The Securities and Exchange Board of India ("SEBI") on September 26, 2014, announced guidelines for the creation of real estate investment trusts ("REITs") in India by issuance of the SEBI (Real Estate Investment Trust) Regulations, 2014 ("REIT Regulations"). Right from the date of issuance of the REIT Regulations, the REIT as an investment structure is being keenly viewed by the market as the next big evolutionary step in the growth story of the Indian real estate sector.

These quasi debt-equity instruments are structured to operate in a manner similar to mutual funds by pooling in money from investors and investing these funds in to rent generating assets, thereby offering REIT investors a chance to diversify their asset portfolio to real estate, without having to shell out the big bucks to actually purchase property, in an already expensive property market.

However, in the past financial year, the actual implementation of the REIT has proven to be an uphill task due to funding challenges, faced by the cash strapped real estate sector, and the ambiguity persisting in relation to the incidence of taxation of REITs.

The Government took its first step towards resolving these issues by announcing its approval to REITs being considered as an eligible financial structure for foreign investment (necessary amendments to FEMA 20 were introduced in November, 2015 to grant legal validity to REITs as an investment vehicle for foreign investments). This amendment was complemented by much needed tax exemptions granted to REITs, in the Union Budget, 2016, which removed dividend distribution tax on income earned by the special purpose vehicle holding the REIT assets.

The abovementioned amendments to the legal and regulatory regime governing REITs in India were accompanied by the Government diluting its stand on 'real estate business' and permitting FDI in rent generating assets. At this juncture it is important to note that the size of rental assets in India is significant, and this move by the Government, when coupled with recent tax exemption, might prove to be a major contributing factor in making the establishment of REITs in India less onerous.

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