The Securities and Exchange Board of India (SEBI) has come out with draft guidelines for real estate investment trusts (REIT), a new investment avenue, which is likely to provide liquidity and transparency in the real estate sector.

“For coming out with initial offer, it has been specified that the size of the assets under the REIT shall not be less than Rs.1,000 crore, which is expected to ensure that initially only large assets and established players enter the market,” says SEBI in the draft.

The draft guidelines also prescribe a minimum initial offer size of Rs.250 crore, and minimum public float of 25 per cent. The objective is to ensure adequate public participation and float in the units. Initially, till the market developed, it is proposed that the units of the REITs be offered only to HNIs (high net worth individuals) / institutions. Therefore, it has proposed that the minimum subscription size be Rs.2 lakh and the unit size Rs.1 lakh.

In line with the nature of the REIT to invest primarily in completed revenue-generating properties, the draft has mandated that at least 90 per cent of the value of the REIT assets should be in completed revenue-generating properties.

To provide flexibility, it has been allowed to invest the remaining 10 per cent in other assets.

To ensure regular income to the investors, it has been mandated to distribute at least 90 per cent of the net distributable income after tax of the REIT to investors.

REITs have been allowed to invest in the properties directly or through special purpose vehicles, wherein such special purpose vehicles (SPVs) hold not less than 90 per cent of their assets directly in such properties. However, in such cases, “it has been mandated that REIT shall have control over the SPV so that the interest of investors of the REIT are not jeopardized,” the draft says.

The REIT would not be allowed to invest in vacant land or agricultural land or mortgages other than mortgage-backed securities. Further, “the REIT shall only invest in assets based in India”.

Investment up to 100 per cent of the corpus of the REIT has been permitted in one project, subject to the condition that the minimum size of such asset is not less than Rs.1,000 crore.

After registration, the REIT would raise funds through an initial offer, and once listed, it could subsequently raise funds through follow-on offers.

According to the draft guidelines, listing of units would be mandatory for all REITs. Provisions for delisting have also been specified in the regulations.

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