In light of the increasing popularity of Fractional Ownership Platforms (“FOPs”), the Securities and Exchange Board of India (“SEBI”), with a view to enhance transparency and to secure the interest of investors, felt the need to amend the extant Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014. On 8 March 2024, the SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2024, (“2024 Regulation”) dealing with issuance of the Real Estate Investment Trusts to small and medium investors (“SM REIT”).
HIGHLIGHTS OF THE SM REIT:
- ELIGIBITY CONDITIONS FOR INVESTMENT MANAGER (“IM”)
In order to be eligible to act as the IM for the SM REIT, the 2024 Regulation provides for certain conditions to be fulfilled by the IM as below:
- the net worth of IM shall be not less than 20 crores and the IM shall have at least 2 years of experience in the real estate industry or real estate fund management. If the IM is unable to meet the aforementioned criteria of industry experience, the 2024 Regulation provides for an alternative by employing two key managerial personnel, each having not less than 5 years of experience in the real estate industry or real estate fund management.
- not less than half of directors of IM have to be independent directors and they should not be directors or the manager or investment manager of another REIT or SM REIT.
- THRESHOLD LIMIT FOR SM REIT
The scheme in order to qualify as the SM REIT shall pool at least 50 crores but not exceeding 500 crores with the purpose of acquiring tangible assets and the units of the scheme shall be issued to not less than 200-unit holders.
Further, in order to increase the participation of the retail investors and HNIs in the FOPs, the 2024 Regulation provides the minimum price of 10 lakhs of each unit under the scheme of the SM REIT.
- KEY PROVISIONS
- Disclosure requirements
The main objective of SEBI being to protect the interest of the investors, the 2024 Regulation requires the offer document of the SM REIT to disclose the details of the asset proposed to be acquired and the income proposed to be generated therefrom and other disclosures about the scheme. Based on the offer document, the investors can take an informed decision.
- Investment in completed projects
Taking into consideration the risk associated with the under-construction projects being failed or the promoter being unable to complete the projects, the 2024 Regulation provides for deployment of at least 95% of the value of the scheme in completed and revenue generating properties (restricting the scheme to invest in under-construction or non-revenue generating properties) and the remaining 5% may be invested in the liquid assets. This would provide reasonable comfort to the investor as the scheme will start generating revenue on the date of investment. Further, the basis of the SM REIT is not to generate the income for the lending business and the 2024 Regulation restricts the IM from lending any money to any entity save and except its own entity.
- Timely allotment and penalty
The 2024 Regulation also encompasses the responsibility on the IM to allot and list the units on the stock exchange within the timeline as provided by SEBI and also mandates the IM to distribute the proceeds of the SM REIT within the timelines as mentioned therein. In case of failure of the IM to comply with the aforementioned provisions, penalty may be imposed on the IM in the form of interest.
- Dematerialized form
In order to smoothen the process of buying, selling and transferring the units of the SM REIT, the 2024 Regulation provides for issuance of units in dematerialized form ensuring liquidity in the hands of the investors.
- Delisting
The 2024 Regulation provides for delisting of the units from the stock exchange if the SM REIT fails to make an initial offer of a scheme within a period of 3 years from the date of registration.
- Investor Grievance Redressal
SEBI, in order to provide for a grievance redressal mechanism in a timely and effective manner to the investor has included the complaints raised by the investors with respect to the SM REIT within its existing complaint redressal portal viz., SEBI SCORES.
CONCLUSION
The 2024 Regulation aims to protect the interest of the investors and facilitate the growth of the SM REIT. The above amendment will boost investment in the real estate sector and will increase the confidence of investors of diverse backgrounds to participate in fractional ownership allowing them to own a tangible asset through the safety of a regulated platform.
