Infrastructure and real estate are the two most important sectors for the growth of any developing economy. Both these sectors need a substantial amount of continuous capital for their development. Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are investment vehicles that can be used to attract private investment in the infrastructure and real estate sectors.
On April 18, 2017, the RBI released a notice providing the guidelines for the Banks’ investment in units of REITs and InvITs, to all Scheduled Commercial Banks excluding RRBs.
According to the statement on Developmental and Regulatory Policies, issued on April 6, 2017, Reserve Bank of India said, regarding the participation of banks in Real Estate Investment Trust (REITS) and Infrastructure Investment Trust (InvITs), “The Securities and Exchange Board of India (SEBI) has put in place regulations for REITS and InvITs and requested the Reserve Bank to allow banks to participate in these schemes. Currently, banks are allowed to invest in equity-linked mutual funds, venture capital funds (VCFs) and equities to the extent of 20 percent of their NOF. It is proposed to allow banks to invest in REITS and InvITs within this umbrella limit.”
The notification reveals, “It has been decided to allow banks to participate in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) within the overall ceiling of 20 per cent of their net worth permitted for direct investments in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and exposures to Venture Capital Funds (VCFs).”
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The conditions given in the notification, for the banks are: 1. Banks should put in place a Board approved policy on exposures to REITs/ InvITs which lays down an internal limit on such investments within the overall exposure limits in respect of the real estate sector and infrastructure sector. 2. Banks shall not invest more than 10 percent of the unit capital of an REIT/ InvIT. 3. Banks should ensure adherence to the prudential guidelines issued by RBI from time to time on Equity investments by Banks, Classification and Valuation of Investment Portfolio, Basel III Capital requirements for Commercial Real Estate Exposures and Large Exposure Framework, as applicable.
Detailed guidelines will be issued by end-May 2017.