Tax Free Govt. Bonds
© PRAVIN P. SHAH & CO. 2
Increasing
Returns
Reducing
Returns
Increasing
Risk
Reducing
Risk
REITS: MID-RISK & MID-RETURN
AIF: HIGH-RISK & HIGH-RETURNS
◦ Established in 1960
◦ 300+ REITs in USA
◦ Market Cap of 216 Listed REITs = $816 bn.
◦ Own $1.7 tn of Commercial RE
Over 40,000 Commercial Properties owned by REITs
◦ Paid $34 bn in Dividends in 2013
◦ Avg. Debt Ratio : 46%
◦ Raised $35 bn from Public in 2014
© PRAVIN P. SHAH & CO. 5
◦ Popular way of monetising commercial real estate
◦ Excellent value unlocking tool for Developers, esp. In Retail
& Commercial space.
◦ India has over 350 million sq.ft. of Grade A leased offices
which can be monetised through REITs
◦ Developers often prefer a lease model for commercial
spaces.
◦ REITs typically invest in constructed and leased-out
comm’l properties
© PRAVIN P. SHAH & CO. 6
◦ Developers often prefer a lease model for commercial
spaces
◦ REIT makes IPO to various investors and raises funds
◦ REIT acquires the leased assets from developers or shares
in the company (SPV) owning such assets
◦ Risk element associated with real estate of investing in
under construction properties is substantially done away
with
© PRAVIN P. SHAH & CO. 7
Concept similar to a MF
◦ REIT – A Trust
◦ Sponsor – Developer who sets up the Trust
Introduces his Yield Portfolio in the REIT
◦ Trustees – of the REIT
◦ Manager – Professional Manager (AMC)
◦ Unitholders – Investors of the REIT
◦ Valuer – Values the REIT’s portfolio
© PRAVIN P. SHAH & CO. 10
◦ Sets up the REIT
Max. 3 sponsors
Net Worth as a whole ≥ Rs. 100 cr.
If multiple then each ≥ Rs. 20 cr.
5 Yrs experience in RE Indst / Fund Mgmt /
Development
If Developer = at least 2 Projects completed
© PRAVIN P. SHAH & CO. 11
◦ Manages the REIT = similar to AMC in MF
Net Worth ≥ Rs. 10 cr. If Co. Or Net Assets ≥ Rs. 10 cr. if
LLP
5 Yrs experience in Advisory / Fund Mgmt / Property
Mgmt in in RE Ind or Development
At least 2 key personnel with 5 Yrs exp.
50% of Board is Independent & Not on Other REITs
© PRAVIN P. SHAH & CO. 12
◦ Must within 3 yrs of Regn. else cancellation
Min. Value ≥ Rs. 500 cr.
IPO Size ≥ 25% to Public
Offer Size ≥ Rs. 250 cr.
Subsequent: FPOs, Pref. QIP, Bonus, Rights, OFS, etc.
◦ Sponsor:
Must hold 25% of Total units post IPO
Must hold 15% of Units in aggregate at all times
Individually 5% at all times
3 Yrs lock-in from listing + Re-designate New Sponsor
© PRAVIN P. SHAH & CO. 13
REIT can allot units to both residents and non-residents.
Investment by non-residents shall be subject to FEMA
Regulations
REITs should have a minimum of 200 public unit holders
at any point in time
Minimum subscription – Rs 200,000 with minimum
tradable lots of Rs 100,000
© PRAVIN P. SHAH & CO. 14
◦ Continued Listing:
Public: 25% of all Units + 200 Holders at all times
◦ Compulsory Delisting
Public Holding or Number dips
No Projects in REIT > 6 mts.
Can also go for Voluntary Delisting
◦ Redemption of units:
Only at Buyback or Delisting
© PRAVIN P. SHAH & CO. 15
◦ REIT must invest at least 80% of the value of the REIT assets
in completed and rent generating properties:
A completed property = property for which OC is received.
