INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Brijita Prakash, JSA
Each phase of a construction development project would be considered a separate project, so an inves - tor can potentially exit before the completion of an entire project, subject to a lock-in period of three years, as mentioned above. REITs REITs in India are private trusts set up under the Indi - an Trusts Act 1882 and compulsorily registered with SEBI. The set-up of REITs would include the sponsor, manager and trustee (which must be a SEBI-regis - tered debenture trustee that is not an associate of the sponsor or manager). The REIT regulations have been modified to permit, inter alia, REITs to issue debt securities for raising funds. Further, SEBI has amend - ed the REIT regulations to introduce the concept of SM REITs, with a reduced size of qualifying assets between INR500 million and INR5,000 million. Non- SM REITs must have assets to the value of INR5,000 million for an initial public offering and a minimum ini - tial offering size of INR2,500 million. AIFs AIFs are privately pooled investment vehicles that col - lect funds from investors (Indian or foreign) for invest - ments and are regulated by the SEBI (AIFs) Regu - lations 2012. AIFs must be compulsorily registered with SEBI. AIFs may invest as private equity or debt funds, or both. The RBI has sought to prevent AIFs from being used by regulated entities (banks and non- banking financial companies (NBFCs)) to evergreen loans, by restricting the ability of AIFs to invest in securities (other than equity shares) of debtor entities of such regulated entities, if such regulated entities are also partners in the AIFs. Debt Financing The most common means of fundraising for real estate developers is by issuance of non-convertible debentures (NCDs) or loans from bank and NBFCs. Financing by banks in the real estate sector is subject to certain prudential norms relating, inter alia, to bank exposure to such investments, as stipulated by the RBI. Real estate developers are required to obtain all the permissions required from the relevant govern - ment authorities for the project prior to funding by such banks and NBFCs for the development of the
project. This has restricted access to funds for real estate developers in the early stages of the project development from banks and NBFCs. Further, if the lender to an ECB is an offshore branch or a GIFT City branch of an Indian bank, then this condition will also apply to such ECB financings. In such situations, developers may prefer private cred - it from domestic and foreign funds that invest in debt or hybrid securities. ECBs The RBI has recently liberalised the regulations gov - erning external commercial borrowings by Indian cor - porates from overseas lenders (ECBs) to permit ECBs for construction and development in the real estate sector. Companies and LLPs in the real estate sector can now avail ECBs for several activities, including: • development of industrial parks, integrated town - ships and SEZs; • new industrial projects or expansion/modernisation of existing units; • projects in the infrastructure sector; • construction-development projects; and • commercial or residential property for the bor - rower’s own use. Where ECBs are used for construction-development projects involving sale of plots, the borrower may sell the plots only after developing trunk infrastructure. Further, certain conditions have been prescribed for industrial parks as well. While the purchase, sale or lease of land or immovable property with the primary objective of earning profit from such transactions is still not a permitted end use for ECBs, the above activities have been specifically carved out and permitted. Further, ECBs can now be availed with a minimum average maturity of three years, irrespective of end use. The pricing for all ECBs with average maturity of three years and above can be at the prevailing market rate, removing the cap on interest prescribed earlier. The amount of ECBs which can be borrowed
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