How Sebi's Move On InvITs Will Help Unlock Realty Potential

At its meeting on May 19, the Securities and Exchange Board of India (Sebi) proposed a few key steps that could infuse the much-needed liquidity into the cash-strapped real estate sector.

Among the many proposals mooted at the meeting were amendments to the Sebi Act, 1992, Securities Contracts (Regulation) Act, 1956, and Depositories Act, 1996. Also, the KYC (know your customer) norms were reviewed, a pension scheme for permanent board members was launched and a policy on dividend distribution for listed companies was laid down. However, what would particularly interest the real estate sector was Sebi's decision to relax the rules for investing in Infrastructure Investment Trusts (InvITs).

What are InvITs?

InvITs allow developers to raise funds from the public for their projects and enable the common man to invest comparatively small amounts in real estate assets. That helps developers raise funds to complete their projects and bring more properties for sale in India. It also allows the common man to make profits on their money invested in this instrument. The features of InvITs are similar to those of the real estate investment trusts (REITs).

While InvITs had got a go-way back in September, 2014, the country is yet to see its first InvIT. Four applications were reported to have been submitted to the market regulator, but only two of them were approved.

Key changes proposed to InvIT rules

• Proposed: Allowing InvITs to invest in a two-level special purpose vehicle (SPV) structure. (An SPV is an arm of an asset company). An InvIT should be able to have SPVs that would have stakes in other SPVs.

Earlier: SPVs were not allowed to further invest in other SPVs. 

• Proposed: Mandatory sponsor-holding in InvIT be reduced to 10 per cent from the current requirement of 25 per cent.

Earlier: A higher cap meant sponsors had to use their own money to meet the minimum holding requirement. The proposed investment option will be within the reach of a large number of developers.

• Proposed: An increase in the number of sponsors to five. More sponsors would mean more people to manage and fund an InvIT. This would further ease the process of launching InvITs.

Earlier: Only three sponsors were allowed. 

How will the changes help the real estate market?

The government, through its various agencies, has been trying to put in place measures to push the real estate sector in India, which has been battling a rough phase for a couple of years. The Sebi move is expected to bring more InvIT proposals. InvITs will help cash-starved developers unlock capital, and allow the public to invest smaller amounts in real estate, an otherwise expensive asset class for most. When they come into being, InvITs will bring cheer to investors and public alike.