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Securities And Exchange Board Of India (Real Estate Investment Trusts) (Amendment) Regulations, 2024; With Special Emphasis On Fractional Ownership

The Securities and Exchange Board of India (SEBI) has introduced, "Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendments) Regulations, 2024". The amendment aimed to further streamline and enhanced the functioning of Small and Medium Real Estate Investment Trusts in India.

The amendment gives a clear definition of Real Estate Investment Trusts) REIT, highlighting fund pooling and the goal of purchasing and overseeing real estate assets. It makes it clear that any company issuing securities pertaining to real estate assets will be classified as a REIT.

The amendment makes real estate investment more accessible to wider set of investors, also to regulate and foster growth in Fractional Ownership investment.

The salient features of the "Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendments) Regulations, 2024" can be seen in different aspects:
  • Minimum Investment Amount and Expansion Size:
    • The increase in the minimum application and trading lot size requirements for REIT units indicates the SEBI's intention to make REIT more accessible to retail investors.
    • The amendment laid down the Asset size of REIT to be minimum of INR. 50 crores and less than INR. 500 crores with a minimum subscription price of INR. 10 lakh per unit. It also laid down the minimum no. of investors to be 200 investors.
    • This amended action is in line with SEBI's overreaching objective of democratising investment opportunities and giving regular investors access to wide range of asset classes, in real estate through REITs.
  • Valuation of Assets:
    • For REITs, real estate asset valuation is essential as it directly influences financial reporting, investor perception, and decision-making process.
    • As per the amendment each property of the scheme will be physically inspected by the valuer while conducting the valuation exercise. Also, the Investment Manager is responsible for ensuring that the valuer performs an annual asset valuation of each scheme. Further it requires that the Valuation report shall not be more than 6 months old at time of such offer.
    • The changes are expected to give REITs more detailed guidelines on how to value their assets, guaranteeing consistency and reliability in valuation procedure, which also helps investors make better decisions and build trust in REIT financials.
  • Tax Considerations:
    • Amendment to Tax regulations governing REITs may have a big impact on investors as well as REITs themselves.
    • Under the framework of the amended REIT regulations, SM REIT is included, and it is mentioned that a REIT must include an SM REIT. Also, the IT Act as stipulated for business trust shall also apply to SM REIT.
    • REITs having a clear understanding of the tax implications help them to have better operational planning and may have an impact on their approach to investing and distributions to unit holder.
  • Investment conditions:
    • To guarantee the stability and transparency of SM REIT investments, specific requirements are set out concerning SPV ownership, asset management and restriction on lending.
    • As per scheme of SM REIT, they are not allowed to invest in under construction or non-revenue generating properties. Also, minimum 95% of the value of the scheme to be invested in completed and up to 5% of the value of the scheme's assets may be invested in unencumbered liquid assets.
    • It is the duty of the Special Purpose Vehicle (SPV), to directly and solely own all assets that are acquired or proposed to be acquired by the scheme.
    • The amendment has offered a greater approach in the investment structure of REITs by enabling the use of creative methods for asset management and capital development.
  • Annual meeting of unit holder:
    • The amendment aimed to enact measures to simply REIT reporting requirements. This might include standardizing reporting formats, reducing paperwork's and improving technology to facilitate smoother compliance.
    • The amendment ensures that an annual meeting of unit holders should be held at least once in a year, within 120 days from the end of financial year.
    • Now the approval of unit holders must be required by REIT for change in any kind of investment strategy and have a right to vote in any unitholder's meeting.
    • The new regulations are in line to meet SEBI goals to secure the investors interest and give them power to have check on their invested money.

Regarding Fractional ownership platforms, the requirement to register under these regulations is contingent upon whether their operations conform to the SEBI's definition of REITs. Fractional ownership platforms (FOPs) allowed investors to share in the advantages and risk of owning a small portion of a real estate property. Through this channel, a retail investor could make comparatively smaller investments in big commercial real estate assets. Multiple investors are the partial owners of these assets and investment is jointly operated by the stakeholders.

The requirement of fractional ownership platforms to register under the "Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendments) Regulations, 2024" is contingent upon number of factors, such as the nature of their operations, the assets they manage, and the degree to which their activities correspond with those of REITs.

It might be thought essential to register under SEBI regulations, if a Fractional ownership platform functions similarly to a REIT by providing investors with fractional ownership of real estate asset or if the operations of a Fractional ownership platform are like those of REITs in terms of asset management, investor structure, income distribution, and compliance requirements. This is because, these platforms basically serve as middleman that allow investors to access real estate investments in a controlled and organised way.

As per the amendment SEBI proposed, FOPs and other organisations that support fractional real estate investments must register as MSM REITs with SEBI and adhere to the agency's prescribed registration procedures. Trustees, sponsors, and investment managers should all be independent, separate entities in MSM REITs. Additionally, SEBI suggests that MSM REIT be established as a Trust under the Indian Trusts Act, with the capacity to create distinct schemes for the ownership of real estate assets.

The new regulations also laid down the timelines for migration of existing FOPs. As per this the application for the migration of the FOPs under the SEBI guidelines is to be completed within 6 months from the date of notification or such period as may be prescribed by the SEBI.

All things considered, Fractional ownership platforms that deals with real estate assets pr conduct business in a manner identical to that of REITs may be required to register under SEBI regulation. In, addition FOPs would be subject to the same tax advantages as SEBI-registered REITS under the expanded regulatory framework of the REIT regulations, which would help investors to have a fair and transparent process have access to liquidity.

To summarise, the revisions made to the "Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendments) Regulations, 2024" are intended to strengthen the legal framework, improve safeguards for investors, and encourage the expansion and advancement of the REIT industry in India. These adjustments are likely to reshape the real estate investment scenario in India by offering stakeholders and investors a more organised and safer environment.

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