TaxTMI 
TaxTMI 
Notification on Real Estate Mutual Fund Schemes and Initial Issue Expenses
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.... - Circulars". This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996. Yours faithfully, Ruchi Chojer Encl : a/a THE GAZETTE OF INDIA EXTRAORDINARY PART -III- SECTION 4 PUBLISHED BY AUTHORITY New Delhi, April 16, 2008 SECURITIES AND EXCHANGE BOARD OF INDIA NOTIFICATION Mumbai, the 16th April, 2008 SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) (AMENDMENT) REGULATIONS, 2008 F. No. LAD-NRO/GN/2008/03/123042. - In exercise of the powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following Regulations to further amend the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, namely :- 1. These regulations may be called the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008. 2. They shall come into force on the date of their publication in the Official Gazette. 3. In the Securities and Exchange Board of India (Mutual Funds) Regulati....
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....ion 44, in sub-regulation (5), clause (a) shall be omitted. (vii) in regulation 49 - (a) in sub-regulation (3), third proviso shall be omitted; (b) for sub-regulation (3B), the following shall be substituted, namely: - "(3B) The conditions referred to in sub-regulation (3A) are the following: (a) the scheme is launched after the commencement of the Securities and Exchange Board of India (Mutual Funds)(Second Amendment) Regulations, 2006 and prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008; (b) initial issue expenses in respect of the scheme are accounted in the books of accounts of the scheme in accordance with Tenth Schedule.". (viii) after regulation 49, the following Chapter and regulations shall be inserted, namely:- "CHAPTER VIA REAL ESTATE MUTUAL FUND SCHEMES Definitions 49A. For the purposes of this Chapter, unless the context otherwise requires- (a) "real estate asset" means an identifiable immovable property- (i) which is located within India in such city as may be specified by the Board from time to time or in a special eco....
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....itions for real estate mutual fund schemes 49D. (1) Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange: Provided that the redemption of a real estate mutual fund scheme may be done in a staggered manner. (2) The units issued by a real estate mutual fund scheme shall not confer any right on the unit holders to use the real estate assets held by the scheme and any provision to the contrary in the trust deed or in the terms of issue shall be void. (3) The title deeds pertaining to real estate assets held by a real estate mutual fund scheme shall be kept in safe custody with the custodian of the mutual fund. (4) A real estate mutual fund scheme shall not undertake lending or housing finance activities. (5) All financial transactions of a real estate mutual fund scheme shall be routed through banking channels and they shall not be cash or unaccounted transactions. Permissible investments 49E. (1) Every real state mutual fund scheme shall invest at least thirty five per cent. of the net assets of the scheme directly in real estate assets. (2) Subject to sub-regulation (1), every real esta....
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....fair price on every ninetieth day from the day of its purchase. in accordance with the norms specified in Schedule IXB. (2) The asset management company, its directors, the trustees and the real estate valuer shall ensure that the valuation of assets held by a real estate mutual fund scheme are done in good faith, in accordance with the norms specified in Schedule IX B and that the accounts of the scheme are prepared in accordance with accounting principles specified in Schedule XI. (3) The net asset value of every real estate mutual fund scheme shall be calculated and declared at the close of each business day on the basis of the most current valuation of the real estate assets held by the scheme and accrued income thereon, if any. Duties of asset management company 49G. (1) Without prejudice to the provisions of regulation 21, the asset management company of a mutual fund having real estate mutual fund schemes shall appoint suitable number of qualified key personnel with relevant experience, before undertaking investment management of real estate assets of a real estate mutual fund scheme. (2) The asset management company may appoint advisors to advise it on acq....
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....ment company shall diligently collect the rents or other income in a timely manner. (3) Real estate assets held by a real estate mutual fund scheme may be let out to the sponsor, asset management company or any of their associates, at market price or otherwise on commercial terms: Provided that not more than 25% of the total rental income of the scheme shall be derived from assets so let out. Duties of trustees 49I.(1) The trustees shall ensure that the asset management company has the necessary expertise, internal control systems and risk management mechanism to invest in and manage investments in real estate assets on a continuous basis. (2) The trustees shall monitor whether due diligence is exercised by the asset management company in managing the investments. (3) The trustees shall review the market price of the units during the year and shall recommend proportionate buy back of units from unit holders, if the units are traded at steep discount to the net asset value. (4) The magnitude of discount which shall amount to steep discount referred to in sub-regulation (3) shall be disclosed in the offer document. (5) The trustees shall ensure that only permi....
