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Sebi may allow realtors to float mutual funds

Janaki Krishnan in Mumbai

The Securities and Exchange Board of India is planning to allow real estate companies to float mutual funds, which will in turn mobilise money from the market.

Originally Sebi had the idea of allowing existing mutual funds to invest in the real estate market and the Association of Mutual Funds of India had even drawn up a report based on the recommendations of the Deepak Satwalekar committee.

However the report was not acted upon and Sebi has again told Amfi to make a fresh report. According to Sebi's current plans, property developers and companies in the business of real estate would be floating mutual funds, which would then approach the public for money like other funds operating now.

The real estate companies would form Real Estate Investment Trusts for the purpose of floating the funds.

A mutual fund insider said the original plan had not found many takers owing to the unorganised nature of the real estate market. "The number of listed real estate companies are very few plus there are a lot of hassles associated with the transfer of title deeds which the funds were not very comfortable with."

Further apart from HDFC, Tatas, Life Insurance Corporation and General Insurance Corporation none of the other sponsors had any expertise in real estate, which was a major handicap.

It would have entailed the funds having to appoint a whole galaxy of real estate experts including lawyers, valuers, tax consultants and so on. Sources however indicated that only really well known realty players will be allowed to float mutual funds and mobilise resources from the public.

In markets such as the US REITs buy, develop, manages and sell real estate assets. Under the recommendations submitted last year, the Amfi committee had suggested that mutual funds can float real estate investment schemes but the sponsors should have a minimum track record of five years.

In case the sponsors do not meet this criteria the fund then would have to appoint an advisor on a fee-sharing basis. These advisors should have track record between 5 and 7 years in the real estate businesses of development and management. Soon after the recommendations were made several real estate companies such as the Mittals, Rahejas, and Tata Housing Development Co among others had expressed interest in tying up with mutual funds as advisors.

The report had suggested that real estate mutual funds could take exposure in securities of listed companies which are dealing in property or property development. They could also invest in mortgage-backed securities.

The funds could also undertake or finance the properties that is, ready buildings with a view to lease where the lease rental would be regular income to such MFs can then be distributed as dividends to unitholders. Last year Sebi had cleared the decks for mutual funds to invest in mortgage-back housing loan securities.

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