A rent generating property = rented / leased out
Draft: At least 75% area should be leased out
If project in phases = only rent-generating portion considered
75% of Revenues of REIT from Renting, Leasing of Real Estate
Assets
Min. Two Projects but Max. 60% of Assets’ Value from One Project
Can be Commercial / Res / Retail but must be Rented out
© PRAVIN P. SHAH & CO. 17
◦ 80% of REIT assets in completed & rent generating properties:
Real Estate / Property ~ Land (leasehold or freehold), Buildings,
Garages, Warehouses, Parkings /TDR
Any Asset = Infrastructure Real Estate / Property
Could be owned directly / via SPV ~ Hard Assets possible
SPV = Co. or LLP
Min. 50% held by REIT
Min. 80% of Assets of SPV in direct Properties (not in other SPVs)
No Other Activity by SPV
Must be an Indian Company only cannot be Foreign SPV
© PRAVIN P. SHAH & CO. 18
◦ 80% of REIT assets in completed & rent generating properties:
Can co-invest on not less favourable terms
No other Shareholder of SPV can have rights which prevent REITs
from Dividend Payout obligations
REIT would appoint 1 Rep. on BoD of SPV
REIT will vote on GMs of SPVs
Can’t invest in
Vacant land
Agr. Land
Mortgages (other than mortgage-backed securities)
© PRAVIN P. SHAH & CO. 19
◦ Balance 20% in other assets
Of which max. 10% in under-construction properties / completed
but rent generating properties
But REIT must hold for Min. 3 Years
Debt of Realty Cos.
Listed Equity Shares which get 75% Income from Real Estate
Unutilised FSI of a Project in which it has made investment
MMF / FDs
Can’t invest in Units of other REITs
◦ For sale of Property or sale of shares in SPV by REIT ≥ 10%
of Value of REIT = Approval of Unit holders
© PRAVIN P. SHAH & CO. 20
◦ Aggregate Borrowings & Deferred Payments ≤ 49%
of Value of REIT Assets
Not Including Refundable Deposits of Tenants
If Borrowings > 25% of REIT Assets, then for fresh
leveraging:
Credit Rating
Approval of Unit Holders
© PRAVIN P. SHAH & CO. 21
PAYOUT
90% of Distributable Cash Flows to REIT by
SPV
Once in 6 mts. + Payout within 15
Days of decl.
90% of Distributable Cash Flows by REIT to
Unitholders
Once in 6 mts. + Payout within 15
Days of decl.
Property Sale by REIT / SPV
If Reinvested = No Payout
If Not Reinvested = Payout Rules
apply
© PRAVIN P. SHAH & CO. 22
Key to Mutual Fund is NAV ~ same is the case with a REIT
Full valuation of REIT’s assets - Min. at Year End by 30th June
Full valuation includes a detailed valuation of all assets
Half yearly valuation a must for key changes in past 6 months
A valuation is also required to purchase or sell a property.
◦ Variation in excess of 10% to the valuation requires
Unitholders’ approval
CAs with 10 years experience can act as Valuer / Regd. Valuer
under Companies Act
Rotate Valuer every 4 years
© PRAVIN P. SHAH & CO. 23
RPT Compliance
Purchase / sale of
Properties at any time
Price = Avg of 2 Ind. Valn. Reports
RPT before IPO Disclosures in Prospectus + Proper Agr.
RPT after IPO Disclosures to St.Ex. + UH’s prior Approval if RPT ≥
10% Value of REITs
Lease to RPs by REIT Valuer’s Fairness Opinion if:
• Lease Area > 20% of total area
• Value of leased area > 20% of REIT Value
• Rentals > 20% of Total Rental
2 or more REITs with
Common Manager
Deemed RPT
RP has competing business
with REIT activities
Details in Prospectus
© PRAVIN P. SHAH & CO. 24
◦ Appointed for max. 5 yrs + reappoint. for another 5 years
◦ Audit Min. Twice a Yr – Sept & March
A/R within 45 days of these periods to St Ex.
◦ A/C & Auditing Standards may be specified by SEBI
◦ A/C, B/s, P&L, CF give T & F View of State of Affairs
◦ Right of access to all Books & Vouchers pertaining to REIT
Right to Info. & Expl. Pertaining to REIT as he deems fit from:
Employees of REIT
Parties to REIT / SPV
Any other person in possession of such information
© PRAVIN P. SHAH & CO. 25
Entity Income Stream
SPV • Lease Rentals from renting out property
• Capital Gains on selling the Yield Properties
REIT Dividends distributed / Interest paid by SPV
Unitholders • Distributions made by the REIT
• Sale of Units on Stock Exchange / Off-market
Sponsor Same as Unitholders
Manager AMC Fees + Carry (2-20 Model?)
