KS Badri Narayanan SEBI recently came out with a consultation paper with new proposals to make Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) more accessible to common investors and to allow issuers to raise funds more easily.

So far, these investment avenues have failed to attract investor fancy. Currently, only three InvITs are listed and the first REIT is yet to hit the market.

Under the new proposals, the minimum allotment and trading lot for publicly issued REITs and InvITs would be reduced to 100 units and the value of one such lot should be within the range of ₹15,000-20,000. Currently, the minimum subscription in an initial offer and a follow-on offer is ₹10 lakh and a trading lot is ₹5 lakh.

“Representations have been received that the present investment limit for minimum subscription and trading in units of such vehicles is quite high and not in consonance with the current requirements for investment in equity instruments,” SEBI said, and added “it has, therefore, been represented that in order to encourage participation of even retail investors, the minimum investment required for subscription and subsequent trading in units of REITs and InvITs, may be reduced to a lower threshold.”

SEBI also proposed to increase the leverage limit for InvITs from the existing 49 per cent to 70 per cent.

Cash flow-based leverage

Optimal leverage based on the cash flows of the projects could provide investors with the ability to enhance their returns on investment. In general, most operating infrastructure projects with good cash flows are leveraged between 70 per cent and 80 per cent of the value of the assets. The current limitation on leverage restricts the InvITs from offering incremental returns as compared to other alternative investment avenues with similar assets.

The limitation on leverage also puts restrictions on the ability of the InvITs to acquire new assets for growth.

SEBI seeks public comments for the proposed framework by February 18.

A welcome move

SEBI’s proposals are a welcome move as investors with lower sums of ₹20,000 can participate in the initial offer of REITs and InvITs, which are considered stable, income-yielding investment vehicles. Besides, this will also enhance liquidity for these products in the stock exchanges. However, these proposals may not usher in a flood of new products immediately, as the structural problems of the real estate sector such as lack of transparency remain. Though the government has tried to tone up transparency through the Real Estate (Regulation and Development) Act or RERA, the situation on the ground is yet to show material improvement.

Another problem is lack of awareness about the products such as the ‘ Mutual Funds Sahi Hai ’ campaign launched by the AMFI that helped expand the reach of MF products to the masses. Learning from the experience of this campaign, real estate and infrastructure bodies should create awareness about their products through marketing strategies. They may even join hands with SEBI and the exchanges to spread awareness of these products.

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