Introduction:
The Securities and Exchange Board of India (“SEBI”), vide notification dated on 8 March 2024, introduced regulatory framework for facilitation of Small and Medium Real Estate Investment Trusts (“SM REITs”) by amending the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”), through SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 (“Amended REIT Regulations”), thereby, paving the way to make real estate investment more accessible to wider set of investors and to regulate and foster growth in Fractional Ownership investment.
What is Small and Medium REITs?
“Small and Medium REIT” means a SM REIT that pools money from investors under one or more schemes whereby:
- Asset size proposed to be acquired is at least INR 50 crores and less than INR 500 crores; and
- Minimum number of unitholders of a scheme are not less than 200 (other than Investment Manager, its related parties, and associates of the SM REIT).
Differentiation between REITs and SM REITs:
| PARTICULARS | REITS | SM REITS |
|---|---|---|
| Minimum Investment | Rs. 10,000 – Rs. 15,000 | Rs. 10 lakhs |
| Asset size | TMin of Rs. 500 Crore | Rs. 50 – Rs. 500 Crore |
| Types of investments | Generally commercial properties. | Commercial and residential properties. |
| Concentration risk | Generally diversified. | Probable concentration risk due to lower asset size. |
| Value of units | Same across all units. | Value and assets represented by units depends on scheme to scheme. |
| Can they borrow? | Upto 49% of the value of assets. | Upto 49% of the scheme’s value. |
| Investment in under-construction property? | Allowed upto 20% of assets. | Not allowed. |
| Distributing cash flows | 90% of net cash flows to be distributed to unitholders. | 100% of net cash flows to be distributed to unitholders. |
| Pay-out frequency | Half-yearly; most REITS do on quarterly basis. | Quarterly. |
The step-by-step procedure on how the SM REIT works:
1. Registration: The SM REIT needs to be registered with SEBI.
Steps to register with SEBI;
a). An application for grant of certificate of registration as MSM REIT shall be made, by the Investment Manager on behalf of the Trust in Form A as specified in the Schedule IA to these regulations and shall be accompanied by a non-refundable application fee of such amount and shall be payable in the manner as specified in Schedule IIA to these Regulations.
b). For migration of existing persons, entities, or structures into MSM REIT structure, the application for registration as a MSM REIT shall be made to the Board within six months from the date of notification of the regulatory framework for MSM REITs or such period as may be granted by the Board.
c). The migration of existing persons, entities or structures shall be completed within six months from the date of grant of registration or such period as may be granted by the Board.
d). Fees to SEBI:
| Particulars | Amount (INR) |
|---|---|
| Application fee | 1 lakh |
| Registration fee | 10 lakh |
2. Pooling resources: Investors, invest money in SM REIT, receiving units in return. The SM REIT can also borrow money (debt) up to a maximum of 49% of the scheme’s value.
3. Transfer to SPV:The pooled funds are then transferred by the SM REIT to a special purpose vehicle (SPV), a separate entity holding the actual properties.
4. Buying properties:The SPV must invest at least 95% of its assets in completed and revenue-generating real estate projects. They are not allowed to invest in under-construction properties, which are considered risky.
5. Rental Income: The SPV collects money from rent or property sales.
6. Distributing income:The SPV distributes at least 95% of the cash flows back to the SM REIT.
7. Pay-out time:The SM REIT distributes 100% of the remaining net cash flow to unitholders every quarter.
The concept of Small and Medium REITs typically involves:
1. Lower Asset Size:Small and Medium REITs may focus on real estate assets of smaller scale compared to traditional REITs. This could include properties such as residential complexes, neighbourhood shopping centres, or smaller commercial buildings.
2. Targeted Investors:These REITs aim to attract a broader base of investors, including retail investors and smaller institutional investors, by offering investment opportunities at a more accessible entry point.
3. Regulatory Flexibility:Regulators may introduce specific provisions and regulatory relaxations to facilitate the establishment and operation of Small and Medium REITs. These measures could include simplified compliance requirements and reduced regulatory burden to encourage participation from smaller players.
4. Local and Regional Focus:Small and Medium REITs may focus on specific geographic regions or niche markets where smaller real estate assets are prevalent. This localized approach allows them to capitalize on opportunities that may be overlooked by larger REITs.
5. Innovation and Adaptability:Given their smaller scale and flexibility, Small and Medium REITs may be more agile in adapting to market trends and exploring innovative investment strategies tailored to their target assets and investor base.
