Chennai Investment：India： Real Estate Investment Trusts (‘REITs’) - Fractional Ownership Platforms (‘FOPs’)

REITs can invest in real estate assets located in India, either directly or through holding companies and/ or special purpose vehicles (‘SPVs’). Although there is immense potential in real estate investment, one of the reasons for lesser number of REITs may be attributed to the requirement of minimum asset size of INR 500 crores and minimum offer size of INR 250 crores as envisaged in the REIT Regulations.

In the last few years, India has witnessed an emergence of web-based platforms that provide investors an opportunity to invest in real estate assets, in exchange for fractional ownership in these real estate assets. Usually, the investors are required to invest on these platforms, popularly known as, FOPs. The strategy generally adopted by these FOPs is that the investors subscribe to the securities of a SPV established by the FOPs, which in turn purchases the actual real estate asset. Through this approach, the cost of acquisition of any identified real estate is split among several investors. It has been seen that these FOPs do not register themselves as real estate agents under RERA, even though they act as real estate agents or property managers.

SEBI Consultation Paper - Micro, Small and Medium (‘MSM’) REITs

In May 2023, SEBI had floated a consultation paper for regulating the FOPs. SEBI has suggested that there is a need to govern the FOPs as the varying nature of structures adopted by the FOPs raise concerns regarding adequate protection to the investors and potential violation of the norms relating to Companies Act, 2013, Prevention of Money Laundering Act, 2022 and other laws.Chennai Investment

SEBI intends to label these FOPs as MSM REITs. Under the proposed MSM REITs regulations, SEBI has indicated the MSM REIT be set up as a trust under the Indian Trusts Act, 1882. Further, similar to the existing REITs, MSM REITs shall have parties such as trustee, sponsor and investment manager.

While the criteria for a sponsor of a MSM REITs is similar to that of existing REITs, the net worth for manager of MSM REIT is proposed to be reduced.

The consultation paper proposes mandatory unitholding of 15% for 3 years (from the date of the listing of the units of the MSM REITs) by the sponsor of MSM REITs. This will ensure that the party establishing the MSM REIT will have skin in the game – resulting in comfort to the investors.

The minimum asset size to be acquired by such MSM REITs is INR 25 crores (which is far less as compared to the minimum asset size of INR 500 crores applicable to existing REITs).Jaipur Wealth Management

The MSM REIT will be required to hold 100% equity share capital in all the SPVs, which is much stricter when compared to 26% threshold for existing REITs.

The minimum number of investors in case of MSM REITs is proposed to be 20 which is significantly less than 200 investors required in case of existing REITs. Under the MSM REITs, the minimum ticket price is proposed at INR 10 Lakhs (as compared to INR 1 Lakh in case of existing REITs). MSM REITs would not be allowed to raise debt whereas REITs have historically been allowed to raise external debt.

SEBI in its consultation paper has indicated that such MSM REITs shall be eligible for the same taxation framework as those applicable to the existing REITs, as MSM REITs will qualify as business trusts. The table below depicts the taxability of interest, capital gains, dividend and rental income for the REIT and its’ unit holders:

Particulars

Interest

Dividend

Rental income

Capital Gains

Unit Holders

TaxableSimla Investment

Taxable

Taxable

ExemptKanpur Wealth Management

TDS by REITs

Exempt

Exempt

Exempt

Taxable

Note: The above taxability is based on the assumption that SPVs have adopted the concessional tax regime.

With respect to repayment of debt by REITs, typically, REITs lend to SPVs and SPVs may repay this loan with interest (‘surplus’). REIT will then distribute this surplus to the unit holders. This surplus (considered as repayment of debt) was earlier not being subject to tax. Effective 1 April 2023, the repayment of debt will be taxable as income from other sources as per a prescribed formula in the hands of the unit holders.

Mumbai Investment