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Mutual
Funds get ready for the 'real' action
The Securities and
Exchange Board of India ("SEBI") has , in a Board Meeting
held in Mumbai on Monday, June 26, 2006, approved the guidelines
for Real Estate Mutual Funds ("REMFs").
A
press release to this effect has been issued by the SEBI (Press
Release No. 166/2006), as per which the REMFs would be allowed
to invest directly in real estate properties within India, in
mortgage (housing lease) backed securities, equity shares/ bonds/
debentures of listed and unlisted companies which deal in properties
and also undertake property development, as well as in other securities.
This
essentially means that unlike the real estate Venture Capital
Funds ("VCFs"), the REMFs would be allowed to own properties
directly, thereby making the structure more tax efficient. Further,
the REMFs may have more flexibility in structuring of investments
as compared to real estate VCFs.
The
REMFs shall be governed by the provisions and guidelines under
SEBI (Mutual Funds) Regulations, 1996 ("Regulations") which
are to be amended soon. Accordingly, REMFs would be required to
appoint a custodian, who has been granted a certificate of registration
to carry on the business of custodian of securities by the SEBI,
for the safe keeping of the title of real estate properties held
by the REMFs. The units of the REMFs shall be compulsorily listed
on the stock exchanges to provide liquidity to the investors and
the net asset value will have to be declared daily. The structure
of the REMFs, initially, shall be close ended. The final set of
guidelines governing the REMFs are awaited and are expected to
be notified soon.
The
Association of Mutual Funds in India Sub-Committee on Real Estate
Funds ("Committee") had earlier recommended that the REMFs
should be close ended for a minimum of 3 years, offering redemption/
repurchase at the end of this period in a staggered manner. Further,
the Committee recommended that the schemes may be open at the
end of every quarter for sale of fresh units and remain open for
a minimum period of 15 days, and should be eligible for all tax
benefits as other mutual funds.
Internationally,
the Real Estate Investment Trusts ("REITs"), are structured
as open ended vehicles. However, in India, the SEBI has moved
in line with the recommendations of the Committee to initially
allow only close ended schemes, so that it can not only test the
waters but also provide for building up of liquidity for the asset
class. Once adequate liquidity is achieved, open ended schemes
may be allowed. It would also be important to see the valuation
guidelines that may be laid down by SEBI in this regard and compare
the same to the international practice followed by REITs.
Concerns
over foreign investments
Time
and again, the Reserve Bank of India ("RBI") has made it
clear in its position that it would like to be cautious about
the inflating 'asset-price bubble'. Accordingly, over the last
several months the RBI has been raising concerns against opening
the realty sector to investments from overseas investors, albeit,
the same has not been reflected in SEBIs decision on Monday. However,
it is still unclear as to whether (i) the imbroglio surrounding
Foreign Venture Capital Investment in real estate, owing to concerns
that allowing the same would be akin to Foreign Direct Investment
("FDI") without the necessary norms being followed (FDI
up to 100% is allowed in real estate subject to compliance with
specified criteria), would be resolved any time soon, and (ii)
whether any foreign participation would be permitted in the REMFs,
and if so, in what form.
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You
can direct your queries or comments to the authors
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Source:
- SEBI
Press Release 166/2006
- The
Economic Times dated June 27, 2006
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