Real Estate Investment Trust
A Real Estate Investment Trust (‘REIT’ for short) is a company that owns and typically operates income-producing real estate or related assets. It allows individuals to invest in large-scale, income-producing real estate. Real estate has proven to be an excellent long-term investment. Buying property often comes with a sizable monetary investment. REITs are a great alternative to owning real estate directly. They do have some disadvantages compared to owning real estate directly.
The concept of REIT has started its journey in USA in 1960 and spreaded to other countries. In 2000 it further spreaded to other eastern Asian countries. In India such type of investment has been expected for last 10 years. In the year 2008 SEBI has introduced draft regulation for REIT but it could not be implemented. The Government of India has shown much interest in introducing it in India. Income Tax Act, 1961 has been amended in the year 2014 giving exemption to this investment. In the year 2014 SEBI made the SEBI (Real Estate Investment Trusts) Regulations, 2014 (‘Regulation’ for short). These regulations have met some amendments.
Real Estate
Regulation 2(zi) defines the expression ‘real estate’ as land and any permanently attached improvements to it, whether leasehold or freehold and includes buildings, sheds, garages, fences, fittings, fixtures, warehouses, car parks, etc. and any other assets incidental to the ownership of real estate but does not include mortgage. Any asset falling under the purview of 'infrastructure' as defined vide Notification of Ministry of Finance dated October 07, 2013 including any amendments or additions made thereof shall not be considered as 'real estate' or 'property' for the purpose of these regulations.
The following captured within the abovementioned definition of infrastructure shall be considered under “real estate” or “property”-
- hotels, hospitals and convention centers, forming part of composite real estate projects, whether rent generating or income generating;
- common infrastructure" for composite real estate projects, industrial parks and SEZ.
Re-designated sponsor
Regulation 2(zl) defines the expression ‘Re-designated sponsor’ as any person who has assumed the responsibility of the sponsor from the person as designated as sponsor or from any re-designated sponsor thereafter.
Sponsor
Regulation 2(zt) defines the term ‘sponsor’ as any person(s) who set(s) up the REIT and designated as such at the time of application made to the Board.
Sponsor group
Regulation 2(zta) defines the expression ‘sponsor group’ as including-
- the sponsor(s);
- in case the sponsor is a body corporate-
- entities or person(s) which are controlled by such body corporate;
- entities or person(s) who control such body corporate;
- entities or person(s) which are controlled by person(s) as referred above.
- in case sponsor is an individual-
- an immediate relative of such individual (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and
- entities or person(s) which are controlled by such individual.
Parties to REIT
Regulation 2(zc) provides that the parties to the REIT shall include-
- Trust and trustee;
- Sponsor group;
- Re-designated sponsor;
- Manager;
Requirements for trust
- The instrument of trust is in the form of a deed duly registered in India under the provisions of the Registration Act, 1908.
- The trust has its main objectives as undertaking activity of REIT in accordance with these regulations and includes the responsibilities of the trustee as provided in Regulation 9.
- The persons designated as sponsors, manager and trustee shall be separate entities.
Requirements for sponsor
- Each sponsor shall hold or propose to hold not less than 5% of the number of units of the REIT on post-initial offer basis.
- Each sponsor and sponsor group shall be clearly identified in the application of registration to the Board.
- For each sponsor group, not less than one person shall be identified as sponsor.
- Of the entities categorized as sponsor group, only the following entity may be considered-
- a person or entity who is directly or indirectly holding an interest or shareholding in any of the assets or SPVs or holdcos proposed to be transferred to REIT.
- A person or entity whose experience is being utilized by the sponsor for meeting with the eligibility conditions.
- The sponsor(s), on a collective basis, have a net worth of less than ₹ 100 crore.
- But each sponsor has a net worth of not less than ₹ 20 crores.
- The sponsor or its associate shall have more than 5 years of experience in development of real estate or fund management in the real estate industry.
- If the sponsor is a developer it shall have completed at least two projects.
Requirements for Manager
- The Manager shall have a net worth of not less than ₹ 10 crores if the Manager is a body corporate or company or net tangible assets of value not less than ₹ 10 crores if the Manager is an LLP.
- The Manager or its associate shall have more than 5 years experience in fund management or advisory services or property management in the real estate industry or in the development of real estate.
- The manager shall have not less than 2 key personnel who each have not less than 5 years experience in fund management or advisory services or property management in the real estate industry or in development of real estate.
- The manager shall have not less than half, of its directors in the case of a company or of members of the governing Board in case of an LLP, as independent and not directors or members of the governing Board of the manager of another REIT; and
- The manager shall have entered into an investment management agreement with the trustee which provides for the responsibilities of the manager in accordance with regulation 10.
Requirements for trustee
- The trustee is to be registered with the Board under SEBI (Debenture Trustees) Regulations, 1993 and is not an associate of the sponsor(s) or manager; and
- The trustee has such wherewithal with respect to infrastructure, personnel, etc. to the satisfaction of the Board and in accordance with circulars or guidelines as may be specified by the Board.
Registration
- To get registration of a REIT with the Board the sponsor shall file an application before the Board on behalf of the Trust in Form A.
- The application is to be filled in all aspects-
- General Information;
- Details of Trust;
- Details of Trustee;
- Details of sponsors;
- Details of Manager;
- Details of business plan and investment strategy;
- Details of regulatory action taken in the past, if any;
- Other information/declarations.
- The non refundable fee payable along with the application is ₹ 1 lakh.
- The Board may appoint any person to take charge of records/documents of REIT for the protection of interests of investors.
- The Board may prescribe terms and conditions for such appointment.
- The Board shall consider-
- the fulfillment of the requirements of the parties to the REIT;
- no unit holder of the REIT enjoys superior voting or any other rights over another unit holder and there are no multiple classes of units of REIT;
- subordinate units may be issued only to the sponsors and its associates, where such subordinate units shall carry only inferior voting or any other rights compared to other units;
- the applicant has clearly described at the time of application for registration, details pertaining to proposed activities of the REIT;
- the REIT and parties to the REIT are fit and proper persons based on the criteria as specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;
- whether any previous application for grant of certificate by the REIT or the parties to the REIT or their directors/members of governing board has been rejected by the Board;
- whether any disciplinary action has been taken by the Board or any other regulatory authority against the REIT or the parties to the REIT or their directors/members of governing board under any Act or the regulations or circulars or guidelines made there under;
- The Board may require the applicant to furnish any such information or clarification as may be required by it for the purpose of processing of the application.
- The Board, if it so desires, may require the applicant or any authorized representative to appear before the Board for personal representation in connection with the grant of certificate.
Grant of certificate
If the Board is satisfied that the trust fulfils all the requirements shall send intimation to the trust. On receipt of such intimation the trust shall pay a non refundable fee of ₹ 10 lakhs within 15 days from the date of receipt of the intimation from the Board. On payment of the said fee the Board shall issue a certificate of registration in Form B to the trust.
Conditions of registration
The grant of certificate is subject to the following conditions-
- The REIT shall abide by the provisions of SEBI Act and these regulations.
- The REIT shall inform the Board in writing, if any information or particulars furnished to the Board are false or material particular or if there is any material change in the formation already submitted.
- The REIT and the parties to the REIT shall satisfy the conditions meant for their appointment.
- The REIT and the parties to the REIT shall comply with the code of conduct wherever required.
Rejection of application
While considering the application for registration, if the Board is of the opinion that the certificate should not be granted to the trust, it may reject the application after giving a reasonable opportunity of being heard to the applicant. The said decision shall be communicated to the applicant within 30 days of such decision.
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