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TMI BlogNotification on Real Estate Mutual Fund Schemes and Initial Issue ExpensesX X X X Extracts X X X X X X X X Extracts X X X X ..... ar is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996. Yours faithfully, Ruchi Chojer Encl : a/a THE GAZETTE OF INDIA EXTRAORDINARY PART III SECTION 4 PUBLISHED BY AUTHORITY New Delhi, April 16, 2008 SECURITIES AND EXCHANGE BOARD OF INDIA NOTIFICATION Mumbai, the 16th April, 2008 SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) (AMENDMENT) REGULATIONS, 2008 F. No. LAD-NRO/GN/2008/03/123042. - In exercise of the powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following Regulations to further amend the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, namely :- 1. These regulations may be called the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008. 2. They shall come into force on the date of their publication in the Official Gazette. 3. In the Securities and Exchange Board of India (Mutual Funds) Regulations, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviso shall be omitted; (b) for sub-regulation (3B), the following shall be substituted, namely: (3B) The conditions referred to in sub-regulation (3A) are the following: (a) the scheme is launched after the commencement of the Securities and Exchange Board of India (Mutual Funds)(Second Amendment) Regulations, 2006 and prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008; (b) initial issue expenses in respect of the scheme are accounted in the books of accounts of the scheme in accordance with Tenth Schedule. . (viii) after regulation 49, the following Chapter and regulations shall be inserted, namely:- CHAPTER VIA REAL ESTATE MUTUAL FUND SCHEMES Definitions 49A. For the purposes of this Chapter, unless the context otherwise requires- (a) real estate asset means an identifiable immovable property- (i) which is located within India in such city as may be specified by the Board from time to time or in a special economic zone within the meaning of clause (za) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (ii) on which construction is complete and which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al fund scheme may be done in a staggered manner. (2) The units issued by a real estate mutual fund scheme shall not confer any right on the unit holders to use the real estate assets held by the scheme and any provision to the contrary in the trust deed or in the terms of issue shall be void. (3) The title deeds pertaining to real estate assets held by a real estate mutual fund scheme shall be kept in safe custody with the custodian of the mutual fund. (4) A real estate mutual fund scheme shall not undertake lending or housing finance activities. (5) All financial transactions of a real estate mutual fund scheme shall be routed through banking channels and they shall not be cash or unaccounted transactions. Permissible investments 49E. (1) Every real state mutual fund scheme shall invest at least thirty five per cent. of the net assets of the scheme directly in real estate assets. (2) Subject to sub-regulation (1), every real estate mutual fund scheme shall invest- (a) at least seventy five per cent. of the net assets of the scheme in- (i) real estate assets; (ii) mortgage backed securities (but not directly in mortgages); (iii) equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l fund scheme are done in good faith, in accordance with the norms specified in Schedule IX B and that the accounts of the scheme are prepared in accordance with accounting principles specified in Schedule XI. (3) The net asset value of every real estate mutual fund scheme shall be calculated and declared at the close of each business day on the basis of the most current valuation of the real estate assets held by the scheme and accrued income thereon, if any. Duties of asset management company 49G. (1) Without prejudice to the provisions of regulation 21, the asset management company of a mutual fund having real estate mutual fund schemes shall appoint suitable number of qualified key personnel with relevant experience, before undertaking investment management of real estate assets of a real estate mutual fund scheme. (2) The asset management company may appoint advisors to advise it on acquisitions or proposed acquisitions of real estate assets. (3) The asset management company shall exercise due care while appointing real estate valuers for valuing the real estate assets held by the real estate mutual fund scheme and shall ensure that there is no conflict of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial terms: Provided that not more than 25% of the total rental income of the scheme shall be derived from assets so let out. Duties of trustees 49I. (1) The trustees shall ensure that the asset management company has the necessary expertise, internal control systems and risk management mechanism to invest in and manage investments in real estate assets on a continuous basis. (2) The trustees shall monitor whether due diligence is exercised by the asset management company in managing the investments. (3) The trustees shall review the market price of the units during the year and shall recommend proportionate buy back of units from unit holders, if the units are traded at steep discount to the net asset value. (4) The magnitude of discount which shall amount to steep discount referred to in sub-regulation (3) shall be disclosed in the offer document. (5) The trustees shall ensure that only permissible investments are made by the asset management company. (6) The trustees shall ensure that all financial transactions of the real estate mutual fund scheme are made only through banking channels and that systems exist to exclude transactions in cash and unaccou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to the extent disclosed in the offer document; and ; (b) in sub-regulation (5), the provisos shall be omitted. (x) in the Seventh Schedule, clause 5 shall be omitted. (xi) in the Ninth Schedule - (a) in the opening words, for the bracket, word and figures [ Regulations 50(3),55(4)(iii) ] the bracket , words and figures [Regulations 49F(1) and (2), 50(3),55(4)(iii) ] shall be substituted; (b) in the heading, after words ACCOUNTING POLICIES AND STANDARDS , the words Part A: For Investment in Securities shall be inserted; (c) after clause l, the following shall be substituted, namely:- m. In case of real estate mutual fund scheme, investments in unlisted equity shares shall be valued as per the norms specified in this regard. (d) after clause m. the following shall be inserted, namely:- Part B: For direct investment in real estate asset Definitions 1. In this Part, unless the context otherwise requires-: (a) fair value means the amount for which an asset could be exchanged between knowledgeable parties in an arm s length transaction and certified by the real estate valuer; (b) knowledgeable means that both the buyer and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for legal services, registration expenses and asset transfer taxes. 9. If the payment for a real estate asset is deferred, its cost is the cash price equivalent. An real estate mutual fund scheme shall recognise the difference between this amount and the total payments as interest expense over the period of credit. 10. A real estate mutual fund scheme may acquire one or more real estate assets in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The cost of such a real estate asset shall be measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired real estate asset shall be measured in this manner even if an real estate mutual fund scheme cannot immediately derecognise the asset given up. If the acquired real estate asset cannot be measured at fair value, its cost shall be measured at the carrying amount of the asset given up. 11. A real estate mutual fund scheme determines whether an exchange transaction has commercial substance by considering the extent to which its future cash fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market conditions at the balance sheet date iii. The fair value of real estate asset reflects, among other things, rental income from current leases and reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental income from future leases in the light of current conditions. It also reflects, any cash outflows that could be expected in respect of the asset. iv. The best evidence of fair value is given by current prices in an active market for similar real estate asset in the same location and condition and subject to similar lease and other contracts. Care shall be taken to identify any differences in the nature, location or condition of the asset, or in the contractual terms of the leases and other contracts relating to the asset. v. In the absence of current prices in an active market, information from a variety of sources shall be considered, including: (a) current prices in an active market for properties of different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences; (b) recent prices of similar properties on less active markets, with adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al estate asset, an real estate mutual fund scheme shall not recognise that furniture as a separate asset. (c) the fair value of real estate asset shall exclude prepaid or accrued operating lease income, because the real estate mutual fund scheme would recognise it as a separate liability or asset. (d) The fair value of real estate asset held under a lease reflects expected cash flows (including contingent rent that is expected to become payable). Accordingly, if a valuation obtained for a asset is net of all payments expected to be made, it will be necessary to add back any recognised lease liability, to arrive at the fair value of the real estate asset for accounting purposes. ix. The fair value of real estate asset does not reflect future capital expenditure that will improve or enhance the asset and does not reflect the related future benefits from this future expenditure. x. Where a real estate mutual fund scheme expects that the present value of its payments relating to a real estate asset (other than payments relating to recognised liabilities) will exceed the present value of the related cash receipts it shall apply Accounting Standard (AS) 29, Provisions, Conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 49(3B)(b)] shall be substituted; (b) for clause (b) the following shall be substituted, namely:- (b) For a close-ended scheme floated on a load basis prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008, the initial issue expenses shall be amortised on a weekly basis over the period of the scheme: Provided that in case such schemes provide for partial redemption during the life of the scheme, the amortisation shall take into account the number of outstanding