INDIA: RBI permits Foreign Investment in REITS, INVITS and AIF`s

Tuesday April 26 2016

The Reserve Bank of India (RBI), in consultation with Government of India, has announced amendments to the SEBI regulations permitting foreign investment in units issued by Real Estate Investment Trusts (REI’s), Infrastructure Investment Trusts (Invits) and Alternative Investment Funds (AIF’s), without requiring approval from RBI (or FIPB).

The amendments have been adopted to facilitate investment in units of collective investment vehicles for real estate and infrastructure, which must be regulated by SEBI or any other competent authority.

Units are defined as the beneficial interest of an investor in the investment and shall include shares or partnerships interests.
An investment vehicle currently includes:

• REIT’s registered and regulated under the SEBO (REIT’s) Regulations 2014;
• Infrastructure Investment Trusts (invIT’s) registered and regulated under the SEBI (AIF’s) Regulations 2012.

Any person resident outside of India, including non-resident Indians, are permitted to invest in units of Investment Vehicles.

Downstream investment by an investment vehicle shall be regarded as foreign investment if either the sponsor or the manager or the investment manager is not Indian “owned and controlled” as defined in Regulation 14 of the Principal Regulations.

The extent of foreign investment in the investment vehicle will not be a factor in determining whether downstream investment of the investment vehicle concerned is a foreign investment or not. However a downstream by an investment vehicle that is considered to be a foreign investment must conform to the sectorial caps and conditions, as applicable to the company in which the investment is made as per the FDI Policy or Schedule 1 of the Principal Regulations. Similar conditions extend to investments in LLP’s, which must conform to Schedule 9 of the Principal Regulations, when considered to be a foreign investment by an investment vehicle.

Investment vehicles receiving foreign investment are required to make a report in the format prescribed by SEBI to the Reserve Bank of India or SEBI.

It is important to note that as per Regulation 4(b) (iv) of Notification No. FEMA 1/2000-RB dated May 3, 2000, foreign investment in any company which proposes to engage “in real estate business, or construction of farm houses” is prohibited. However, explanation (i) ibid provides that “real estate business” shall not include development of townships, construction of residential or commercial premises, roads or bridges. It is now further clarified that foreign investment in units of REIT’s registered and regulated under the SEBI (REIT’s) Regulations, 2014 will not be included in “real estate business” for the purpose of these regulations.

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