Blackstone's plan to buy stake in DLF Cybercity hits Reits hurdle

Government in talks with developers on deferment of minimum alternate tax

A deal between American private equity group Blackstone and leading real estate developer DLF might be stuck over taxation-related clauses in real estate investment trusts (Reits), it is learnt. The government is however, keen to remove such hurdles and is in talks with developers on deferment of minimum alternate tax (MAT).

Blackstone was understood to be in advanced talks with DLF to acquire a substantial stake in DLF Cybercity, a subsidiary of the developer, for lease rental business in Gurgaon.

According to industry estimates, DLF Cybercity's value is Rs 5,000-6,000 crore.

While both DLF and Blackstone declined to comment on "market speculation", a source said as of now, there were no discussions between the two companies on buying Cybercity. Another source attributed the breakdown in talks to the fact that Reits had failed to take off.

As Blackstone is keen to group all its property in India under Reits and go for a Reits initial public offering (IPO) to monetise its investments, any taxation hurdle is seen as a dampener. DLF has also been upbeat on Reits; earlier, it had announced plans to list two Reits for its rent-yielding commercial assets.

The biggest issue in the way of launching Reits is MAT. Developers are wary of launching these instruments because in the current format, the tax liability of developers could be up to 20 per cent, making it unattractive, according to a real estate company representative. Some legal heads and real estate players have labelled the product a non-starter.

While industry has sought MAT be done away with, a source said there could be a compromise between the government and industry in this regard. Discussions on deferment of MAT are underway between finance ministry officials and developers. "Rather than kicking in taxation early, MAT should be applicable later, once transaction has taken place and cash has flowed in," said a source.

The ministry is learnt to be considering deferring MAT, as the government wants to see developers launch Reits. It is also keen that foreign investors be made a part of Reits to ensure their success before the National Democratic Alliance government completes a year in office.

"We are approaching developers and clearing all their queries related to Reits. They have concerns around the applicability of MAT. We are assuring them as the Budget this year announced the removal of exemptions, MAT would be redundant in the coming years," said a ministry official.

The capital markets division is working overtime to get developers on board, as Prime Minister Narendra Modi has taken keen interest in the progress of these infrastructure-linked instruments. It is likely the division will urge the revenue department that till the time MAT isn't redundant, the applicability of the tax should be deferred and that it should be applied once the underlying project turns profitable.

Reits are similar to mutual funds, which can be listed and traded on stock exchanges. These have to distribute a majority of their income as dividends. In Budget 2015-16, the finance minister exempted capital gains for sponsors at the time of listing of Reits units and gave a pass-through of rental income on assets held by Reits to unit holders.

COMPANIES CLARIFY

• While both DLF and Blackstone declined to comment on "market speculation", a source said as of now, there were no discussions between the two companies on buying Cybercity
   
• Another source attributed the breakdown in talks to the fact that Reits had failed to take off