Recently the Reserve Bank of India has allowed overseas investments in the debt instruments of REITs and InvITs. The regulations concerning foreign investment in these trusts were amended suitably to accommodate the changes.
The intention of allowing FII money into these trusts was announced earlier this year during the Budget of 2021-22. The amendments were also expected since the first quarter of 2021.
Consequently, the foreign portfolio investors will now be able to invest in the debt instruments of these real estate and infrastructure trusts. The money can be invested via a mid-term framework and voluntary retention route where the respective terms and conditions shall be applied.
What are InvITs and REITs?
InvITs and REITs are trusts that made their debut around 2014 in India but they began their operations only starting from 2017. Since then, in the last four years, there have been 5 InvITs and 2 REITs. They both have the working very close to mutual funds but are different in terms of structure, revenue, risk and, liquidity.
InvIT stands for infrastructure investments trust. Their operations are very similar to how mutual funds work. They collect money from the people who want to invest and utilise that for building and operating roads, storage houses, power plants, supply lines, and other similar infrastructure.
On the other hand, REIT stands for real estate investments trust. They are similar to InvITs but instead of infrastructure, they are into building and operating real estate to generate revenue. Both these trusts provide revenue income as well as capital income to their investors. Revenue income is by way of dividends whereas capital income is by way of appreciation of the asset value.
A glance at the amendment
As per the notification, the amendment was brought in the First Schedule to Foreign Exchange Management Regulations. The regulations that focus on debt instruments were amended to allow foreign money to infuse in debt issued by real estate and infrastructure investments trusts.
The expected amendment that was announced at the beginning of 2021 was actualized in October. These regulations facilitate and govern the foreign trades and payments in the Indian debt market. It formulates the procedure for foreign exchange deals.
This amendment was necessary because due to the absence of these regulations governing foreign investments, the government was not able to invest overseas funds to invest in these trusts.
- The provisions of Regulations governing the infusion of foreign funds in the debt market have been amended to accommodate foreign investors to take part in REITs and InvITs.
- The vision behind this move by the central bank to allow funds from overseas into real estate and infrastructure trusts is to boost the industry that has been on a setback for many years now.
- Recently, the Sebi has allowed overseas real estate and infrastructure trusts to list on the exchange in India’s International Financial Services Center (IFSC).
- The steps to welcome the foreign trusts, as well as foreign funds in Indian trusts, are being taken by the government.
What is the history of InvITs and REITs?
In the 60s, real estate investment and infrastructure investment trusts were brought to the United States of America. After more than 50 years, the stock market regulator SEBI approved them as investment assets in 2014. These instruments are still new to the Indian markets and many investors are still unsure about this asset class.
Can real estate investment trusts be listed?
Yes, these trusts can be listed on the stock exchanges provided they fulfill the conditions required for listing. Currently, there are two infrastructure trusts and two real estate trusts listed on the stock exchanges.
How are FPIs regulated in India?
In India, foreign portfolio investors are regulated by the provisions of the Foreign Exchange Management Act (FEMA), 1999. They are overlooked by the stock market regulator SEBI as per the regulations for FPI brought up in 2019. Some provisions of the Income-Tax Act, 1961 are also applicable to these investors.