To start any new venture or business, you always seek clarity in many forms. First you need clarity in your thoughts as to what you want to achieve by undertaking such an activity. Then follows the calculation part which helps in assessing the capital required to start the venture or the business. But when you learn that the rules and regulations framed by the Government for that particular venture or business are not very clear and there is a lot ambiguity surrounding the same, your hopes actually crash. Eventually you lose all your interests’ in doing that business even though there are some rules in place for the same.
Similarly, the mutual fund industry is also in a dilemma of launching Real Estate Mutual Funds (REMF) despite regulations being in place for the same since 2008 by the Securities and Exchange Board of India. Let’s find out what deters the mutual fund industry from launching such funds.
The SEBI in 2008 had laid down the following rules governing the REMF:
- Invest at least 75% of the REMF scheme's net assets in real estate companies and related securities
- From the above mandate of 75% a minimum of 35% to be invested directly into real estate
- Investments upto 30% only allowed in a single city
- Investments upto 15% only allowed in a single real-estate project,
- To invest not more than 25% of the total issue capital of any unlisted company
- Mandatory listing of REMFs on the stock exchanges
Despite the above rules and regulations, the mutual fund industry has been unable to launch REMFs due to lack of ‘clarity’, want of transparency and uncertainty prevailing in the real estate sector. Moreover, there being no regulatory framework for the real estate sector for its efficient functioning, have also refrained mutual fund houses from launching such funds.
We believe that clarity of rules and regulations is vital for any new beginning. Real Estate sector in India is surrounded by a lot of ambiguity in the absence of a regulator. There is no control over prices of the real estates throughout the country, providing a thriving ground for malpractices and mis-selling. Under this situation, it is right that the mutual funds have delayed launching REMFs as the investors’ hard-earned money would be at stake.
Also with respect to taxation of these schemes, the current regulation treating such funds as “debt funds” for taxation (as they will invest directly in real estate projects), has also precluded mutual fund houses from launching such scheme as such tax status fails to enthuse investors.