Why prefer SMREITs over REITS?
1. Inclusivity through Small and Medium REITs:'SMREITs' is designed to facilitate greater participation from a wider spectrum of investors. By providing a regulatory framework tailored to the needs of smaller players in the real estate market, SEBI aims to democratize access to real estate investments and foster the growth of smaller REITs.
2. Enhanced Regulatory Clarity:The amendments also aim to provide enhanced regulatory clarity and operational flexibility for REITs. This move is expected to streamline processes and encourage more real estate developers and asset owners to explore the REITs route for fundraising and monetization of assets
3. Boosting Real Estate Sector: By enabling the emergence of Small and Medium REITs, SEBI's amendments are poised to inject fresh momentum into India's real estate sector. These measures are anticipated to unlock the potential of smaller real estate projects and assets, thereby catalysing economic growth and job creation.
4. Investor Protection:SEBI's amendments prioritize investor protection by ensuring that Small and Medium REITs adhere to robust regulatory standards. This is crucial for maintaining investor confidence and fostering sustainable growth in the real estate investment landscape.
Income Tax at Investor level:
| TYPE OF INCOME FROM REITS | TAXATION |
|---|---|
| Rent | Taxable at applicable rates. |
| Dividend | If SPVs has opted for lower tax regime: Taxable at applicable rates. |
| Interest | For Residents: Taxable at applicable rate For NRIs: Taxable @ 5%. |
| Amortisation of Debt / Repayment of Loan. | Upto FY 2022-23: Not taxable as the amount was not in nature of income. w.e.f. FY 2023-24: Taxable u/s 56(2)(xii) as IFOS. |
| Capital Gain on Sale of Units of Business Trust. | Taxed as CG Income. |
| Any other Income. | Exempt u/s 10(23FD). |
Disclaimer: The above tax rates are applicable to REITS.
Income Tax at Trust level:
| TYPE OF INCOME | TAX |
|---|---|
| Dividend | Exempt u/s 10(23FC). |
| Interest | Exempt u/s 10(23FC). |
| Amortisation of Debt / Repayment of Loan. | It is not taxable as the amount is not in nature of Income. |
| Rental Income from any real estate asset owned directly. | Exempt u/s 10(23FCA). |
| Capital Gain on Sale of Shares of SPVs or any real estate asset owned directly. | Taxable at Applicable rates. |
| Miscellaneous Income like Bank Deposit Interest, Money Market Fund Income, etc. | Taxable at MMR. |
Disclaimer: The above tax rates are applicable to REITS.
Returns to be filed by SMREIT’s:
1. Quarterly compliance report:The board is required to review compliance reports every quarter relating to laws applicable to REITs and steps taken to rectify instances of non-compliance. This is in addition to the existing requirement to review quarterly reports on the activity and performance of the REIT.
2. Quarterly corporate governance report:A corporate governance report in the specified format is required to be submitted to the stock exchanges on a quarterly basis, within 21 days of the end of the quarter. The report is required to be signed by the compliance officer or the chief executive officer.
3. Secretarial compliance report:A secretarial compliance report issued by a practicing company secretary in specified format is required to be submitted to the stock exchanges on an annual basis, within 60 days of the end of the financial year. This report is required to be annexed to the annual report of the REIT.
4. Compliance certificate:The chief executive officer, chief financial officer and compliance officer are required to submit a compliance certificate to the board of the investment manager in relation to the financial statements of the REIT and internal controls. The format of this certificate is similar to the format prescribed for listed companies under the LODR Regulations (Listing Obligations and Disclosure Requirements).
5. Vigil mechanism and whistleblower policy:The investment manager is required to formulate a vigil mechanism to provide safeguards against victimization of employees, including a whistleblower policy. The functioning of the vigil mechanism is required to be reviewed by the audit committee. The investment manager is permitted to engage an independent service provider for providing or operating the vigil mechanism.
Services provided by CA Firms:
Formation stage:- Accounting of Trusts and SPVs.
- Advising/ Consulting on Taxation Aspects.
- FDI in trusts.
- Accounting for Construction.
- Accounting for Infrastructure Projects.
- Registration of SPVs.
- Registration of Trusts.
- Advisor to Managers/ Trustees/ Sponsors.
- Valuation of Properties.
- Advisor to registrar and transfer agents for units.
- Listing of units on Exchanges.
- Drafting of conveyance deeds, transfer deeds and agreements, etc.
Disclaimer:
“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”
Prepared On:
17/10/23
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