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Sebi’s proposal to regulate fractional ownership in real estate is a significant step toward enhancing investor protection and promoting transparency in India’s real estate market. By establishing standardised practices, ensuring proper valuation, and introducing regulatory oversight, Sebi aims to create a conducive environment for fractional ownership investments.
The Securities and Exchange Board of India (Sebi) has recently proposed a groundbreaking move to regulate online platforms that offer fractional ownership in real estate. This investment model, already popular in countries like the United States and UAE, allows individuals to own a fraction or a small share in real estate assets such as office spaces, warehouses, shopping centres, and conference centres. In a consultation paper, Sebi suggested bringing fractional ownership under the MSM (micro, small, medium) REITs category, governed by Sebi’s Real Estate Investment Trusts Regulations.
This move aims to provide investors with greater transparency, regulatory oversight, and protection, while also ensuring liquidity for these investments.
Regulation for Investor Protection and Standardised Practices: Recognising the increasing number of fractional ownership platforms (FOPs), Sebi emphasises the importance of registration and regulation to establish uniform standards for disclosures, valuations, due diligence of assets, and redressal mechanisms. Such oversight will also enable liquidity through listing or similar measures. By setting up a Special Purpose Vehicle (SPV), these FOPs can facilitate the issuance of securities. Sebi suggests that migrating these SPV structures to REITs may provide tax benefits to Sebi-registered REITs, which were previously unavailable to SPVs and investors.
Requirements for FOPs: Under the proposed regulations, FOPs will need to register with Sebi as MSM REITs, operating as trusts with various involved parties such as investment managers, trustees, and sponsors. The sponsor must have a net worth of at least Rs 20 crore and hold a minimum of 15 percent of total units. FOPs that fail to meet the eligibility criteria and do not register with Sebi will be required to cease their operations.
Key Norms and Guidelines: Sebi has outlined several important norms to ensure the proper functioning of FOPs. These include regulations regarding valuation, liquidation procedures, providing investors with an exit strategy, disclosure of investment strategies, and imposing a cap on the total expense ratio, among others. By implementing these guidelines, Sebi aims to create a safe and transparent environment for fractional ownership investments in India.
Addressing Potential Risks: In the consultation paper, Sebi acknowledges the risks associated with the Power of Attorney (POA) granted by investors in these structures. There is a concern that such POAs could be misused or abused, particularly during insolvency or in the event of the investor’s death. Sebi is actively working on mitigating these risks to safeguard investors’ interests.
Global and Indian Perspective: Sebi highlights the success of fractional ownership platforms in the United States, where a single platform manages assets worth $7 billion. In India, the largest platform mentioned in the Sebi paper has an Asset Under Management (AUM) close to Rs 1,000 crore. With the introduction of regulatory oversight, Sebi anticipates that fractional ownership will thrive in India, providing exciting opportunities for investors in the real estate market.
Sebi’s proposal to regulate fractional ownership in real estate is a significant step toward enhancing investor protection and promoting transparency in India’s real estate market. By establishing standardised practices, ensuring proper valuation, and introducing regulatory oversight, Sebi aims to create a conducive environment for fractional ownership investments. This move is expected to encourage the growth of fractional ownership in India, enabling more individuals to participate in the real estate market and potentially enjoy the benefits of this innovative investment model.
To ensure credibility and stability, FOPs will be required to register with Sebi as MSM REITs. The registration process will involve various parties such as investment managers, trustees, and sponsors, each playing a crucial role in the trust’s operations. Sebi has also set eligibility criteria for sponsors, emphasising their net worth and minimum unit holdings.
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