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SEBI introduces Regulatory Framework for fractional investing

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SEBI recently in its board meeting has approved amendments to the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) to establish a regulatory framework for facilitating SM REITs. SM REITs, characterized by an asset value of at least Rs. 50 crore, shall have the ability to formulate separate schemes for real estate assets ownership through special purpose vehicles (SPVs) constituted as companies. This is a departure from the present requirement of a minimum asset value of Rs. 500 crore for existing REITs.  

The rationale behind these amendments stems from the surge in web-based platforms, over the past 2-3 years, offering fractional ownership of real estate assets. On these Fractional Ownership Platforms (FOPs), the minimum investment typically ranges from INR 10 lakhs to INR 25 lakhs.  

“Fractional investment” or “ownership of real estate through FOPs” is an investing strategy where the cost of acquisition of real estate is divided among multiple investors. These investors invest in securities issued by a SPV established by the FOP, which then purchases the real estate asset. The expenses related to upkeep and acquisition are shared among the investors/shareholders in the SPVs. The main advantage of FOPs is that a group of people can pool in money and jointly purchase real estate.       

In May 2023, SEBI floated a consultation paper acknowledging the ambiguous or absent regulatory oversight of FOPs. While some FOPs may have registered as ‘real estate agents’ under state-level Real Estate (Regulation and Development) Act, 2016 (RERA), RERA’s oversight is limited and may not provide adequate protection to investors. Concerns have also been raised about SPVs, constituted as private limited companies, potentially undertaking a Deemed Public Issue without complying with prospectus issuance or filing with SEBI. There are worries that this might constitute unregistered Collective Investment Scheme.  

SEBI noted that given the increasing value of investments and the rising number of investors in FOPs, there is a need to register and regulate these platforms. The regulatory framework approved by SEBI for SM REITs includes provisions for the structure of SM REITs, migration of existing structures meeting specified criteria, obligations of the investment manager, investment conditions, minimum subscription, distribution norms, valuation of assets, etc.   

The SEBI Board Meeting press release is enclosed herewith and can be accessed at: https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/nov-2023/1700916755216.pdf#page=1&zoom=page-width,-15,525

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com

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