SEBI Seeks To Regulate Fractional Ownership Platforms

NovoJuris Legal


NovoJuris Legal logo
NovoJuris Legal, an innovative and new-age law firm, where clients leverage on in-depth knowledge and solutions based approach. We work with high impact and rapid growth companies to large corporates and disruptive tech businesses. Our Funds formation practice is robust and we are consistently ranked amongst India’s top 5 in private equity.
Vide the consultation paper, SEBI seeks comments/views/suggestions from the public on the proposal for regulating fractional ownership platforms.
India Real Estate and Construction
To print this article, all you need is to be registered or login on

Through its recent consultation paper titled "Regulatory Framework for Micro, Small and Medium REITs (MSM REITs)" dated 12 May, 2023 ("Consultation Paper"), the Securities and Exchange Board of India ("SEBI") proposes the regulation of all platforms that offer fractional ownership of real estate assets.

Vide the consultation paper, SEBI seeks comments/views/suggestions from the public on the proposal for regulating fractional ownership platforms ("FOPs"). The markets regulator proposes to bring in the fractional ownership of real estate assets as 'MSM REITs' under the existing framework of SEBI (Real Estate Investment Trusts) Regulations, 2014 ("REIT Regulations").

The Consultation Paper has been prepared by SEBI in light of the sudden rise of FOPs over the past 2-3 years. In brief, FOPs provide retail investors the opportunity to invest in commercial real estate (which was earlier primarily restricted to institutional investors) such as buildings and office spaces including warehouses, shopping centres, conference centres, etc. SEBI has observed that the underlying real estate assets offered on FOPs are similar to the real estate or property defined under the REIT Regulations.

Owing to the increasing value of investments in FOPs, as well as rising number of investors, SEBI seeks to examine whether it is necessary to consider registration requirements and regulations for FOPs in order to bring about, inter-alia, regulatory oversight, common uniform standard disclosure practices, ensuring liquidity by way of listing or similar such measure, investor redressal mechanism, etc. to safeguard the interest of investors.

This note will provide certain highlights of the proposed regulation of FOPs as set out in the Consultation Paper.


REIT Regulations

The REIT Regulations were notified on September 26, 2014 to provide a regulatory framework for regulation of Real Estate Investment Trusts ("REITs"). The REIT Regulations enable investors to invest in real estate assets. Prior to the framework, investors were unable to undertake such investments and exposure.

Some of the features of REITs and REIT Regulations are provided below:

  • REIT is set up as a trust under the Indian Trusts Act, 1882 and it must be registered under the REIT Regulations.
  • The parties involved are Trustee, Sponsor(s) and Manager, similar to alternative investment funds.
  • The trustee of the REIT should be a SEBI registered Debenture Trustee who is not an associate of the Sponsor.
  • The role of the trustee is generally that of oversight of the activity of the REIT whereas, the Manager has more of an operational role. In case the Manager is constituted as a Company, at least half of the directors are required to be independent and in case the Manager is constituted as an LLP, at least half the members of the governing board are required to be independent.
  • REITs raise funds through an initial offer and subsequently through a follow on offer, rights issue, qualified institutional placement, etc.
  • REITs invest in real estate assets, either directly or through Holdcos and/or SPVs.
  • REIT must hold controlling interest and a minimum of 50% of the equity share capital or interest in the Holdco and/or SPV.
  • Minimum 80% of the value of its assets shall be invested in completed and revenue generating properties and maximum 20% can be invested in under development properties and other eligible investments.
  • The assets must be situated in India.
  • The minimum value of the assets owned/proposed to be owned by an REIT should be INR 500 crore and the minimum issue size for initial offer should be INR 250 crore.
  • At least 90% of the net distributable cash flows, should be distributed to the investors on a half-yearly basis.
  • The REIT must conduct full-fledged valuation of all REIT assets on a yearly basis through a registered valuer.
  • Units of an REIT are mandatorily required to be listed on recognized stock exchanges in India. This provides exit to investors whenever desired.


SEBI notes that as of 31 March, 2023, 5 REITs are registered with SEBI, out of which 3 REITs have issued units which are listed on a stock exchange and have a total unit capital of INR 54,411 crores.

