Capital Markets: Challenges and Developments

InvITs and REITsPrelims Only

Note4Students

From UPSC perspective, the following things are important :

Prelims level : InvITs and REITs

Mains level : Not Much


 

Markets regulator SEBI has put in place a framework for the rights issue of units by listed REIT and InvITs.

What are InvITs and REITs?

Infrastructure Investment Trusts (InvIT)

  • An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return.
  • InvITs work like mutual funds or real estate investment trusts (REITs) in features.
  • InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
  • They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

Real Estate Investment Trusts (REIT)

  • A REIT is roughly like a mutual fund that invests in real estate although the similarity doesn’t go much further.
  • The basic deal on REITs is that you own a share of property, and so an appropriate share of the income from it will come to you, after deducting an appropriate share of expenses.
  • Essentially, it’s like a group of people pooling their money together and buying real estate except that it’s on a large scale and is regulated.
  • The obvious pitch for a REIT is that it enables individuals to generate income and capital appreciation with money that is a small fraction of what would be required to buy an entire property.
  • However, the resemblance to either mutual funds or to owning property ends there.
  • According to Indian regulation on REITs, these are meant to primarily own finished and rented out commercial properties –– 80 per cent of the investments must be in such assets. That excludes a real estate that is under development.

Why need InvITs and REITs?

  • Infrastructure and real estate are the two most critical sectors in any developing economy.
  • A well-developed infrastructural set-up propels the overall development of a country.
  • It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.
  • Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

What did SEBI rule?

  • SEBI said the issuer will have to disclose objects of the issue, related-party transactions, valuation, financial details, review of credit rating and grievance redressal mechanism in the placement document.
  • The SEBI had first notified REITs and InvIT Regulations in 2014, allowing setting up and listing of such trusts which are popular in some advanced markets.

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