units and the aggregate amount during the relevant periods. (c) in clause (d), the following shall be substituted, namely:- (d) In case of close-ended schemes floated on a load basis prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008, the unamortised portion of the expenses shall be included in the calculation of the NAV. However, such portion shall not be included in the NAV for the purposes of determining the asset management company s investment management and advisory fees or for determining the limitation of expenses under regulation 52 of these regulations. (xiii) for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t value shown separately and the reconciliation statement for the changes in investments valued in the two different ways shall be provided. Where the financial statements are prepared on a marked to market basis, there need not be a separate provision for depreciation. Since unrealised gain arising out of appreciation on investments cannot be distributed, provision has to be made for its exclusion and for calculating distributable income. ii. Non-traded investments shall be valued in good faith in accordance with the norms specified in Seventh Schedule. Provided that in the case of real estate mutual funds schemes, investments in unlisted equity shares shall be valued as per the norms specified by the Board in this regard. iii. For quoted shares, the dividend income earned by the scheme shall be recognised, not on the date the dividend is declared, but on the date the share is quoted on an ex-dividend basis. For investments in shares which are not quoted on the stock exchanges, the dividend income must be recognised on the date of declaration. iv. In respect of all interest-bearing investments, income shall be accrued on a day to day basis as it is earned. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the unit, if positive should be debited to reserves and, if negative, should be credited to reserves, the face value being debited to the capital account. x. (a) In the case of an open-ended scheme, when units are sold an appropriate part of the sale proceeds shall be credited to an Equalisation Account and when units are repurchased an appropriate amount shall be debited to Equalisation Account. The net balance on this Account should be credited or debited to the revenue account. The balance on equalisation account debited or credited to the Revenue Account shall not decrease or increase the net income of the fund but is only an adjustment to the distributable surplus. It shall, therefore, be reflected in the Revenue Account only after the net income of the fund is determined. (b) The Trustees of the Board of the Trustee Company may, if necessary, transfer a portion of the distributable profits to a dividend equalisation reserve. Such a transfer would be independent of the requirement to operate an Equalisation Account as provided in (x)(a). xi. In a close-ended scheme which provides to the unitholders the option for an early redemption or repurchase their own units, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be stated separately in respect of each type of investment, such as equity shares, preference shares, convertible debentures listed on recognised stock exchange, non-convertible debentures or bonds further differentiating between those listed on recognised stock exchange and those privately placed. (iii)(A) The balance-sheet shall disclose under each type of investment(s) in securities the aggregate carrying value and market value of non-performing investments. An investment shall be regarded as non-performing if it has provided no returns in the form of dividend or interest for a period specified in the guidelines issued by the Board. (iii)(B) The balance-sheet shall disclose under each category of real estate asset the aggregate carrying amount of nonperforming investment properties. A real estate asset shall be regarded as non-performing if it has provided no returns in the form of rental income for a period specified by the Board. (iv) The Balance Sheet shall indicate the extent of provision made in the Revenue Account for the depreciation/loss in the value of non-performing investments in securities. However, if the investments in securities are valued at marked to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (15,40,000) (154.00) 13,62,10,000 13,621.00 (i) the name of the company including the amount of investment made in each company of the group by each scheme and the aggregate investments made by all schemes in the group companies of the sponsor; (j) if the investments are marked to market, the total income of the scheme shall include unrealised depreciation or appreciation on investment. There should be disclosure and unrealised appreciation deducted before arriving at the distributable income in the following manner, e.g. Rs. in lakh Rs. in lakh Net income as per Revenue Account 100 Add: Balance of undistributed income as at 1st April, 1994 brought forward 20 120 Less: Unrealised appreciation on investments As on 31st March, 1995 30 As on 1st April, 1994 15 (15) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set separately from the amounts relating to other real estate assets. In addition, an real estate mutual fund scheme shall disclose: 1. a description of the real estate asset; 2.an explanation of why fair value cannot be determined reliably; 3.if possible, the range of estimates within which fair value is highly likely to lie; and 4.on disposal of investment of the real estate asset not carried at fair value: the fact that the real estate mutual fund scheme has disposed of the real estate investment asset not carried at fair value; the carrying amount of that real estate investment asset at the time of sale; and the amount of gain or loss recognised. (viii) Provisions for doubtful deposits, doubtful debts and for doubtful outstandings and accrued income shall not be included under provisions on the liability side of the balance sheet, but shall be shown as a deduction from the aggregate value of its relevant asset. (ix) Disclosure shall be made of all contingent liabilities showing separately underwriting commitments, uncalled liability on partly paid shares and other commitments with specifying details. 