Trustees Trusteeship Fees
© PRAVIN P. SHAH & CO. 27
Exchange of SPV shares for REIT Units
◦ Transfer Exempt u/s.47(xvii) No CGT
© PRAVIN P. SHAH & CO. 28
Sponsor
SPV
REIT
Sale of REIT Units: On Market OR Off-Market
◦ Taxable as Capital Gains – Exemption u/s.10(38) Not Available
Thus, gains on exchange postponed but not fully exempt
◦ Cost of REIT Units = Cost of shares of SPV
◦ Period of holding shares of SPV added to that of Units
◦ LTCG if > 36 months, else STCG
◦ STCG u/s.111A – Taxed @ Normal Slab Rates
◦ LTCG
Taxed @ 20% with Indexation or
10% without Indexation
◦ LTCL of Developer can be set-off against LTCG on Units
© PRAVIN P. SHAH & CO. 29
Issues / Posers
◦ Exchange of shares of SPV for Units of REIT
Is MAT applicable?
What if physical assets exchanged for Units of REIT?
What if shares of SPV held as Business Assets?
Would any Income arise to Developer on such exchange?
How would Valuation be done?
When Units sold how would cost be worked out?
© PRAVIN P. SHAH & CO. 30
Tax
◦ Normal Tax @ 30% + SC + Cess
◦ No Exemption from MAT @ 20% - Big Negative
Interest to REIT
◦ REIT is a Pass-through Vehicle
◦ No TDS @ 10% on Payment to REIT
Dividend distributed to REIT
◦ DDT u/s.115-O payable @ 20%
◦ Biggest Disadvantage of current regime
Reduces Yield to Investor drastically
© PRAVIN P. SHAH & CO. 31
Income stream of SPV
◦ What would be the Income stream for SPV?
◦ How would Tax be computed?
© PRAVIN P. SHAH & CO. 32
Interest from SPV
◦ Exempt u/s.10(23FC)
◦ No Tax in hands of REIT, i.e., REIT is a Pass-through Vehicle
◦ No TDS by SPV also
Dividend from SPV
◦ Exempt in hands of REIT
◦ SPV pays DDT @ 20%
Sale of Assets by REIT
◦ Capital Gain Taxable at applicable rates
© PRAVIN P. SHAH & CO. 33
Any Other Income
Taxable at MMR @ 30% u/s.115UA
HPI if Assets held directly by REITs
Management Fees charged from SPVs, if any?
REITs must file Return of Income
© PRAVIN P. SHAH & CO. 34
Distribution relation to Interest from SPV
◦ TDS by REIT @ 5% on payment to Non-Residents
◦ TDS by REIT @ 10% on payment to Residents
Distribution relation to Dividend from SPV
◦ Exempt – No TDS
Distribution relation to Capital Gain on Sale of
Assets by REIT
◦ Exempt – No TDS
© PRAVIN P. SHAH & CO. 35
Interest from REIT
◦ Residents: TDS by REIT @ 10% & Taxable @ Normal Rates
◦ Non-Residents: TDS by REIT @ 5%
Dividend from REIT
◦ Exempt – No TDS by REIT whether Resident or Non-Resident Unitholders
Distribution of Capital Gain on Sale of Assets by REIT
◦ Exempt – No TDS by REIT whether Resident or Non-Resident Unitholders
Capital Gain on Transfer of Units
◦ On-Market: LTCG – Exempt / STCG – Taxed @ 15% - Not for Developer
◦ Off-Market: LTCG – Taxed @ 20% with Indexation / 10@ without Indexation
◦ Off-Market: STCG – Taxed @ Normal Slab Rates
© PRAVIN P. SHAH & CO. 36
© PRAVIN P. SHAH & CO. 37
Investors
REIT
SPV
Debt
pushdown
Interest ~
Exempt to
REIT
Interest allowed as Deduction to SPV
5% TDS
◦ How would REIT acquire Debt Securities of SPV?
Exchange with Sponsor?
Invest in fresh Debt issued by SPV out of IPO proceeds
What would SPV do with this fresh debt?
© PRAVIN P. SHAH & CO. 38
◦ Drive with Caution!
Stamp Duty on SPVisation?
Property held in Flagship Co. or directly to SPV
SD Exemption for Transfer to 90%+ Sub?
Available in Maharashtra?
© PRAVIN P. SHAH & CO. 41
Income-tax Hurdles
Sponsor
Period of holding for Listed Units is 3 years to qualify as LT?
Investors
Availability of Foreign Tax Credit for non-resident Unit
holders of taxes paid by SPV
© PRAVIN P. SHAH & CO. 42
FEMA
Auto Route for Foreign Investment in REITs?
