and space including modern offices, warehouses, shopping and conference centres.
"For such rapidly growing industry, it is crucial that investment vehicles such as (REITs) evolve in the country," Sebi said in a draft paper.
Globally, framework for REIT exists in several countries including the US, the UK, Australia, Singapore, Japan and France.
In line with the nature of the REIT to invest primarily in completed revenue generating properties, "it has been mandated that at least 90 per cent of the value of the REIT assets shall be in completed revenue generating properties."
"In order to provide flexibility, it has been allowed to invest the remaining 10 per cent in other assets as specified in the proposed Regulations," it added.
Sebi said that REITs would be allowed to invest in the properties directly or through special purpose vehicles (SPVs), wherein such SPVs hold not at least 90 per cent of their assets directly in such properties.
However, in such cases, it has been mandated that REIT would have control over the SPV so that the interest of the investors are not jeopardised.
The REIT would not invest in vacant land or agricultural land or mortgages other than mortgage backed securities. Further, the REIT woudl only invest in assets based in India.
"Investment up to 100 per cent of the corpus of REIT has been permitted in one project subject to the condition that minimum size of such asset is not less than Rs 1,000 crore," Sebi said.
In a bid to safeguard the interests of the investors, several prerogatives like right to remove the manager, auditor, principal valuer, seek delisting of units, apply to Sebi for change in trustee among others have been provided them to empower them.
"...approval of investors has been made mandatory in special cases such as certain related party transactions, any transaction with value exceeding 15 per cent of the REIT assets, borrowing exceeding 25 per cent, change in manager/ sponsor, change in investment strategy, delisting of units, etc," Sebi said.
In order to ensure that a related party does not influence the decision, Sebi said that any person who is a party to any transaction as well as associates of such person would not participate in voting on the specific issue.
Keeping in mind that transparency has been a cornerstone of the REIT industry globally, Sebi said that minimum disclosure requirements in the IPO and FPO document, annual and half yearly reports have been specified in the proposed Regulations.