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....a), the following sub-clause shall be inserted, namely:- "(xii-b) in case of a real estate mutual fund scheme, insurance premia and costs of maintenance of the real estate assets (excluding costs of development of such assets) over and above the expenses specified in regulation 52 to the extent disclosed in the offer document; and"; (b) in sub-regulation (5), the provisos shall be omitted. (x) in the Seventh Schedule, clause 5 shall be omitted. (xi) in the Ninth Schedule - (a) in the opening words, for the bracket, word and figures "[ Regulations 50(3),55(4)(iii) ]" the bracket , words and figures "[Regulations 49F(1) and (2), 50(3),55(4)(iii) ]" shall be substituted; (b) in the heading, after words "ACCOUNTING POLICIES AND STANDARDS', the words "Part A: For Investment in Securities" shall be inserted; (c) after clause l, the following shall be substituted, namely:- "m. In case of real estate mutual fund scheme, investments in unlisted equity shares shall be valued as per the norms specified in this regard." (d) after clause m. the following shall be inserted, namely:- "Part B: For direct investment in real estate asset Definitions 1.....
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....nd scheme obtains an enforceable right including all significant risks and rewards of ownership. Measurement at initial recognition 8. A real estate asset shall be measured initially at cost. Such cost shall comprise purchase price and any other directly attributable expenditure such as professional fees for legal services, registration expenses and asset transfer taxes. 9. If the payment for a real estate asset is deferred, its cost is the cash price equivalent. An real estate mutual fund scheme shall recognise the difference between this amount and the total payments as interest expense over the period of credit. 10. A real estate mutual fund scheme may acquire one or more real estate assets in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The cost of such a real estate asset shall be measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired real estate asset shall be measured in this manner even if an real estate mutual fund scheme cannot immediately derecognise the asset given....
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....nations i. Fair value specifically excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangement, special considerations or concessions granted by anyone associated with the sale. ii. The fair value of real estate asset shall reflect market conditions at the balance sheet date iii. The fair value of real estate asset reflects, among other things, rental income from current leases and reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental income from future leases in the light of current conditions. It also reflects, any cash outflows that could be expected in respect of the asset. iv. The best evidence of fair value is given by current prices in an active market for similar real estate asset in the same location and condition and subject to similar lease and other contracts. Care shall be taken to identify any differences in the nature, location or condition of the asset, or in the contractual terms of the leases and other contracts relating to the asset. v. In the absence of current prices in an ac....
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.... part of a building and is generally included in the fair value of the real estate asset, rather than recognised separately as asset, plant and equipment. (b) if an office is leased on a furnished basis, the fair value of the office generally includes the fair value of the furniture, because the rental income relates to the furnished office. When furniture is included in the fair value of real estate asset, an real estate mutual fund scheme shall not recognise that furniture as a separate asset. (c) the fair value of real estate asset shall exclude prepaid or accrued operating lease income, because the real estate mutual fund scheme would recognise it as a separate liability or asset. (d) The fair value of real estate asset held under a lease reflects expected cash flows (including contingent rent that is expected to become payable). Accordingly, if a valuation obtained for a asset is net of all payments expected to be made, it will be necessary to add back any recognised lease liability, to arrive at the fair value of the real estate asset for accounting purposes. ix. The fair value of real estate asset does not reflect future capital expenditur....
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....estate asset is deferred, the consideration received is recognised initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent should be recognised as interest revenue over the period of credit." (xii) in the Tenth Schedule - (a) in the heading, for brackets, words and figures "[Regulation 52(4)(a)]", the brackets, words and figures "[Regulation 49(3B)(b)]" shall be substituted; (b) for clause (b) the following shall be substituted, namely:- "(b) For a close-ended scheme floated on a 'load' basis prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008, the initial issue expenses shall be amortised on a weekly basis over the period of the scheme: Provided that in case such schemes provide for partial redemption during the life of the scheme, the amortisation shall take into account the number of outstanding units and the aggregate amount during the relevant periods." (c) in clause (d), the following shall be substituted, namely:- "(d) In case of close-ended schemes floated on a 'load' basis prior to commencement of t....
