Sebi, policymakers work on regulatory framework for REITs

A falling rupee and waning foreign investor appetite has lead to policymakers in Delhi and Sebi in Mumbai to actively work on a regulatory framework for Real Estate Investment Trust or REITS- an asset class that buys income generating real estate assets and passes on the yield to investors. CNBC-TV18's Payaswini Upadhyay reports.

First, in 2008, Sebi put out draft regulations for REITS. But they remained just that. Later, Sebi allowed asset management companies to launch real estate mutual funds. But that didn't catch on either. Now, Sebi is making a third attempt to put in place a regulatory framework for REITS in India. This time, REITs could take the avatar of category IV under Sebi's alternate investment fund (AIFs) regime.
"I believe this asset class — if you look at the vibrant REIT market or a developed REIT market — requires public participation and today obviously AIF, as a framework, will not allow a public participation as compared to a dedicated REIT regime," Siddharth Shah, Partner, Khaitan & Co told CNBC-TV18.
S Sriniwasan, CEO, Kotak Realty Fund says: "I think what we are suggesting and the discussions that are currently on with the regulator is that under the AIF regulations we expect initially the HNIs to participate but we are also expecting these units which will be issued would be listed. There could be potentially a retail investor interest that could come in the listed traded unit market."
Several groups are working on assisting the regulator to arrive at new guidelines for REITs. Their efforts will have to include two important aspects: 1) get the Sebi guidelines to prescribe type of assets REITs can invest in and 2) get the tax department to offer a conducive tax regime.
"Once you recognize it as a separate class, because you need to have the flexibility to own the asset directly versus the other asset classes where it effectively buying into securities and that has its own inefficiency to that extent. Second, you also have a diversification requirement under the other categories by putting caps on how much you can own in a single asset; as compared to that a REIT could be a completely asset-dedicated structure. So you need to have a regime which allows that," Shah says
Add to that industry's proposal of amending the stamp duty act to either exempt REITs from paying stamp duty or at least lower the rates. Besides that, for investor participation, RBI too would have to allow FIIs to invest in REITs under its FEMA regime. It seems like a daunting task- we'll know soon if all of this comes together this time around.