Alok Saraf & Bhavin Vora

It is no secret that infrastructure and real estate have a defining role to play in shaping a country’s future and to propel its economic development. Every Government in India sets aside huge amount of funds for the development of the infrastructure sector as they realise that the journey from a “developing” nation to a “developed” one is literally through this “road”. The fact that the real estate and infrastructure sector is the second largest employer in India makes its importance in an Indian context immense.

Both these sectors require large capital investments for their development, and the funds from the public sector have not been sufficient. Thus, in dire need of funds from the private sector and in need for a new and innovative form of financing, the Government introduced the Infrastructure Investment Trusts Regulations, 2014 (InvIT Regulations) for infrastructure projects and the Real Estate Investment Trusts Regulations, 2014 (REIT Regulations) for real estate projects.

In essence, REITs and InvITs are investment vehicles that are set up as trusts that own and operate infrastructure or real estate assets and are used to raise funds from Investors.

The journey for REITs and InvITs began long back when SEBI released the first draft of the REIT regulations. Over the years, having taken inputs from various stakeholders such as developers and investors, SEBI did a commendable job in finalising and releasing the regulations in 2014.

What’s in it for the stakeholders

The REIT and InvIT platform provides many benefits to the various stakeholders. The some of the key benefits are mentioned below:

Developers/ sponsors
  • Increase in entry and exit opportunities that consequently help in part monetizing of existing assets
  • Reduction of debt in the books
  • Availability of funding for stalled projects
  • Change from an asset heavy to an asset light model
  • Focus on core expertise and segregation of operations and infrastructure
  • Stable platform for retail and institutional investors to invest in high class real estate and infrastructure assets
  • Opportunity to invest in stable return-generating instruments with low risk to capital
  • Opportunity for small retail investors to invest in real estate/ infrastructure, an asset class that normally is unaffordable to them
Macro economy
  • Decrease in the financing burden on banks by reducing exposure to real estate/ infrastructure, thereby enabling the creation of additional capital for other sectors
  • Increased financing for key sectors such as transportation and energy that will help propel the growth of the country
  • Creation of direct and indirect employment opportunities

Further, with the financial markets and debt papers under the scanner in the recent past, investing in units of REITs and InvITs looks to be a safer bet for Investors.

Tax reforms

Having created a strong base for REIT and InvIT with the SEBI regulations, it was extremely important that the tax laws complimented the efforts taken by SEBI to ensure that the REITs and InvITs were a success. With this in mind, the Government introduced various income tax measures to ensure that REIT and InvIT regulations were at par with world standards and did not cause any unnecessary hindrances. Broadly, there are no tax implications on the setting up of the REIT and InvIT structure, and the income (dividend or interest) earned by the REIT and InvIT from its operating subsidiaries is pass through and taxable directly in the hands of the unit holders. Additionally, there is no tax payable on distribution of profits as dividend by subsidiaries to the REIT and InvIT, subject to certain conditions.

Story so far…

The first REIT, Embassy Office Parks REIT (a platform jointly owned by the Embassy and Blackstone) was successfully listed in April 2019 on Indian bourses. The IPO raised INR 4,750 crores, making it the largest REIT offering in Asia with a market cap of USD 4 billion. The success of the IPO has set the stage for other real estate developers to consider REIT as a vehicle to raise funds.

Similarly, there are a couple of publicly listed InvITs in India, which have received a relatively warm response from the investors. However, InvIT regulations also provide the flexibility to have a privately placed InvIT in India. A privately placed InvIT provides benefits such as the possibility of listing with only five investors, better valuations due to close discussions with the selected group of investors etc. Thus, there is an increased interest in privately placed InvITs from big players such as Brookfield-sponsored India Infrastructure Trust and Larsen & Toubro’s IndInfravit.

It’s here to stay

There has been some hustle and bustle in the REIT/ InvIT space in recent times, which is very heartening to see. While it may be too early to comment on the success of REITs and InvITs in India, the great start has surely gotten everyone very excited. With the regulatory boosts provided by the Government and interest shown by the Investors for the first REIT listing, it surely looks like REITs and InvITs are on their way to be the next Thalaiva or superstars in India. So grab your seats and let the action begin.


The views expressed in this article are personal. This article includes inputs by Kunal Kandhari – Manager, M&A Tax, PwC India and Dhwani Bheda-Associate- M&A Tax, PwC India.

Author: Alok Saraf, Partner – M&A Tax, PwC India and Bhavin Vora, Director – M&A Tax, PwC India

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May 2021