Auto Route for Swap by Foreign Sponsors of SPVs
FIPB Approval required?
RFPIs can Invest?
Renting of Properties ~ Is it RE Business?
ECBs by SPVs and REITs allowed?
Other
State Rent Control Laws should not be a Hindrance
Property Taxes should not be a dampener!
© PRAVIN P. SHAH & CO. 43
◦ Trust / Company / LLP
Privately Pooled Investment Vehicle
Most Important Portion of Definition
Collects Funds from Investors
Foreign or Domestic
Defined Investment Policy
Not a CIS / Not a MF
© PRAVIN P. SHAH & CO. 46
Not AIF
Gratuity Trust
Regulate Pool of Funds
RegulatSPVs
Holding Co
Family Trusts
ESOP Trust
Securitisation
Funds
© PRAVIN P. SHAH & CO. 47
Concept similar to a VCF
◦ AIF – A Trust / Company / LLP
◦ Sponsor – Person who sets up the AIF (Manager can
be Sponsor also)
◦ Trustees – of the AIF if in the form of Trust
◦ Manager – Professional Manager (AMC)
◦ Investors – Investors of the AIF
© PRAVIN P. SHAH & CO. 49
◦ Sponsor Sets up the AIF / Manager Manages it
Manager or Sponsor must have:
Continuing Interest in AIF
Minimum 2.5% of Corpus or Rs. 5 cr. ~ Lower
If Cat III AIF – Min. 2.5% or Rs. 10 cr. ~ Lower
By way of Investment in AIF – monetary terms
Not in Kind – fee waiver
Must disclose their Investment in AIF to Investors
© PRAVIN P. SHAH & CO. 50
R or NR Investors
◦ Invest in Units
◦ Min. Corpus Rs. 20 cr.
◦ Per Investor Min. Rs. 1 cr.
Eees / Dir of AIF / Manager ~ Min. Rs. 25 lakhs
◦ Max. 1000 Investors for an AIF
◦ Can have separate Schemes ~ Min. tenure 3 + 2 extension
◦ Only by Private Placement
Placement Memorandum
© PRAVIN P. SHAH & CO. 51
◦ Listing
Optional
Only after Final Closure of Fund / Scheme
Min. Tradeable Lot of Rs. 1 cr.
◦
© PRAVIN P. SHAH & CO. 52
Particulars AIF-I AIF-II AIF-III
Types VCF / SME /
Social Venture /
Infra Funds
Private Equity / Debt
Funds
Hedge Funds
Borrowing
Allowed
No Temporary funding ≤
30 days; 10% of
Corpus + 4 times /
Year
Yes subject to a
maximum limit to be
specified by SEBI
Investment VCU /Cos /
SPVs / LLP
Unlisted Cos. / Units of
AIF-I / II
Listed / Unlisted
Securities /
Derivatives /
Structured Products /
Units of AIF-I /II
Max
Investment in
1 Co.
25% of Corpus 25% of Corpus 10% of Corpus
© PRAVIN P. SHAH & CO. 53
AIF Category Commitments -
Sep 2014
Commitments – Dec
2014
Category I
Infrastructure 5,706.82
Social Venture 484.49
Venture Capital 645.83
SME -
Total for Category I 6,837.14 7,819
Category II 8,492.58 10,302
Category III 2,122.52 2,336
Grand Total 17,452.24 20,457
© PRAVIN P. SHAH & CO. 54
Norms VCF AIF-I SME AIF-I Infra AIF-I Social AIF-I
Primary
Invests
Startups / Early
stage / Angel
Funds but not
in NBFC / Gold
Financing
SME Startups /
listed on SME
Exchange
Sec / Listed Debt of
SPV in Infra
Projects
Securities of
Social Ventures
+ social
performance
norms
Funds Min. 66% in
Unlisted Equity
of VCU / Cos.
on SME
Exchange
Min. 75% in
Unlisted Sec /
LLP of VCU /
SME Exchange
Cos.
Min. 75% in
Unlisted Sec / LLP
of Cos. in Infra.
Projects
Min. 75% in
Unlisted Sec /
LLP of Social
ventures
Max. 33% in
IPO / Debt of
VCU / QIP by
Listed Co / Sick
listed Co.
Also Listed
Securitised Debt /
Debt of Infra Cos.
