The Securities and Exchange Board of India (Sebi) on May 15, 2023 released a consultation paper in a bid to regulate fractional ownership platforms (FOPs), and safeguard investors.
The consultation paper has sought comments from the public on proposals to regulate such platforms. FOPs are platforms that allow investors to buy a small share of a real estate asset, typically for a minimum investment of Rs. 10 lakh.
Sebi’s proposal comes as the number of FOPs has grown significantly in the last three years.
What is Fractional Ownership Of Real estate
Fractional investment or ownership of real estate through FOPs is an investing strategy in which the cost of acquisition of real estate, usually commercial, is split among several investors, who invest in securities issued by a special purpose vehicle (SPV) established by the FOP.
Such SPV purchase the real estate asset. The costs of upkeep and acquisition are divided among the investors or shareholders in SPVs, who also share the benefits and returns of the assets, subject to management and maintenance fees levied by the FOP or its associates or specified third parties.
Concerns: Working of FOPs
All activities of FOPs are not currently regulated by the Real Estate (Regulation and Development) Act, 2016, which means that investors are finding it hard to get legal redressal. FOPs often do not provide investors with enough information about the real estate assets they are investing in, making it difficult to assess the risks involved. Lack of liquidity in long-term is another issue concerning an FOP investor.
Sebi’s Proposals
The proposal suggests bringing FOPs under regulatory oversight by including them in the Reit (Real Estate Investment Trust) Regulations and labelling them as MSM REITs. FOPs, along with any person or entity involved in fractional investment in real estate, will be required to register with Sebi as an MSM REIT. The registration process will be specified by Sebi.
FOPs and other entities must meet the eligibility criteria set by Sebi and transition their existing transaction structures to comply with MSM REIT regulations. SEBI will specify the maximum allowable expense ratio for MSM REITs to protect the interests of investors.
To ensure transparency, minimum disclosure requirements are followed in the offer document, and in the annual and half-yearly reports sent to investors. Now, periodic disclosure requirements also have to be followed as per the listing agreement with exchanges.
Sebi’s proposal is still in the consultation stage, and the regulator is seeking feedback from the public. Sebi claims that the proposed regulatory framework for FOPs offers several benefits to the market and market participants.
Key Benefits
FOPs registering under the Sebi Reit Regulations will have to follow the standard know your customer (KYC) requirements, thus ensuring that the client information is properly verified.
Net worth and deposit requirements for sponsors and managers will guarantee the platforms’ financial stability. Artificial limitations on the number of investors and the use of SPVs will be eliminated, thus allowing for more participation in FOPs.
Listing FOP units on stock exchanges enables robust risk management, fair pricing, and guaranteed settlement. It also provides liquidity and exit opportunities for investors and establishes a well-defined framework for addressing investor grievances.
