Jurisdiction - India
India – A Brief Write‐Up On The Proposed SEBI (Real Estate Investment Trusts) Regulations, 2013 In Light Of The Tax Eexemptions Proposed In The Finance Bill (02) Of 2014.

30 July, 2014



The Real Estate Development sector in India is mostly fragmented and without any sectoral regulator/ governing body, save and except the wide matrix of laws, both at the state as well as at the national level. Due to complexity of laws, bureaucratic rigmarole, delays in statutory approvals thereby delaying the projects etc all make it a bit difficult for Real Estate developers in India to raise funds for the projects.

Acknowledging the long standing requirements of the real estate sector in India, Securities and Exchange Board of India (SEBI) had first introduced the concept of Real Estate Investments Trusts(REITs) in the form of ‘Real Estate Mutual Fund Schemes’ by way an amendment to SEBI (Mutual Funds) Regulations, 1996 in the year 2008. In October 2013, SEBI had issued draft regulations for REITs viz. SEBI (Real Estate Investment Trusts) Regulations, 2013 (REIT Regulations), by way of a consultative paper with a view to seek comments from the public and other stakeholders.

Until now, SEBI had deferred the introduction of the REIT Regulations essentially due to the uncertainty of tax implications on the income of REITs. However, the Finance Bill (02) 2014 (as introduced in the Lok Sabha) provides the much needed clarity on the tax implications on the income of REITs by granting pass through status to REITs.

This Note endeavors to consolidate the concept of REIT, salient features of the REIT Regulations and tax exemptions provided in the Finance Bill (02)2014.

Concept And Meaning

A REIT is an entity that owns, in most cases operates, income generating real estate. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.

In many parts of the world, REIT can be publicly or privately held. But in India, SEBI has proposed mandatory listing of units to be issued by REIT. It is also a popular investment option for long term pools of capital viz. pension funds and insurance companies. Moreover, the listed REITs provide the cushion of liquidity to its investors.

Registration And Structure Of REITS

The REIT Regulations require the registration of REITs with the SEBI, in a manner and by payment of such fees as prescribed under the REIT Regulations, before carrying out any activity.

The REITs shall be set up as a Trust as per the provisions of the Indian Trusts Act, 1882 and shall have trustee (to be registered with SEBI), sponsor, manager and principal valuer as its parties.

Major Parties Involved In The REIT Ecosystem

The Trustee shall be independent of sponsor and manager and hold the assets of the REIT in the name of the REIT which would be for the benefit of the investors of the REIT in accordance with the provisions of the Trust Deed as well as the REIT Regulations. The role of Trustee is essentially a supervisory in nature.

The Manager shall primarily assume all the operational responsibilities with respect to the activity of the REIT. Roles and responsibilities of the manager shall be specified in the agreement entered into between the trustee and the manager.

The Sponsor shall be responsible for setting up of the REIT including,appointment of the Trustee. The sponsor shall also be obligated to maintain a certain percentage holding in the REIT so that the Sponsor is also exposed to the same amount of risks to which the investors have to face by virtue of their investments in the REIT.

Principal Valuer shall be appointed in the annual meeting of the unit holders and shall be changed not less than every 2 years and new principal valuer shall be appointed.

Manner Of Raising Funds And Listing Of Units Of REITS

As per the REIT Regulations, the REITs shall be required to initially raise funds through an initial offer and subsequently through a follow-on offer. Thus, the REIT cannot raise funds by way of private placement through preferential issue.

No offer of units of REIT shall be made, unless a detailed initial offer/follow-on offer document is filed with the designated Stock Exchange within the time fram eand in the manner as set out in REIT Regulations.

It is mandatory for all REITs to lists all its units on the recognized stock exchange(s) within 15 days from the date of closure of the offer. The procedure for listing (including, requirement of minimum subscription amount and minimum number of subscribers) as well as the de listing of units of the REIT is more particularly set out under the REIT Regulations.

For initial offer,the asset size under REITs should not be less than INR 1000 crores (INR 10bn) and the minimum initial offer size and minimum public float of INR 250 crores (INR 2.5bn) and of 25% respectively has been specified by the regulations in order to ensure adequate public participation and float in the units. Further, minimum subscription size for each investor shall be INR 2 lakhs (INR 200k)and unit size shall be INR 1 lakh (Rs. 100k).

The funds may be raised by REITs from resident or foreign investor. In case of foreign investors, such foreign investment shall be subject to guidelines as may be specified by RBI and the Government of India from time to time.

Investment Conditions And Dividend Policy

Taking into consideration the nature of REITs to invest primarily in completed revenue generating properties, the REIT Regulations has imposed certain conditions, some of them being as follows:


  • at least 90% of the value of the REITs assets shall be invested in completed revenue generating properties and the remaining 10% can be invested in other assets as specified under the REIT Regulations;
  • distribute at least 90% of the net distributable income (after tax)to the investors;
  • invest in the properties, either directly or through a special purpose vehicle(SPV), controlled by the REIT;
  • invest only in assets based in India and investment should not be in vacant land or agricultural land or mortgages, other than mortgage backed securities.

Pass Through Status In Union Budget 2014

The Finance Bill (02), 2014 has introduced the concept of “business trust” which comprises trust registered as an Infrastructure Investment Trust or a Real Estate Investment Trust, the units of which are required to be listed on a recognised stock exchange, in accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and notified by the Central Government in this behalf.

Interest income will not be liable to tax in the hands of the REIT. Further TDS is not required to be deducted by SPV while paying interest to the REIT. However, REIT is required to deduct TDS along with surcharge and cess while distributing interest income to the resident and nonresident unit holders.

Dividend income earned by the REIT from SPVs as well as distribution of distribution income to unit holders by REIT is exempt from tax. The provisions of dividend distribution tax shall be applicable to the SPV.

Capital Gains earned by REIT shall be taxable as per normal provisions of capital gains. Exemption for unit holders for long term capital gains in relation to the sale of units on recognised stock exchange and the short term capital gains will be taxed at 15% in addition to applicable surcharge/cess.

In case of other income earned by REIT, the same shall be taxable at 33.99%.

Our View

There has been a continuous demand for REIT and now with the clarity in the Budget, it provides the real estate sector alternative means to raise funds for the various projects. It will be interesting to see the categories of non resident investors that may be eligible for such investment and terms and conditions that may be issued by the RBI for investing in units of REITs (which is in the form of trust) especially, in current scenario, where Foreign Direct Investment in Trust, other than FVCI investment in registered VCF, is not permitted.

The draft Regulations provide that 90% of the value of the REITs assets shall be invested in completed revenue generating properties (which has received Certificate of Occupancy from competent authority). Thus, cost of acquisition of the REIT of such completed projects will be very high.

The announcement of pass through status in the recent Budget should only open lot of opportunities for REITs as the proposed REIT Regulations would provide much needed transparency and is expected to make real estate a bit ‘organised’ to say the least. So it looks like that the momentum started by SEBI has eventually received the much needed support from the taxation perspective. It will be just a matter of time when SEBI and RBI will notify necessary regulations to open the gate for investment in REIT.




For further information, please contact:


Ashish Parwani, Partner, Rajani Singhania & Partners

[email protected]

Construction & Real Estate Law Firms in India 

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