Can give grants
to Social
Ventures
© PRAVIN P. SHAH & CO. 55
◦ DDT on Distribution @ 20%
◦ MAT or Normal tax
◦ Highly Tax Inefficient
◦ Regulatory hurdles of Companies Act, 2013
◦ No AIFs are in Form of Company
◦ Non-starter for all purposes
© PRAVIN P. SHAH & CO. 57
◦ Single Point taxation
◦ Firm Tax @ 30%
◦ No MAT
◦ Distribution to Partners Tax Free - No DDT
◦ Entry – Exit of Partners: Cumbersome
◦ Pass-through u/s. 10(23FB) for VC also for LLPs?
◦ FDI in AIF LLP: FIPB approval
◦ Several AIFs-II and III are LLPs
© PRAVIN P. SHAH & CO. 58
◦ Most popular Vehicle for Pooling of Funds
FDI in AIF Trust: FIPB Approval
Taxation of Trusts: Some Hurdles – Some Clarity
Ambiguity has retarded AIF Registration to some extent
SEBI has made representations to FM
Budget expected to present some Cheer!!
© PRAVIN P. SHAH & CO. 59
AIF-Trust
Cat-I: VCFPass-through
Status: S.10(23FB)
Cat-I/ II / III
Discretionary
Specific
© PRAVIN P. SHAH & CO. 60
Full Pass-through Status – S.10(23FB)
◦ Only for Trusts? What about LLPs and Companies?
◦ No Tax on VCF
◦ Beneficiaries taxed:
Dividend: Tax Free
Interest: Normal rates
CG: LTCG & STCG
◦ Poser- Pass-through for AIF-II & III also?
© PRAVIN P. SHAH & CO. 61
For Investee Companies
◦ S.56(2)(viib) NA when VCF invests
Can Invest @ Premium – No Valn. Issues
◦ S.68 NA when VCF Invests
Need not enquire about Source of Funds of VCF
◦ Exemption from both Sections only for VCF
Other Cat-I / Cat –II and Cat III AIFs covered
© PRAVIN P. SHAH & CO. 62
◦ Posers- What is a Specific Trust?
Individual Shares specified in Deed
What if Power to Trustees to determine Shares?
What if Beneficiaries not in existence but shares
determinate?
What if Class of Beneficiaries specified in Deed and
Methodology for the determination of the shares?
© PRAVIN P. SHAH & CO. 64
Income taxed in hands of the Trustee in a like manner and
to the same extent as that of the beneficiaries
Character of the income - dividend, interest, capital gain,
etc., should be the same as it would be in the hands of the
beneficiary
Once income is taxed in the hands of the Trustee as
Representative Assessee, subsequent distribution of the
same should not attract any further income-tax in the
hands of the beneficiaries
© PRAVIN P. SHAH & CO. 65
◦ 2014 CBDT Circular
If ‘the names of the investors’ or their ‘beneficial interests’
are not specified in the trust deed on the ‘date of its
creation’, the trust will be treated as PDT ~ taxed at MMR
All Income of AIF – LTCG / Exempt LTCG taxed @ 30%
Way Out?
Cir. NA if Jurisdictional HC has taken a different position
What happens if Beneficiary position changes – Exits?
© PRAVIN P. SHAH & CO. 66
◦ Posers- Can an AIF be treated as a Revocable Trust?
Under what circumstances?
If yes, then what is the Tax Treatment?
© PRAVIN P. SHAH & CO. 67
Assessment
TrusteesEasiest route
for AO of Trust
BeneficiariesHow does AO
of Trust ensure B pay Tax?
© PRAVIN P. SHAH & CO. 68
Tax Payment
PAN of Trust
Any hurdles to Beneficiaries?
eFiling?
PAN of Beneficiaries
Any hurdles to Beneficiaries?
Are Trustees secured?
© PRAVIN P. SHAH & CO. 69
◦ Entire Income taxed @ MMR – 30%
◦ No shelter for Exempt LTCG / Listed LTCG @ 11%
◦ Everything becomes Business Income
◦ Taxes paid by AIF
◦ CBDT Cir
Credit should be given to Beneficiaries for Tax paid
No such Instruction in case of Specific Trusts
© PRAVIN P. SHAH & CO. 70
◦ Poser-Is the Trust taxable as an AOP?
Have Investors come together for earning Profit
Hence, taxable as an AOP?
© PRAVIN P. SHAH & CO. 71
www.ppsco.in
© PRAVIN P. SHAH & CO. 72