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Sebi board will consider substantially relaxing the regulations for REITs and allow the players opting for this product to invest a larger corpus in under-construction assets. Photo: Abhijit Bhatlekar/Mint
Sebi board will consider substantially relaxing the regulations for REITs and allow the players opting for this product to invest a larger corpus in under-construction assets. Photo: Abhijit Bhatlekar/Mint

Sebi proposes easier norms for REITs, relocation of foreign fund managers

Sebi to do away with minimum ticket size norm for fund managers, let real estate investment trusts invest more in assets under construction

Mumbai: The Securities and Exchange Board of India (Sebi) on Friday proposed easier norms for real estate investment trusts (REITs) to attract the interest of developers, and relaxed the rules for foreign fund managers to relocate to India.

Sebi will allow REITs to invest a larger corpus in under-construction assets. The current regulations cap investment of REITs’ assets in under-construction projects at 10%, which will be raised to 20%.

Sebi also proposed to raise the number of REIT sponsors, which is now capped at three. Additional relaxation is also proposed on clearing related-party transactions and the number of shareholders needed to pass a resolution.

“By and large, Sebi’s decision will have a positive impact in making REIT a viable product for investors and a fund-raising instrument for real estate players. However, the intent to allow REIT to invest more in under-construction assets may dilute the idea of a REIT. Globally, REIT is composed of only stable assets. Allowing more investments in incomplete projects may improve return on investment but on the flip-side it will also increase risks," said Bhairav Dalal, a partner at PricewaterhouseCoopers.

In a note, the market watchdog said fund managers based overseas who are willing to relocate to India can register under Sebi portfolio management regulations, 1993, as eligible fund managers.

The regulatory requirements for eligible fund managers will be diluted and such fund managers would not need to comply with the minimum ticket size requirement, which is set at 25,00,000 for domestic portfolio managers. The overseas fund managers would not be required to act in a fiduciary capacity and audit the overseas fund.

Sebi will come out with a discussion paper before finalizing the proposed norms.

These changes assume significance in the wake of the amendment to the Income Tax Act (IT Act). In budget 2015-16, the finance ministry announced fund management activity by such fund managers would not constitute business income under the safe harbour norms.

Experts are sceptical about the impact of the proposed changes. The requirements under section 9A of the IT Act (which pertain to safe harbour norms) are too stringent, they said.

“Safe harbour provisions still continue to have several stringent requirements as a result of which the fund managers continue to be located overseas and cannot operate from India," said Tejesh Chitlangi, a partner at IC Legal.

“For instance, the provisions pertaining to the limitations on profit portion which can accrue to investment manager, requirement of minimum 25 investors, cap of 20% on investments in a single entity, etc., still continue as a result of which the liberalized regime under Section 9A has till now been a non-starter. Accordingly, the proposed changes by Sebi will not be of much relevance till the time the safe harbour rules are further liberalized," added Chitlangi.

To qualify as eligible fund managers under the safe harbour norms, a fund needs to have a minimum of 25 members, the aggregate participation of 10 members. The fund cannot invest more than 25% of its corpus in a single entity.

The Sebi board also cleared its annual accounts. The total income earned by Sebi in fiscal 2016 rose to 601.67 crore from 513.17 crore in the previous fiscal. The increase is largely due to the registration fees of commodity brokers who had to get fresh registration under Sebi after the merger of erstwhile commodity market regulator Forward Markets Commission with the securities market watchdog.

On Friday, the Sebi board also bid farewell to its longest serving member, Prashant Saran, who has been with it for seven years, receiving an extension in 2012. Saran retires on 25 June.

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