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REITs, InvITs seek parity with listed companies on tax liabilities, debt access

REITs, InvITs seek parity with listed companies on tax liabilities, debt access 2

MUMBAI: Global institutional investors and sponsors of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs) are seeking parity in terms of tax liabilities of their business trusts in line with listed companies to avoid the lopsided treatment meted out to them despite being listed.

They are also seeking the government’s push to enable REIT and InvITs’ debt raising from insurance companies and foreign portfolio investors (FPIs). Despite the Finance Ministry’s approval in Union Budget 2019 for the debt funding, these entities are still not able to get access to liquidity through this channel.

“The InvITs and REITs market in India has grown exponentially with two of the four largest listed realty sector securities as REITs. It is now imperative that these are treated at par with listed entities. This will ensure a level playing field and offer necessary support to these nascent products that are growth drivers for the economy,” said Sigrid Zialcita, CEO, Asia Pacific Real Estate Association (APREA).

APREA has made representations to the government and statutory bodies on behalf of investors and sponsors.

Since the first listing three years ago, the market has grown quickly to seven InvITs and three REITs across infrastructure assets like roads, power transmission, commercial real estate and gas pipelines with a market capitalization of $18 billion.

These REITs and InvITs have cumulatively garnered over Rs 2 lakh crore worth of asset under management with over Rs 40,000 crore equity raised from domestic and global investors like the GIC, KKR, CPPIB, Brookfield, Blackstone, Allianz, IFC, etc.

With regards to REITs and InvITs’ access to debt funding, the Reserve Bank of India (RBI) has an objection on enforcement of the security in case of a default. Sponsors are of the view that the Trust Act allows trusts to borrow, but business trusts are being treated differently and moreover, business trusts are governed by stringent SEBI regulations that enable enforcement.

“Owing to robust regulation, operating assets and AAA ratings, InvITs and REITs make a compelling case for debt investments by FPIs and Insurance companies. Both global FPIs and insurance companies have subscribed to units of business trusts heavily showcasing their confidence,” said Harsh Shah, CEO, IndiGrid.

Shah believes if India wants InvITs to play a meaningful role in attracting capital to the infrastructure sector including monetisation program for the government of India through InvITs, regulators need to enable subscription to debt securities issued by the business by FPIs and insurance companies.

Currently the holding period of REITs and InvITs units to qualify as long-term capital assets is 36 months whereas for listed shares and units of equity- oriented funds is 12 months. This is an anomaly especially when Securities Transaction Tax (STT) is also levied on the trading of units of listed Business Trusts.

Parity with other listed instruments will ensure a level-playing field and make the instruments more attractive for retail investors by creating an efficient tax structure, Zialcita highlighted.

The Securities & Exchange Board of India (SEBI) regulations on InvIT and REIT require the trusts to hold not less than 50% in any special purpose vehicle (SPV) and as a part of the regulation there will be a need to transfer shares of SPVs to a business trust.

According to APREA, this leads to a change in shareholding of SPV resulting in lapse of unabsorbed losses of the SPV. Listed companies or its subsidiary get the exemption to carry forward or set off losses. This exemption needs to be granted for such change in shareholding so that the losses of SPV do not lapse and this will enable SPVs to carry forward their losses which is necessary given the nature of the infrastructure business.

Also, these business trusts may invest in a number of holding companies and subsidiaries and it is likely that there may be surplus funds available in one of these entities and can be productively lent to another group entity. Such loans may have adverse tax implications whereas this does not apply to a listed company or its subsidiary.

With a strong regulatory framework aimed at protecting minority shareholders, the REITs and InvITs players are seeking at par status with the listed equities by covering all of these factors.

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