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...., as well as unrealised appreciation or depreciation shall be recognised in all financial statements. For the purpose of all financial statements, all investments shall be marked to market and investments shall be carried out in the balance sheet at market value. However, till necessary guidance notes are issued by the Institute of Chartered Accountants of India to their members, in the above matter, investments may be continued to be valued at cost, with the market value shown separately and the reconciliation statement for the changes in investments valued in the two different ways shall be provided. Where the financial statements are prepared on a marked to market basis, there need not be a separate provision for depreciation. Since unrealised gain arising out of appreciation on investments cannot be distributed, provision has to be made for its exclusion and for calculating distributable income. ii. Non-traded investments shall be valued in good faith in accordance with the norms specified in Seventh Schedule. Provided that in the case of real estate mutual funds schemes, investments in unlisted equity shares shall be valued as per the norms specified by the Board in t....
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.... accrued and no further accrual of income should be made in respect of such investment. ix. When the units of an open-ended scheme are sold, the difference between the sale price and the face value of the unit, if positive, shall be credited to Reserves and if negative is debited to reserve, the face value being credited to Capital Account. Similarly, when units of an open-ended scheme are repurchased, the difference between the purchase price and face value of the unit, if positive should be debited to reserves and, if negative, should be credited to reserves, the face value being debited to the capital account. x. (a) In the case of an open-ended scheme, when units are sold an appropriate part of the sale proceeds shall be credited to an Equalisation Account and when units are repurchased an appropriate amount shall be debited to Equalisation Account. The net balance on this Account should be credited or debited to the revenue account. The balance on equalisation account debited or credited to the Revenue Account shall not decrease or increase the net income of the fund but is only an adjustment to the distributable surplus. It shall, therefore, be reflected in the Re....
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.... to reserves. 3. Contents of Balance Sheet (i) The Balance Sheet shall give scheme wise particulars of its assets and liabilities. These particulars shall contain information enumerated in Annexures 1A and 1B hereto. It shall also disclose, inter alia, accounting policies relating to valuation of investments including real estate investment asset and other important areas. (ii) If investments in securities are carried at costs or written down cost, their aggregate market value shall be stated separately in respect of each type of investment, such as equity shares, preference shares, convertible debentures listed on recognised stock exchange, non-convertible debentures or bonds further differentiating between those listed on recognised stock exchange and those privately placed. (iii)(A) The balance-sheet shall disclose under each type of investment(s) in securities the aggregate carrying value and market value of non-performing investments. An investment shall be regarded as non-performing if it has provided no returns in the form of dividend or interest for a period specified in the guidelines issued by the Board. (iii)(B) The balance-sheet shall disclose under each ....
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....alue of such investments; and (h) movement in unit capital should be stated. An example of the manner in which the movement in unit capital may be disclosed is given below : No. of units (Rs. in lakhs) Balance as on 1st April, 1994 12,50,00,000 12,500.00 Units sold during the year 1,27,50,000 1,275.00 Units repurchased during the year (15,40,000) (154.00) 13,62,10,000 13,621.00 (i) the name of the company including the amount of investment made in each company of the group by each scheme and the aggregate investments made by all schemes in the group companies of the sponsor; (j) if the investments are marked to market, the total income of the scheme shall include unrealised depreciation or appreciation on investment. There should be disclosure and unrealised appreciation deducted before arriving at the distributable income in the following manner, e.g. Rs. in lakh Rs. in lakh Net income as per Revenue Account 100 Add: Balance of undistributed income as at 1st April, 1994 brought forward 20 120 Less: Unrealised a....
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....that real estate asset separately from the amounts relating to other real estate assets. In addition, an real estate mutual fund scheme shall disclose: 1. a description of the real estate asset; 2.an explanation of why fair value cannot be determined reliably; 3.if possible, the range of estimates within which fair value is highly likely to lie; and 4.on disposal of investment of the real estate asset not carried at fair value: - the fact that the real estate mutual fund scheme has disposed of the real estate investment asset not carried at fair value; - the carrying amount of that real estate investment asset at the time of sale; and - the amount of gain or loss recognised. (viii) Provisions for doubtful deposits, doubtful debts and for doubtful outstandings and accrued income shall not be included under provisions on the liability side of the balance sheet, but shall be shown as a deduction from the aggregate value of its relevant asset. (ix) Disclosure shall be made of all contingent liabilities showing separately underwriting commitments, uncalled liability on partly paid shares and other commitments with spec....
