The Securities and Exchange Board of India (Sebi) has done well to clear the rules for launching investment trusts for real estate and infrastructure. These trusts will raise money from investors to finance property and infrastructure developers. The industry is expecting investments of between $15 billion and $20 billion from domestic and foreign long-term investors, including NRIs. Sebi has paved the way for investment to flow into these sectors. It would be a boon to the cash-starved real estate and infrastructure industries, which have suffered from lack of easy access to credit from banks. The banking system faces great pressures due to high degree of non-performing assets and, as such, cheap funding is not easy to come by. This is more so in real estate, which has so far not been given industry status to entitle it to priority lending for accessing long-term funds at reasonable rates.
The trust structure is aimed at creating a framework of fast-track, investment-friendly and predictable public private partnerships to build vital large-scale projects. To raise long-term capital, the new guidelines will incentivise the creation of such trusts so that investors have a lower tax burden, besides avoiding multiple taxation at different levels. The proposed move will help unlock funds from completed projects in infrastructure and real estate. The promoters of such projects, particularly the completed ones, would be able to sell their stake to the trust, which, in turn, can raise long-term, tax-free funds from unit holders. The trusts will raise funds through the sale of units. This will be used to buy equity stakes in completed projects. Part of this can be invested as debt as well.
The real estate investment trusts, however, aren’t fully risk-free and the fear of an asset price bubble should be balanced against the need for large investments in the sector. Therefore, India now needs a real estate regulator. The government must ensure the passage of a law to check unfair trade practices through such a watchdog.