FLASH ALERT SEBI consultation paper on regulatory

Securities Law | framework for Micro, Small and

18 May 2023 Medium REITs

• With the advent of technology and changing business dynamics, a number of

web-based platforms have emerged on the concepts of fractional ownership of
real estate projects wherein ownership of real estate property(ies) is split
amongst various investors. These platforms provide investors an option to invest
in real estate projects e.g. buildings, office spaces, warehouses, shopping
centres, conference centres, etc.
• Currently, the concept of fractional ownership is not regulated by any law or
authority. Therefore, Securities and Exchange Board of India (‘SEBI’) has
released a consultation paper on separate framework for Micro, Small and
Medium REITs (‘MSM REITs’) in order to regulate the operations and activities of
the Fractional Ownership Platforms as well as protect the interests of investors.

Summary of key proposals

• Any person or entity who facilitates fractional investment in real estate

by any structure whatsoever shall be required to register with SEBI for operating
as MSM REIT by fulfilling the eligibility criteria as specified by SEBI from time to
time.
• Persons / entities which either do not meet the eligibility criteria or do not
register within the timelines given by SEBI shall be required to wind-up their
operations and cease to operate.
• Any MSM REIT shall be required to be set up as a Trust under the provisions of
the Indian Trusts Act, 1882 with an ability to establish separate and distinct
scheme/s for owning of real estate assets through wholly owned special
purpose vehicles constituted as a company under the Companies Act, 2013.
• Unlike REITs, MSM REIT Scheme shall have full control and shall hold 100%
equity share capital in all SPV(s). Further, the SPV shall be required to have full
control and 100% ownership of underlying properties.
• An MSM REIT shall be required to be mandatorily registered with SEBI and shall
have parties such as trustee, sponsor and Investment Manager with each such
person being a separate and distinct entity.
• The MSM REIT shall be required to raise funds initially through an initial offer of
units of a scheme. The units shall be required to be issued in dematerialised
form and shall be required to be mandatorily listed on stock exchange. MSM
REIT shall not be allowed to raise debt.
• MSM REIT Scheme shall raise funds from at least twenty investors, residents as
well as non-residents those who are unrelated to the Sponsor, its related parties
and its associates.
• Minimum subscription size shall be INR 10 lakhs per investor. Maximum
subscription shall not be more than 25% of total unit capital.
• No unit holder of the MSM REIT scheme shall enjoy superior voting or any other
rights over another unit holder in the same scheme and there shall not be
multiple classes of units of REIT in each scheme
• At least 95% of the asset under management shall be invested in completed and
rent generating real estate properties at all times. Balance 5% may be deployed
in liquid assets which are unencumbered.
• At least 95% of net distributable cash flows of the SPV shall be distributed to the
scheme of MSM REIT and MSM REIT shall in turn distribute 100% of net
distributable cash flows received by it to the investors.
• Sponsor shall have at least 5 years experience in real estate industry as either a
developer or a fund manager.
• The sponsor shall be required to hold a minimum of 15% of the total units of the
MSM REIT for each scheme for a period of at least 3 years.
• Sponsor shall have a net worth of at least INR 20 crores. Out of the same, an
amount of INR 10 crores shall be in the form of positive liquid net worth.
• The Investment Manager of MSM REIT shall have a net worth of at least INR 10
crores. The net worth shall be in the form of positive liquid net worth.
Alternatively, the role of Sponsor and Investment Manager could be combined
into making the Investment Manager into as self-sponsored entity.
• For coming with initial offer of a scheme, the size of the asset proposed to be
acquired should be at least INR 25 crores and should not exceed INR 499 crores.
• MSM REITs to adhere to the compliance guidelines relating conduct of
meetings, total expense ratios periodic disclosures, etc.