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JC - Legal Updates - Proposed framework for Micro, Small & Medium REITs (“MSM REITs”)

Legal Updates

24 May 2023

Proposed framework for Micro, Small & Medium REITs (“MSM REITs”)

Overview:
 
A framework for regulating platforms offering fractional ownership of real estate assets has been proposed for investor protection, especially for non-institutional investors:
 
Technical Details:

Following are the key proposals pursuant to the consultation paper:

1)   The Securities and Exchange Board of India (“SEBI”) seeks views from the public to introduce a framework to regulate the operations of fractional ownership platforms (“FOPs”) offering fractional ownership of real estate assets to investors.

2)   Accordingly, SEBI proposes to introduce the following framework:

●   Any person or entity facilitating fractional investment in real estate assets by any structure shall be required to register with SEBI for operating as MSM REIT.

●   Existing entities failing to meet the eligibility criteria or do not register within the timelines prescribed by SEBI shall be required to wind up their operations.

●   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 (“SPVs”) constituted as a company under the Companies Act, 2013.

●   MSM REIT shall have full control and shall hold 100% (one hundred percent) equity share capital in all SPVs. All SPVs shall have 100% control and ownership of underlying properties.

●   Detailed eligibility and net worth requirements shall be prescribed for the Sponsor, Trustee, and Investment Manager of the MSM REIT.

●   The MSM REIT shall raise funds initially through an initial offer of units of a scheme. All units shall be mandatorily dematerialized and listed on the stock exchange.

●   At least 95% of the scheme's assets under management shall be invested in completed and rent-generating real estate properties. The balance of 5% shall be deployed in unencumbered liquid assets.

●   At least 95% of the distributable cashflows of the SPVs shall be distributed to the scheme of MSM REIT and in turn MSM REIT shall distribute 100% of distributable cash flows received by it to investors.

●   MSM REIT shall be required to adhere to the compliance guidelines relating to the code of conduct of meetings, total expense ratios, periodic disclosures, etc.

The above mechanism has been proposed by SEBI vide the consultation paper dated 12th May 2023 and titled “Regulatory Framework for Micro, Small and Medium REITs (MSM REITs).” SEBI has further invited comments on the consultation paper till 27th May 2023. 
 
JC Key Takeaways:

●   The proposed regulatory framework would help develop the real estate market and further provide greater investor protection, especially the non-institutional investors.

●   The proposed framework will lead to an orderly development of the real estate sector.

●   Increased transparency and disclosure requirements will increase investor confidence and will potentially attract more investors.
●  A well-defined framework shall be developed to handle all investor grievances effectively.
 
For further details, please see:
 
For any queries/clarifications, please feel free to ping us and we will be happy to chat:

●   Ms. Apurva Kanvinde (apurva.kanvinde@jclex.com)
●   Mr. Smit Parekh (smit.parekh@jclex.com)
●   Mr. Mannan Gala (mannan.gala@jclex.com)