The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has given its approval to allow the Real Estate Investment Trusts (REITs) as an eligible financial instrument / structure under the Foreign Exchange Management Act (FEMA) 1999.

The approval is expected to enable foreign investment inflows into the completed rent yielding real estate projects, which is, as of now, prohibited under the FEMA Regulations.

As a result of this decision, entities registered and regulated under the SEBI (REITs) Regulations 2014 will be able to access foreign investments which as of now are prohibited under the FEMA Regulations. The intent of introducing the instrumentality of REITs is to reduce pressure on the banking system to which the real estate sector looks for funds, free up existing funds of Banks and to encourage construction activities. REITs while attracting long term finance from foreign and domestic sources including NRIs would make available fresh equity to the sector.

Background:

The Finance Minister in his Budget 2014-15 Speech proposed the introduction of Real Estate Investment Trusts (REITs), which have been successfully used as an instrument for pooling of investment by several countries for investments in the real estate, with a view to earning income and distributing earnings from its investments to investors, who have contributed to the pooled corpus. SEBI (REITs) have been issued vide SEBI (Real Estate Investment Trusts) Regulations, 2014, however, on account of restriction under FEMA Regulations, actual investment has not occurred so far.

Real Estate Investment Trusts allowed under FEMA enable foreign investment into completed rent-yielding property via SEBI-regulated structures. Introduction of Real Estate Investment Trusts (REITs) as eligible under the Foreign Exchange Management Act (FEMA) allows SEBI-registered REITs to accept foreign investment into completed, rent-yielding real estate projects previously prohibited by FEMA, thereby enabling these structures to mobilize long-term foreign and domestic finance, including from non-resident investors, and to provide an alternate equity funding route that reduces reliance on bank financing.