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Corporate governance

Real Estate Investment Trust (REIT) regime in India

On 26 September 2014, the Securities and Exchange Board of India (SEBI) notified the Real Estate Investment Trusts (REITs) regulations, thereby paving the way for introduction of an internationally acclaimed investment structure in India. The Finance Minister has also made necessary amendments to the Indian taxation regime to provide the tax pass through status, which is one of the key requirements for feasibility of REITs.

REITs have been in existence in developed economies since several years and provide a stable investment alternative for retail investors, as well as the real estate sector. Taking cue from developed economies, the Indian REIT regime echoes the internationally followed concepts, methods and principles.

The India REIT regime is aimed at providing:

  • an organised market for retail investors to invest and be part of the Indian real estate growth story
  • a professionally managed ecosystem that is risk averse and is aimed at protecting the interest of public
  • an exit platform for the real estate sector to ease out liquidity burden

This document highlights some of the key aspects of the Indian REIT regime.

Commercials aspects

  • REITs offer a natural experiment in corporate governance due to the fact that they leave little free cash flow for management, which reduces the level of supervision required from the market watchdogs
  • transparency is an important element in the REIT story, which can be analysed in two different ways:
    • REITs provide tax transparency. This means that the REIT does not pay any corporate tax in exchange for paying out strong, consistent dividends. Rather, taxes are paid by the individual shareholder only
    • Further, considering that the listed REITs will be registered and regulated by the SEBI and adhere to highest standards of corporate governance, financial reporting and information disclosure, the REITs will provide operational transparency
  • increasingly, shareholders are scrutinising the corporate governance practices of publicly traded companies. Good corporate governance is reflected in higher valuations; companies that have high governance ratings are also those that tend to have higher valuations in the marketplace as well as stronger total returns