The Hindu Business Line : REITs may face complex rules

Chennai, Feb. 9 The wish-list of the real-estate sector for the Budget should not include tax cuts or introduction of tax incentives, says Mr Abhishek Goenka, Partner, BMR & Associates. “All that the industry should call for is a stable policy,” he adds in the course of a recent e-mail interaction with Business Line.

“The changes in the Industrial Park scheme, which now provides stringent conditions for being eligible for the tax holiday, are a clear indicator of the overall philosophy of the Government to limit or phase out tax incentives,” reminds Mr Goenka.

“Yet, this is one sector that can, with a slash of a whip, take the ‘poor infrastructure’ tag off the Indian economy and bring to greater life the big Indian dream.”

Woefully, the most common dampener to the otherwise robust Indian economy has been the ‘poor infrastructure’ tag, he rues. “The Government has taken a few steps in the recent past to give impetus to this sector with the introduction of a separate legislation to govern Special Economic Zones (SEZs) being the most notable one. However, much is left to be done to improve the infrastructure sector in general and the real-estate sector in particular.”

Excerpts from the interview:

On REITs

The most recent proposal affecting the real-estate sector that is expected to see light during the coming financial year is the introduction of a legislation to govern real-estate investment trusts (REITs). Not long ago, SEBI put up a draft REIT legislation inviting public comments.

Introduction of REITs would be a welcome move since this would enable various real-estate developers to unlock value in their income generating assets. REITs would also provide an opportunity for retail investors with nominal investments to enjoy the relatively healthy returns real-estate investments earn.

It is important that a taxation regime for these funds is also announced, so that the legislation can actually be implemented. While the Government has the benefit of being able to choose from best practices of other countries, it is feared that given the amendment in the last budget wherein the so called “pass through” status for venture capital funds was removed (other than certain specified sectors), REITs may have to brace for some complex rules.

Many other legislative changes, particularly on stamp duty, would also be required to make the schemes workable and it may not leave the Government enough time to carry out all such changes as part of the Budget.

On SEZs

The SEZ legislation has also moved centre-stage and becoming a social issue, rather than an economic one. While no major announcement or amendment is expected on the law and rules relating to SEZs, there are certain aspects that require tinkering.

There are many States where the local laws have not been amended to provide fiscal benefits to the SEZs. Separately, the Central Government, after consultation with the States, needs to come up with a stable policy on SEZ approvals to avoid situations like the one in Goa, where the State Government is seeking a de-notification of already approved SEZs.

On FDIs

The keen interest in Indian real-estate market shown by various foreign investors and the large capital market issues made by some companies have started a debate on the need for regulating capital inflows and access to this sector.

A recent study by Assocham pegged the expected foreign direct investment (FDI) into the realty sector at an astounding $30 billion in the next ten years. However, there has been a lot of uncertainty surrounding FDI in real-estate sector.

Currently, investment in real-estate projects meeting certain criteria prescribed by the Central Government is through the automatic route. It is acknowledged that any decision relating to FDI means a tightrope walk for the UPA Government. However, what is expected is announcement of a stable policy on FDI in real-estate sectors which would put the present uncertainty to rest.

On funding

The realty sector has been hit hard in the recent past and has been raising overseas debt. The only options available for the real-estate sector to raise overseas funds are equity or instruments which are compulsorily convertible into equity.

This policy of the Government almost rules out mezzanine debt funds from investing in India. This is one area which requires reconsideration and the Government could consider allowing the real-estate sector to access overseas debt markets, albeit with the approval of the RBI.

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