The Sebi board cleared the final guidelines for the setting up and regulation of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) on Sunday. In his budget speech, the finance minister had promised tax incentives to encourage these instruments of investment pooling, which are aimed at easing the burden of having to raise bank finance — an estimated Rs 65 lakh crore will be required for building infrastructure during the 12th Plan period (2012-17). By granting taxation pass-through status to these instruments — this means only the trusts’ special purpose vehicles (SPVs), and not the investors, will pay tax — it is expected that domestic and foreign capital will be encouraged in these sectors. Given the pressure on the banking system due to non-performing assets and the importance of the construction sector in absorbing unskilled labour migrating from the farm sector, the guidelines are certainly welcome, and a good start.
The safeguards built into the Sebi guidelines are reassuring. For instance, while REITs can have up to three sponsors, in order to ensure that their interests are aligned with those of the investors, each must own at least 5 per cent of the units. Even after three years of listing, they must hold a minimum of 15 per cent through the life of the REIT. Similarly, SPVs are not allowed to purchase other SPVs, and rules to ensure the diversification of risk have been included in the guidelines.
The hope is that these trusts will allow infrastructure and commercial real estate companies to monetise their assets and use the funds so raised to complete cash-starved projects. But doubts remain. For instance, the cap on debt of 49 per cent for infrastructure projects seems unrealistically low — on an average, the debt to equity ratio of such projects is 3:1. Similarly, questions remain on certain tax-related issues — such as, how will stamp duty, which is set and controlled by state governments, be treated? It remains to be seen whether the underlying fundamentals of the sectors will support the widespread assumption that the guidelines will result in an infusion of $10-20 billion.