Topic 2: EXPLORING NEW ROADS: REITS & INVITS

At the beginning of the current financial year, NSE Indices Ltd, a subsidiary of the National Stock Exchange (NSE), introduced India's first-ever Real Estate Investment Trusts and Infrastructure Investment Trusts index — Nifty REITs and InvITs Index. This index is designed to monitor the performance of publicly listed and traded REITs and InvITs on the NSE. It was a highly anticipated investment tool for the real sector in India. The Indian government launched InvITs and REITs to attract long-term yield

capital into the country and stimulate private participation in infrastructure and real estate. Analysts predict that the real estate sector in India will grow to a market size of US$1 trillion by 2030. Despite near to medium-term challenges from COVID-19, the long-term drivers for real estate demand are robust and likely to endure current adversities. The REIT/InvIT route has the potential to address several investment challenges in the infrastructure sector.

REITs and InvITs are conceptually akin to mutual funds, where a sponsor raises capital and invests in infrastructure or real estate projects. A Real Estate Investment Trust (REIT) or an Infrastructure Investment Trust (InvIT) is an investment vehicle that owns revenue-generating real estate or infrastructure assets. While REITs invest in real estate projects, InvITs focus on infrastructure projects with a longer gestation period. These trusts provide investors with exposure to diversified, regular income-generating real estate and infrastructure assets, making them strong financial instruments for those seeking involvement in these sectors.

The Nifty REITs and InvITs index comprises securities based on their free float market capitalization, subject to a security cap of 33% each, with the aggregate weight of the top three securities capped at 72%. The index has a base value of 1,000 and undergoes quarterly reviews and rebalancing. It serves as a benchmark for fund portfolios and index variants.

For securities to be eligible for inclusion in the index, they must meet certain criteria:

  • REITs or InvITs must be domiciled in India and listed and traded on NSE; only publicly listed securities are eligible.
  • Securities should have a market lot size of 1 unit for inclusion.
  • A minimum listing history of 1 month as of the cutoff date is required.
  • Securities should have a minimum trading frequency of 60% during the previous 3 months as of the cutoff date.

SEBI has consistently worked on strengthening the regulatory framework for REITs and InvITs. To enhance the efficiency of the public issue process, the time for allotment and listing after the closure of REITs and InvITs issues was reduced from 12 to 6 working days. For privately placed InvITs, the timeline was shortened from 30 days to six working days, contributing to increased market liquidity. According to SEBI, these innovative mechanisms for financing real estate and infrastructure can have a multiplier impact on India's economic growth. SEBI has introduced rules granting special rights to REIT unitholders, enabling them to nominate representatives on the boards. Additionally, the concept of a self-sponsored REIT was introduced. The market continues to show interest in REITs and InvITs, with 3 new InvIT registrations and 1 new REIT registration during 2022-23. The total registered entities now stand at 20 for InvITs and 5 for REITs. Listed REITs and InvITs raised funds amounting to Rs 18,658 crore in the first half of the current fiscal year, driven by robust demand for infrastructure investment, attractive returns, and supportive government policies. The data indicates that, of this amount, Rs 12,753 crore was raised through InvITs, and Rs 5,905 crore was collected via REITs. Tax implications for REITs and InvITs are treated as pass-through vehicles under income tax rules, with

income, in the form of dividends and interest from underlying assets, being fully exempted. Distributions made by investment trusts are directly taxed in the hands of investors, depending on the nature of such distributions (dividend, interest, or capital repayment). It's worth noting that REITs and InvITs have different income tax implications for sponsors, unitholders, and the REIT or InvIT at various stages. With proactive support from the government and regulatory authorities, REITs and InvITs are being extensively promoted. High levels of corporate governance from sponsors and management are of utmost importance in establishing these trusts. Maintaining consistent transparency in financial reporting is crucial for building the foundation for long-term success in this area. Given the sizeable dependence of the Indian economy on infrastructure development, these trusts have become vital in addressing the country's infrastructure needs. While REITs and InvITs are relatively new concepts in the Indian market, they have been popular choices in global markets due to their lucrative returns and capital appreciation. This marks the advent of a new era of growth driven by capital investments in REITs and InvITs.



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