It is further noted that, although there is immense potential in real estate investment in office spaces, one of the reasons for lesser number of REITs may be attributed to the requirement of minimum asset size of INR 500 crores and minimum offer size of INR 250 crores as stipulated under the REIT Regulations.

SEBI notes that there is ambiguity whether the complete list of activities undertaken by FOPs fall under the regulatory ambit of RERA. It states that RERA's oversight may be limited to specific areas and may not encompass the extended operational aspects of the FOPs.

Further, SEBI also highlights that the SPVs established by the FOPs to own the real estate assets, are set up mainly as private limited companies and governed by the provisions of the Companies Act, 2013, as applicable to private limited companies. As per SEBI, such companies have limited governance oversight. Additionally, the Companies Act 2013 limits the number of investors in a private limited company to 200. However, considering how the FOPs obtain interest of participation from members of the public, the regulator notes that it is entirely possible that the SPV may have undertaken a deemed public issue (DPI) without attendant compliances of issuing prospectus or filing with SEBI. The FOPs may also be organizing investors interest in the same real estate into more than 1 SPV to evade the threshold requirement of DPI. Concerns have also been expressed, that fractional ownership of real estate may amount to unregistered collective investment schemes.

The varying nature in the structures undertaken by the FOPs raise concerns regarding due investor protection, lack of uniformity in disclosure standards, lack of transparency in valuation, management fees, maintenance costs, redress of investor issues and grievances, participation in upside from potential sale of the real estate without concomitant contribution to the acquisition price, etc. Moreover, lack of transparency or lack of a market in effecting the sale of unlisted securities of the SPVs or of the underlying real estate asset at the time of exit by an investor may result in investor grievance. Thus, as per SEBI it is imperative that FOPs as providers of services, products and platforms operate in a transparent and regulated environment that balances the needs of all stakeholders.

SEBI argues that bringing FOPs under the ambit of the existing REIT Regulations would address the concerns mentioned above and also provide the much needed impetus for the boom of such a market. Additionally, the migration of existing SPVs or similar structures established by FOPs to the REIT structure may also lead to treatment of such investment by investors as investment in 'Business Trusts' as provided under the Income Tax Act, 1961 wherein certain tax benefits are available to SEBI registered REITs which may not otherwise be available to the SPV and/or its investors.


Few of the concerns for the investors under the FOP structure, as highlighted by SEBI are listed below:

  • The mode, manner and sanctity of transactions executed on the FOPs may be a cause of concern as the dealings are with retail investors and subject matter of transactions in real estate, with accompanying issuance of securities or as joint ownership of the real estate using untested instruments or mechanisms on a large scale among unconnected investors.
  • There is a lack of uniformity of disclosures regarding:
  • valuation of real estate
  • disclosures made to investor at the time of soliciting investment
  • property title diligence and property title documentation
  • lease, rental or tenancy documents and terms arrived at with the lessees/renters/tenants
  • disclosure and managing of potential, perceived or actual conflict of interest by the FOPs/developer/tenants, etc.
  • Unlisted securities connoting the fractional investment in a specific real estate asset, are issued to investors. There is no clarity regarding exit or liquidation of such fractional investment and the investor is dependent on the FOP for necessary information. Such dependency on the FOP without assurance of exit, due valuations, liquidity or transparency is unfavorable for the investors and is not in their long term interests.
  • With FOPs not being within the purview of any financial sector regulator, KYC / AML norms are not applicable to their activities. Accordingly, many of the FOPs are non-compliant with the PMLA guidelines or KYC requirements specified by financial sector regulators.
  • No uniformity or common approach on investor grievances and its handling by the FOPs.
  • A major concern is the possibility of investors having a false sense of comfort that their fractional investment in real estate on an FOP is fully regulated.


