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Real-Estate Mutual Fund (³REMFs´) introduced by Securities and Exchange Board of India
(³SEBI´) gives options to the investors for investing in real-estate. These correspond with the
Real-estate Investment Trusts in USA and Pool Management Vehicle in U.K which are popular
modes of investment in USA and U.K respectively. The real-estate sector was opened in India
for foreign direct investment by the government which has led to a spurt in activities. Before
REMFs, through the capital market, money was invested in the equities of real-estate companies
and not in real-estate. REMF gives an additional mode of raising money through the capital
market for the activities in the real-estate sector. This bulletin deals with REMFs as an
investment option, some key regulatory considerations, and opportunities for foreign investors to
invest in REMF and the basic tax provisions to REMFs.

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REMFs have been allowed to invest in:

[c directly in real-estate properties;

[c mortgage backed securities;
[c equity shares, bonds, debentures of listed/unlisted companies which deal in properties;
and also undertake property development;
[c other securities

REMFs provide better alternative for investors as they have been given a wide opportunity from
investing in real-estate properties to equity shares etc. of companies dealing in properties. This
wide field of investment gives more security to the investors. The investors allowed to invest in
real-estate are High Net worth Investors (³HNWI´) and Foreign Institutional Investors (³FIIs´).
There is ample opportunity for the foreign investors to invest in REMFs. However, REMFs are
still not open for the retail investor. HNWI is the class of investors prominent in investing in
stocks and have a high net worth. The non-institutional investors who invest more than INR
100,000 (US$ 2,500) per trade is above are termed as HNWI. FIIs have also been allowed to
invest in the REMF. FIIs are governed by the Securities and Exchange Board of India (Foreign
Institutional Investors) Regulations, 1995 (³the FII Regulations´). FIIs are allowed to invest only

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which is valid for three years from the date it is issued.

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REMFs are governed by SEBI (Mutual Fund) Regulations, 1996 (³the Regulations´) and
periodic guidelines issued by SEBI. Like any other mutual fund REMFs should be in the
nature of trusts and are required to be registered, they must set up a board of trustees and
trustee companies. Asset Management Companies (³AMC´) should manage REMFs. An AMC
is a company formed and registered under the Companies Act, 1956 and registered with SEBI.
AMC cannot act as the trustees of any REMF. It is the duty of the trustee company to act as
the trustees for the benefit of the unit holders. The net worth of the AMCs should be at least
INR 100 million AMCs as well as the trustee company are required to get the approval of
SEBI for finalizing its charter documents. No trustee of a REMF can be the trustee of any other
REMF.

Certain important compliances of the REMFs are described below.

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The units of REMFs have to be compulsorily listed on the stock exchange. The REMF
has to appoint a SEBI approved custodian who will act as the custodian of securities.
The appointment of custodian must be notified to SEBI within 15 days of the
appointment9 and REMF should enter into a custodian agreement which must contain clauses
required for the efficient and orderly conduct of the affairs of the custodian.

No scheme can be launched by the REMF unless it is approved by the board of trustees. The
REMF is required to file the offer document with SEBI. If the draft is approved by SEBI then the
AMC can issue the offer document. This document contains disclosures to help the
investors to make an informed investment decision. It should clearly specify the amount it
seeks to raise under the scheme and, in case of over subscription, the extent of amount it may
retain.

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SEBI has stipulated that the structure of REMFs should be close-ended i.e. schemes with a
defined period of maturity. These schemes are redeemed at the end of maturity period. Such
schemes may be wound up in case of termination of the period of the scheme unless it is rolled
over for a further period.

The Regulations prescribe certain modalities required to be followed in case of close-ended

schemes. The units of close-ended schemes are required to be compulsorily listed in a
recognized stock exchange within six months of the closing of subscription. No scheme can be
open for subscription for more than 45 days. The REMF is required to return the subscription
amount to the investors within six weeks from the date of closure if there is over subscription or
under subscription. Further, REMFs must declare the Net Asset Value (³NAV´) of the funds on
a daily basis. NAV is the market value of the securities held by the fund in a day which varies
daily. The performance of a fund is determined by its NAV and is calculated by dividing
the net asset of a scheme by the number of units outstanding on the valuation date.

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The tax liability on the investors and the REMF is governed by the provisions of the Income Tax
Act, 1961 (³the IT Act´). Mutual funds are trusts and, therefore, their tax implications are same
as of any trust. Registered REMFs are exempted from income tax. Moreover, REMFs receives
all income without any deduction of tax at source. However, in case of distribution of
income by the mutual funds the tax liability is under the dividend distribution tax which at
present is 16.995%.

