The last month saw the Securities and Exchanges Board of India (“SEBI”) releasing a Consultation Paper, thereby proposing to bring the Fractional Ownership Platforms (“FOPs”) under the ambit of the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”)

The released proposals have been much talked about amongst professionals and concerned market participants. The last date for inviting public comments was May 27, 2023, and as per news media, several notable FOPs submitted their representations to the Securities market regulator.

As much as the proposals have been a welcome change- with an intent to bring about investor protection and transparency in an unregulated sector, it is also a cause of concern amongst the existing FOP players majorly due to the following reasons, as listed below:

• Introducing the “Sponsor” Concept: In order to bring the FOPs in line with the existing REIT Regulations, the SEBI proposed for the concept of “Sponsors” to be developed in MSM REITs along with compliance of the mandatory pre-requisites to be fulfilled in the proposed regulations.

“Every sponsor shall be required to comply with having at least 5 years of experience in the real estate sector as a developer; mandatory net worth of at least INR 20 crores and a mandatory lock in of fifteen percent of the total units for a span of 3 years”, the SEBI proposes.

All such requirements are required to be met prior to the Sponsor making an application for REIT Registration before the Board. Complying with such staunch regulatory requirements, especially for small-scale FOPs, may be a cause of economic constraint. While the stated requirements have been introduced with a view to increase the founder’s financial commitment in the FOP model, it also implies that businesses with deep pockets can only enter into this.

It appears that the SEBI intends to put FOPs on the same footing as REITs but is unable to understand the fact that such platforms majorly function as technology-based market makers.

• Complexities of fund raising through IPO: Since the FOPs shall be brought within the scope of the REIT Regulations, mandatory listing and fundraising by way of an initial offer is required to be made by them within a span of three years, failing which they shall be de-registered with the SEBI.

“The proposed regulations mandate that, “in case of an initial offer under the MSM REITs scheme, the minimum asset size should be at least INR 25 crores and should not exceed INR 499 crores. The MSM REITs shall also ensure that funds are raised from at least twenty investors, unrelated to the Sponsor, its related parties, and associates.”

The consultation paper, however, remains silent on the minimum issue size and we need to wait for the final blueprint for the finer detail.

This implies that every FOP covered under the MSM REIT scheme has to go through the long-drawn process of launching an initial public offer (IPO)- garnering the necessary funds, understanding the pre-listing compliances, ensuring the specified issue and subscription size and bearing with the complexities of regular compliances. Such proposals are cost-intensive may be intimidating for both existing and prospective FOPs.

• Inability to raise debt: While REITs are allowed to fund raise through multiple modes, the consultation paper strictly bars the proposed MSM REITs to do so by way of debt issuance. Such prohibitions restrict the availability of capital to the FOPs.
• Barring investment in under-construction properties: While the existing REIT Regulations allow for 20 percent investment to be in under-construction properties, the proposal allows MSM REITs to invest only in rent-generating properties.

The existing FOPs are wary of such a proposal since investment in built-to-suit assets provides for a rent commitment, thereby offering suitable protection to the prospective tenants but barring investment in an under-construction property, make take away the cost-benefit.

• Limited Migration time: The consultation paper proposes for a limited time of six months for existing persons/entities (including) FOPs with SPVs to migrate to the MSM REIT scheme. Such a short time span may be challenging for the small-scale FOPs to ensure a smooth transition as well as comply with the statutory pre-requisites prescribed for MSM REITs.

The REIT Regulations have been in existence for quite some time- however, it is only recently that such sector has gained popularity- with heavy corpus listings and strengthening of the governance mechanism for REITs. However, there still exists a lack of clarity in the interpretation of existing regulatory provisions and the market regulators have been consistently trying to provide a boost to this sector, by bringing out necessary changes and amendments. In the current scenario, onboarding FOPs without providing an ease in the regulatory regime may only contribute to the existing mayhem.

While the stated proposals by the securities market regulator have been introduced with an intent to provide an impetus to the FOP market, SEBI must make an effort to mitigate the scepticism posed by the market participants.

It shall be interesting to see how the MSM REIT scheme is implemented by the SEBI and the extent to which such recommendations are favourable for the stakeholders.