Proposed scope of regulation

SEBI proposes to bring FOPs under its regulatory ambit by introducing a chapter under REIT Regulations and labelling the FOPs as MSM REITs. The key highlights of the proposed regulatory framework are provided below:

  1. Registration requirement: Any person or entity (including FOPs) which facilitate or have facilitated fractional ownership in real estate shall be mandatorily required to register with SEBI for operating as MSM REIT in the manner specified by SEBI.
  1. Eligibility criteria: Such persons/entities shall be required to fulfill eligibility criteria as specified by SEBI from time to time and also migrate the existing structures to MSM REITs and thereafter continue operations as MSM REIT.

Persons/Entities which either do not meet the eligibility criteria as specified or do not register within the given timelines shall be required to wind-up their operations and cease to operate. Investors aggregated by such Persons/Entities in the real estate should be provided due exit option within a pre-specified period.

  1. Structure of MSM REIT: MSM REIT shall be set up as a Trust under the provisions of the Indian Trusts Act, 1882 with an ability to establish separate and distinct scheme/s for owning of real estate assets through wholly owned special purpose vehicles constituted as a company under the Companies Act, 2013.

MSM REIT Scheme shall have full control and shall hold 100% equity share capital in all SPV(s). The SPV(s) shall be required to have full control and shall hold 100% ownership in all the underlying property(ies).

MSM REIT shall have parties such as trustee, sponsor and Investment Manager with each such person being a separate and distinct entity.

  1. Additional registration conditions

SEBI has proposed various other conditions to be applicable to REITs which are already applicable to existing REITs under the REIT Regulations. These are quite prescriptive and have been mentioned in Annexure A.


The proposal comes as a welcome step which will give the stakeholders some form of clarity on the regulation of fractional ownership in real estate. Up until now, there was a great sense of ambiguity on the legality of fractional ownership structures and SEBI's proposal through the Consultation Paper seems to address this concern to a certain extent. Regulating the FOPs will also benefit in addressing the risks and concerns that retail non-institutional investors are exposed to. However, with that being said the proposal is still very much at a nascent stage and SEBI has invited comments on the Consultation Paper from stakeholders till 27 May, 2023.

It remains to seen how the existing FOPs as well as experts in this industry, will react to this move. Ultimately, the goal would be to balance the interests of all stakeholders involved.