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.... the Abridged Balance Sheet and Revenue Account. The auditor shall report to the Board of Trustees and not to the unitholders. (ii) The auditor shall state whether: (1) he has obtained all information and explanations which, to the best of his knowledge and belief, were necessary for the purpose of his audit, (2) the Balance Sheet and the Revenue Account are in agreement with the books of account of the fund. (iii) The auditor shall give his opinion as to whether: 1. the Balance Sheet gives a true and fair view of the schemewise state of affairs of the fund as at the balance sheet date, and 2. the Revenue Account gives a true and fair view of the schemewise surplus/deficit of the fund for the year/period ended at the balance sheet date. 6. Perspective historical per unit statistics (1) This statement shall disclose the following schemewise per unit statistics for the past 3 years: (a) net assets value, per unit; (b) gross income per-unit broken up into the following components: (i) income other than profit on sale of investment, per unit; (ii) income from profit on inter-scheme sales/transfer of inv....
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....standing and accrued income; - Advance, Deposits, etc.; - Bridge Finance; - Shares/debentures application money, pending allotment; - Others. V. FIXED ASSETS - Depreciated cost of the fixed assets as a whole or net block may be disclosed. ANNEXURE 1B [Refer para 3] Contents of schemewise balance sheet LIABILITIES SIDE OF THE BALANCE SHEET I. Liabilities side of the balance sheet be divided into the following groups : (i) Unit Capital; (ii) Reserves & Surplus; (iii) Loans; (iv) Current Liabilities and Provisions. II. Unit Capital: Distinguishing between: - Initial capital; - Unit capital (including number of units and face value per unit). III. Reserves & surplus Distinguishing between: - Unit premium reserve; (optional) - General reserve; - Dividend equalisation reserve; (optional) (Equalisation Account, as per 2(x) of the Schedule); - Any other reserve (disclosing its nature); - Appropriation account; - Opening balance, transfer from/to reserve, closing balance shall be separately disclosed for eac....
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....than inter-scheme transfer/sale); - Loss on inter-scheme transfer/sale of investments; - Management fees; - Trusteeship fees; - Staff cost including salaries, allowances, contributions to provident fund, gratuity, etc.; - Office and administrative expenses; - Registration and local charges; - Commission to Agents; - Publicity expenses; - Audit fees; - Legal & Title Search Fee; - Insurance & security expenses; - Advisory fee in respect of real estate investment asset; - Other operating expenses; - Depreciation of fixed assets; - Custodian fees; - Registration fees; - Repairs and maintenance in case of real estate asset. Less: Amount recovered on sale of units on account of management expenses. Note: (i) Accounting policy in respect of recognition of revenue and income from investments (including dividend and interest in case of securities and rental income in case of real estate asset) shall be disclosed by way of a note. (ii) Unprovided depreciation and unrealised appreciation in value of investments in securities representing the difference between their aggregate market value and their carrying cost shall be disclosed by....
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....a (Mutual Funds) (Amendment) Regulations, 2001 vide S.O. No.69 (E). (h) on May 29, 2001 by the Securities and Exchange Board of India (Investment Advice by Intermediaries) (Amendment) Regulations, 2001 vide S.O. No.476(E). (i) on July 23, 2001 by the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Regulations, 2001 vide S.O. No.698(E). (j) on February 20, 2002 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2002 vide S.O. No.219 (E). (k) on June 11, 2002 by the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Regulations, 2002 vide S.O. No.625 (E). (l) on July 30, 2002 by the Securities and Exchange Board of India (Mutual Funds) (Third Amendment) Regulations, 2002 vide S.O. No.809(E). (m) on September 9, 2002 by the Securities and Exchange Board of India (Mutual Funds) (Fourth Amendment) Regulations, 2002 vide S.O. No.956(E). (n) on September 27, 2002 by the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 vide S.O. No.1045(E). (o) on May 29, 2003 by the Securities and Exchange Board of India (....