The income received by the investor through a REMF is not liable to tax. However, if the
investor sells the units of REMF he is liable to pay capital gains tax on the proceeds of such sale.
Capital gains tax can either be long-term or short-term tax. Long-term capital gains tax is
applied on the sale of units of REMFs when the units are held for more than 12 months
period. FIIs are taxed at the rate of 10% under long-term capital gains tax while tax rate for
short-term capital gains tax is 30%

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Ascendas India IT Parks Fundc US$ 230.14 millionc
Kotak Mahindra Realty Fundc US$ 115.07 millionc
Deewan Housing Finance US$ 69.04 million
Kshitij Venture Capital Fund US$ 57.53 million
Fire Capital US$ 50 million
Edelweiss Capital US$ 35 million

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Established in May 2005, is one of India¶s first private equity funds with a focus on real estate
and real estate intensive businesses. It operates as a venture capital fund. The fund¶s corpus has
been contributed by leading banks, domestic corporate, family offices and high net worth
individuals. The fund is close ended and has a life of seven years. The Fund has raised around
$100 million from domestic investors. The strategy of the fund is to make investment at project
level with developers as well as at an enterprise level in realty development companies. The fund
has the mandate to make investments in retail, hotels, healthcare, education etc.

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The first specialized housing finance institution in India has been providing financial assistance
to individuals, corporate and developers for the purchase or construction of residential properties
besides providing property related services, training and consultancy. In its 27 years of business
presence, the company has developed close relationships with all major developers, local
development bodies, state governments, regulators and has a branch network of over 180 offices
across the country catering to over 2400 towns and cities.

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Is a seven year close ended real estate venture fund called HDFC India Real Estate Fund. The
fund has been launched in association with State Bank of India. HDFC holds close to 80 per cent
and SBI the remaining stake while the fund is managed by HDFC Venture Capital Ltd. The
scheme had a minimum contribution of Rs 5 crore per investor and would target banks, insurance
companies, corporates and high net worth individuals for investment.
To achieve a balanced risk-reward profile, the inaugural scheme, HI-REF will invest in three
broad classes of companies:
1. Projects which are complete²this would comprise real estate assets, which are in use with
established, high quality tenants. Such asset class typically would denote steady income type
characteristics.

2. Projects in the development stage²where the lead-time to commercial deployment is

typically between 1±3 years and the completed projects subsequently would have contractual off-
take arrangements in place.

3. Projects in the planning stage²where the lead-time to commercial deployment would be 3±6
years. These projects would offer the highest amount of return although with a greater risk.

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Is a close ended fund, for domestic and overseas investors. The fund focuses on growing markets
such as Pune, Bangalore, Chennai, Hyderabad and other cities that are witnessing substantial
urban development. The fund¶s investment strategy is to focus on acquiring secured rental
income producing real estate assets with quality blue chip tenants and picking up equity stakes in
specified real estate projects being developed by reputed developers.
Anand Rathi (AR) is a rapidly expanding full-service securities firm founded in 1994 stock
broker Anand Rathi to provide broking service to customers in Mumbai. The group operates
through over 100 locations in India and its operations extend to Bangkok & Dubai as well.

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It is a private equity fund. The fund seeks to achieve a gross investment-level leveraged annual
internal rate of return in excess of 25%. In addition, the fund will target a cash on- cash stabilized
yield on equity exceeding 8% per annum for income-generating projects.

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Has also launched a property fund, the funds seeks to invest in the commercial, residential, retail
and other world-class real estate assets, both in developed and development projects, in the
potentially growing cities of India. The fund seeks to deliver a compound annual rate of return in
excess of 20±25% p.a over a 7 years tenor. The progress has been very slow so far, and as of
now there is a lot of ambiguity on this subject. Real estate fund so far has been a non-starter
largely because of the roadblocks like varying stamp duty across states, lack of transparent
valuation methodology etc. Increasing awareness about these kinds of funds operating in India
and the advantages and convenience that they offer are sure to catch investor¶s fancy sooner or
later, and we feel it is just a matter of time before market regulators introduce investor friendly
norms in this sector too.Analysis of the fund performance According to the latest quarterly India
Property Investment Review from property consultants Knight Frank India, the target internal
rate of return of these funds range from 15 per cent to as high as 30 per cent. This rate of targeted
return indicates the non-homogeneity in the Indian real estate markets.

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REMFs provide better alternative for the real-estate companies to raise money from the
capital markets for their requirements. As the investment is monitored by SEBI therefore,
it will be structured. REMFs are just like any other mutual fund, they provide the
benefits generally provided by the mutual funds, like pooling of resources for greater benefit,
tax liability on investors which is moderate. REMFs are sector specific funds which inherently
have their own share of risks as the returns are dependent on the rise and fall in the sector.
However, with the real-estate sector showing commendable growth, the investments are secure.
The investment options for the investors have been made broad based as it includes right from
investing directly in property to securities of real-estate companies dealing in which will mean
lower risk for the investors as it will ensure diverse investment opportunities thereby
reducing the chance of losses. Therefore, the REMFs provide the investors an opportunity to
be the part of real-estate boom in India

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