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Govt to allow FPIs to debt finance REITs, InvITs

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NEW DELHI :
In a significant move to augment funds for the infrastructure and real estate sectors, the government on Monday proposed permitting foreign portfolio investors an entry into debt financing of emerging investment vehicles – REITs and InvITs.

In the Union Budget for 2021-22, Finance Minister Nirmala Sitharaman also proposed exempt taxes on dividends on REITs and InvITs, which will make such investment vehicles attractive and lucrative for investors.

REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) are relatively new investment instruments in the Indian context but are popular in global markets.

While a REIT comprises a portfolio of commercial real assets, a major portion of which are already leased out, InvIT comprises a portfolio of infrastructure assets such as highways and power transmission assets.

“Debt financing of InVITs and REITs by Foreign Portfolio Investors (FPIs) will be enabled by making suitable amendments in the relevant legislations,” the minister said.

This will further ease access of finance to InvITs and REITs, thus augmenting funds for infrastructure and real estate sectors, she added.

“The proposal of providing FPIs an entry into debt financing of REITs and InvITs will open up a large source of fresh funding for the infrastructure and real estate sectors. This will also open up a new avenue for FPIs to invest in a growing market like India,” Manoj Purohit, Partner and Leader – Financial Services Tax at BDO India said.

In the context of the real estate sector, budget announcements relating to monetisation of infrastructure and real estate assets will help increase private sector participation and also assist the government in enhancing fund flow for development of critical infrastructure assets, Shishir Baijal, Chairman and Managing Director of Knight Frank India said.

The relaxation on tax compliance for REIT investors will further improve the marketability of such products considering we are likely to witness new REITs this year, he added.

In order to provide ease of compliance, the finance minister has proposed to make dividend payments to REIT and InvIT exempt from Tax Deducted at Source (TDS).

Further, as the amount of dividend income cannot be estimated correctly by the shareholders for paying advance tax, the minister proposed to provide that advance tax liability on dividend income would arise only after the declaration or payment of dividend.

Also, for FPIs, it has been proposed to enable deduction of tax on dividend income at lower treaty rate.

V Balasubramaniam, MD and CEO, India INX welcomed the budget announcement on allowing debt financing of REITs and InvITs by FPIs and is well poised to providing listing and trading of these products on the exchange with considerable ease of business and quicker time to market for issuers and tax efficient trading for foreign investors across time zones with 22 hours non-stop trading.

“Further, the FM’s announcement to exempt taxes on dividends on REITs and InvITs will make them attractive and lucrative for investor,” he said.

Sandeep Upadhyay, MD (Infrastructure Advisory) at Centrum Capital Ltd said TDS exemption on dividend payments to InvITs and REITS will certainly entice more sovereign wealth funds to invest into the sector.

The Securities and Exchange Board of India (Sebi) first issued the guidelines for REITs and InvITs in 2014, and revised them in 2016 and 2017.

Ever since Sebi introduced InvITs, markets witnessed the listing of two public InvITs — IRB InvIT Fund and India Grid Trust. Some InvITs – IndInfravit Trust, India Infrastructure Trust, Oriental InfraTrust and Tower Infrastructure – were privately placed.

Last week, Power Grid Corporation of India filed preliminary papers with Sebi to float infrastructure investment trust through which it seeks to raise over 5,000 crore.

On the other hand, Embassy Office Parks REIT and Mindspace REIT are the only two listed REITs while Brookfield India REIT would launch its initial public offer on February 3.

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