4. Contents of Revenue Account (i) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not to the unitholders. (ii) The auditor shall state whether: (1) he has obtained all information and explanations which, to the best of his knowledge and belief, were necessary for the purpose of his audit, (2) the Balance Sheet and the Revenue Account are in agreement with the books of account of the fund. (iii) The auditor shall give his opinion as to whether: 1. the Balance Sheet gives a true and fair view of the schemewise state of affairs of the fund as at the balance sheet date, and 2. the Revenue Account gives a true and fair view of the schemewise surplus/deficit of the fund for the year/period ended at the balance sheet date. 6. Perspective historical per unit statistics (1) This statement shall disclose the following schemewise per unit statistics for the past 3 years: (a) net assets value, per unit; (b) gross income per-unit broken up into the following components: (i) income other than profit on sale of investment, per unit; (ii) income from profit on inter-scheme sales/transfer of investment, per unit; (iii)income from profit on sale of investment to third party, per unit; (iv) transfer to revenue account from past ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIABILITIES SIDE OF THE BALANCE SHEET I. Liabilities side of the balance sheet be divided into the following groups : (i) Unit Capital; (ii) Reserves Surplus; (iii) Loans; (iv) Current Liabilities and Provisions. II. Unit Capital: Distinguishing between: - Initial capital; - Unit capital (including number of units and face value per unit). III. Reserves surplus Distinguishing between: - Unit premium reserve; (optional) - General reserve; - Dividend equalisation reserve; (optional) (Equalisation Account, as per 2(x) of the Schedule); - Any other reserve (disclosing its nature); - Appropriation account; - Opening balance, transfer from/to reserve, closing balance shall be separately disclosed for each above type of reserve. IV. Loans Distinguishing between: - Loan from Reserve Bank of India; - From Settlor; - From Other Commercial Banks; - From others; - If the above loans are secured, the nature and extent of security should be disclosed; - Borrowings by the scheme with amount, rate of borrowings, rate of interest, source and other terms shown separately, source-wise. V. Current liabilities and provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istration fees; - Repairs and maintenance in case of real estate asset. Less: Amount recovered on sale of units on account of management expenses. Note: (i) Accounting policy in respect of recognition of revenue and income from investments (including dividend and interest in case of securities and rental income in case of real estate asset) shall be disclosed by way of a note. (ii) Unprovided depreciation and unrealised appreciation in value of investments in securities representing the difference between their aggregate market value and their carrying cost shall be disclosed by way of note. (iii) Provision for doubtful deposits, debts and outstanding accrued income need not be separately shown but can be aggregated. (iv) Profit on sale/redemption of investments and loss on sale/redemption of investments need not be shown on a gross basis but only the net profit or loss need be shown. (v) The total income and expenditure expressed as a percentage of average net assets, calculated on a weekly basis should be indicated. (vi) Appropriation of the surplus by way of transfer to reserves and dividends distributed shall be disclosed in the Abridged Revenue Accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment) Regulations, 2002 vide S.O. No.625 (E). (l) on July 30, 2002 by the Securities and Exchange Board of India (Mutual Funds) (Third Amendment) Regulations, 2002 vide S.O. No.809(E). (m) on September 9, 2002 by the Securities and Exchange Board of India (Mutual Funds) (Fourth Amendment) Regulations, 2002 vide S.O. No.956(E). (n) on September 27, 2002 by the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 vide S.O. No.1045(E). (o) on May 29, 2003 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2003 vide S.O.No. 632(E). (p) on January 12, 2004 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2004 vide F.No. SEBI/LAD/DOP/4/2004. (q) on March 10, 2004 by the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 vide S.O. No. 398(E). (r) on January 12, 2006 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2006 vide S.O.No. 38(E). (s) on May 22, 2006 by the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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