Securities and Exchange Board of India has recently notified SEBI (Mutual Funds) (Amendment) Regulations, 2008 for Real Estate Mutual Funds (REMFs) to invest directly or indirectly in real estate assets or other permissible assets.
The regulations defines "real estate" to mean immovable property, which is (i) located in India in cities specified by the Board or in Special Economic Zones(ii) constructed and usable (iii) evidenced by valid title documents (iv) legally transferable (v) free from encumbrances (vi) not subject matter of any litigation, but excludes (I) project under construction, or (II) vacant land, or (III) deserted property, or (IV) land specified for agricultural use, or (V) a property which is reserved or attached by any Government or other authority or pursuant to order of court of law or the acquisition of which is otherwise prohibited under any law in force.
Real Estate Mutual Fund Schemes may be launched by an existing mutual fund having adequate number of key personnel and directors having adequate experience in real estate or new entrants carrying on business in real estate for at least 5 years. They will also have to fulfill all other criteria applicable to a mutual fund.
Such schemes will be subject to the conditions that (1) it is close ended and its units shall be listed on a recognized stock exchange (2) the units issued shall not confer any right on the unit holders to use the real estate assets held for the scheme and any provision to the contrary in trust deed or in the terms of issue shall be void (3) the title deeds pertaining to real estate assets held by scheme shall be kept in safe custody with the custodian of the fund (4) shall not undertake lending or housing finance activities (5) all financial transactions of the scheme shall be routed through banking channels and they shall not be cash or unaccounted transactions
The Real Estate Mutual Fund has to follow the prescribed permissible pattern of investments, which is
However, all is not well with these regulations. The Reserve Bank of India has protested to the finance ministry that NRIs and foreign institutional investors (FIIs) investment in REMFs would lead to indirect foreign investment in real estate. Foreign investment through REMF route will not face the similar guidelines as are applicable to foreign direct investment in real estate. The said guidelines are (a) Minimum area to be developed for serviced housing plots shall be 10 Hectres and for construction - development projects 50,000 square meters. In case of a combination project, any of the two conditions shall be fulfilled. (b) Minimum capitalization of US$ 10 Million for wholly owned subsidiaries and US$ 5 Million for joint ventures with Indian partners. The investments have to be brought in within six months of commencement of business of the company. Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with the prior approval of the Government through Foreign Investment Promotion Board (FIPB). (c) At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor shall not be permitted to sell undeveloped plots. (d) The project shall confirm to the norms and standards, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government /Municipal/Local Body concerned. (e) The investor shall be responsible for obtaining all necessary approvals, including those of the building/layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under rules/bye-laws/regulations of the State Government /Municipal/Local Body concerned. (f) The State Government /Municipal/Local Body concerned, which approves the building/development plans, shall monitor compliance of the above conditions by the developer.
However, the finance ministry has overruled RBI's concern of REMFs violating foreign direct investment norms in the real estate sector.
ASHWIN J. JAJAL
Advocate & Solicitor, Bombay
Solicitor, England & Wales
The author is practicing Advocate & Solicitor advising on NRI and Foreign investment in Housing, Real Estate, Townships, Built up Infrastructure and Construction - Development projects, Acquisition, Sale, Gift, Testamentary disposition, Family Settlement of immovable property in India.