Annexure A

Proposed conditions for MSM REITs under the REIT Regulations

  • The application for registration as a MSM REIT shall be made by the sponsor on behalf of the Trust in the format specified by SEBI and the instrument of Trust is in the form of a deed duly registered in India under the provisions of the Registration Act, 1908.
  • The Sponsor shall have at least 5 years' experience in real estate industry as either a developer or a fund manager.
  • The sponsor shall be required to hold a minimum of [15%] of the total units of the MSM REIT for each scheme for a period of at least three years from the date of listing of such units of such scheme pursuant to initial offer on a post-issue basis. Any holding of the sponsor exceeding the minimum holding, shall be held for a period of at least one year from the date of listing of such units.
  • The Sponsor shall have a net worth of at least INR 20 crores. Out of the same, an amount of INR 20 crores shall be in the form of positive liquid net worth.
  • The Investment Manager of MSM REIT shall be a distinct entity whose primary business is to manage assets and investments of the MSM REIT and undertake operational activities of the MSM REIT.
  • The Investment Manager of MSM REIT shall have a net worth of at least INR 10 crores. The net worth shall be in the form of positive liquid net worth.
  • The Investment Manager of MSM REIT shall be a company incorporated under The Companies Act, 2013.
  • The Investment Manager of MSM REIT or its associate shall have at least 5 years' experience in fund management in the real estate industry or advisory services in the real estate industry or property management in the real estate industry or in development of real estate.
  • The Investment Manager of MSM REIT has at least 2 key personnel who each have at least 5 years' experience in fund management in the real estate industry or advisory services in the real estate industry or property management in the real estate industry or in development of real estate.
  • The Investment Manager of MSM REIT has at least half of its directors as independent and not directors of the Investment Manager or Manager of another MSM REIT/REIT.
  • The Investment Manager of MSM REIT shall enter into an Investment Management Agreement with the trustee which provides for the responsibilities of the Investment Manager in accordance with the REIT Regulations.
  • The trustee is registered with the Board under SEBI (Debenture Trustees) Regulations, 1993 and is not an associate of the sponsor(s) or Investment Manager.
  • No unit holder of the MSM REIT scheme enjoys superior voting or any other rights over another unit holder in the same scheme and there are no multiple classes of units of REIT in each scheme.
  • The MSM REIT and parties to the REIT are fit and proper persons based on the criteria as specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
  • SEBI, on being satisfied with the eligibility conditions, shall grant the MSM REIT certificate of registration.
  • On issuance of certificate of registration for operating a MSM REIT, the Sponsor shall establish a trust and appoint a SEBI registered Debenture Trustee as a Trustee, and also identify a Investment Manager. The Trustee shall appoint such Investment Manager for launching and administering MSM REIT and its Schemes.
  • MSM REIT will be permitted to launch schemes. Each Scheme will be identified by a separate name
  • After registration, the MSM REIT shall raise funds initially through an initial offer of units of a scheme.
  • The listing of units of the MSM REIT Scheme/s shall be mandatory and shall be listed on stock exchange. The units of such MSM REIT Scheme will be held in dematerialized form.
  • For coming with initial offer of a scheme, the size of the asset proposed to be acquired should be at least INR 25 crores and should not exceed INR 499 crores.
  • At least 95% of the schemes AUM shall be invested in completed and rent generating real estate properties at all times. The balance 5% can be deployed in liquid assets which are unencumbered.
  • Distributions: (a) minimum 95% of net distributable cash flows of the SPV shall be distributed to the scheme of MSM REIT subject to applicable provisions in the Companies Act, 2013; (b) 100% of net distributable cash flows of the MSM REIT shall be distributed to the scheme wise unit holders.
  • The MSM REIT Scheme shall raise funds from at least twenty investors that are unrelated to the Sponsor, its related parties and its associates.
  • MSM REITs may raise funds from any investors, resident or foreign.
  • MSM REIT Schemes shall not be allowed to raise debt.
  • The minimum subscription size to the units of a MSM REIT Scheme shall be INR 10 lakhs and the unit size shall be INR 10 lakhs.
  • The maximum subscription to an MSM REIT Scheme from any investor (other than sponsor(s), its related parties and its associates) shall not be more than 25% of the total unit capital.
  • MSM REIT shall not enter into any transaction with related parties. However, payment of fees to the Investment Manager and trustee for carrying out the activities of MSM REIT shall be allowed.

Valuation of assets

  • Valuation of assets shall be carried out by a valuer as defined under Regulation 2(1)(zz) of REIT Regulations or by any other intermediaries specified by SEBI from time to time.
  • To ensure that the underlying assets of a MSM REITs are valued accurately, a full valuation including a physical inspection of the properties shall be carried out on a quarterly basis for each scheme. Consequently, the NAV of each scheme shall be required to be declared on quarterly basis.
  • Disclosure & reporting requirements (for initial offer as well as on a continuous basis to the stock exchange and unitholders) shall be made as specified by SEBI from time to time in order to ensure compliance with the provisions proposed in relation to MSM REIT.

Investor rights

  • The investors shall have right to remove the Investment Manager, auditor, principal valuer, seek winding up of the scheme, etc.
  • An annual meeting of all investors is mandatory to be convened by the Trustee wherein matters such as latest annual accounts, valuation reports, performance of the MSM REIT Scheme, approval of auditors & their fees, appointment of valuer/relevant intermediary, etc. shall be discussed.
  • Further, approval of investors shall be mandatory in cases of change in Investment Manager/ sponsor, change in investment strategy, etc.

Disclosure requirements

  • Minimum disclosure requirements in the offer document will be specified.
  • Minimum disclosures will be specified for the annual and half yearly reports to be sent to the investors.
  • Further, the MSM REIT Schemes shall additionally be bound by periodical disclosure requirements required under the listing agreement with the exchanges.
  • Property-wise disclosure of lease rental income along with comparable lease rental income of other similar properties should be disclosed in the offer document for each property proposed to be acquired by the MSM REIT. The above comparable disclosures shall be certified by an independent registered valuer or any other intermediaries specified by SEBI from time to time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More