The first ever REIT IPO in India was recently launched by the Embassy Group of Mumbai supported by the Blackstone Group of the US. The focus of the REIT was to monetize the commercial real estate assets of the Embassy group. The size of the REIT IPO was Rs.4750 crore and for the first REIT in India, the response was both gratifying and encouraging. But first let us understand what the REITs are and what is an InvIT?
What exactly is a REIT and what are InvIT?
A real estate investment trust (REIT) is the real estate equivalent of a mutual fund. Just as a mutual fund creates a diversified portfolio of equity, long term debt and short term debt; the REIT creates a portfolio of diversified commercial property holdings. Typically, the REIT can hold income earning properties so these would typically be commercial properties like office buildings, IT parks, factories, malls etc. Whatever is earned by way of income from the portfolio of assets either in the form of rents or capital gains must be distributed to the unit holders to the tune of 90% of such income! Since the REIT is structured as a pass through structure to purely securitize the receivables from the commercial property, the dividends received by the unit holder is totally tax free in their hands.
InvITs are structurally similar to REIT; the only difference being that InvITs hold mega infrastructure projects like roads, toll ways, expressways etc in the portfolio. The earnings from such infrastructure projects in the form of toll fees are monetized as an InvIT. We have already seen companies like the Reliance Group and the IRB Infrastructure group monetizing part of their infrastructure assets via InvITs.
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Major changes in REITs to ease the public issue to investors
While the REITs were officially permitted by SEBI in 2014, the first REIT was launched only 5 years later. That was because of too many procedural hassles. In late January 2019, the SEBI took a serious step towards simplifying this process. Some of the key highlights of the SEBI announcement were as follows:
- To protect the interests of the unit holders, SEBI has made it mandatory that IPOs of REITs and InvITs can only accept applications through ASBA route. As you are aware, Application Supported by Blocked Amounts (ASBA) is a system wherein the amount of application only gets blocked in your bank account and only on the date of allotment the actual amount corresponding to allotment is debited and the balance funds are released from the lien immediately.
- The issuer of REITs or InvITs will not be able to announce the floor price and the price band for the book building issue earlier than just 2 days prior to the opening of the issue. This used to be 5 days earlier and this change will allow the issuer to have a more transparent and current pricing that is closer to the time of opening of the issue.
- Since the product is a novel introduction in the market and is yet to be tested, SEBI has allowed an extension of up to 3 days from the closing date in case of some force majeure clause, banking strike etc. The extension period will have to be limited to the outer limit of 30 days.
- The intermediaries accepting the application will not only acknowledge the receipt of the application but also take the responsibility of uploading the bid in the electronic bidding system of the stock exchange. REITs can be held in the regular demat account and that must be mapped at the time of the IPO.
- The stock exchanges will now validate each bid with the master record with the depository and highlight any discrepancies at the time of the upload itself, so that there is sufficient time to rectify the error.
REITs and InvITs offer an additional asset class for Indian investors. Apart from an equity participation in commercial property via REITs, retail investors also have the scope to diversify the overall risk of their asset holdings.