Realty mutual funds mulled

The finance ministry is examining a proposal to allow real estate mutual funds, based on the report of a sub-committee appointed by markets watchdog Securities and Exchange Board of India (Sebi).

Finance ministry officials said the proposal for permitting real estate mutual funds was among the measures the ministry was preparing for the consideration of the new government.

The officials indicated that the model of a mutual fund for such investment schemes was preferable to a collective investment scheme, since the mutual fund structure was based on the Sebi (MF) Regulations, 1996.

As a result, Sebi incorporated several checks and balances to protect investors. For instance, a mutual fund has to declare its Net Asset Value daily, whereas there are no such restrictions for collective investment schemes, which makes the former model more transparent.

The officials said a mutual fund dedicated to the real estate sector would give investors an attractive alternative to investing in small savings.

However, they said the absence of adequate data in the real estate sector, including land records, and the delay in reducing stamp duties by state governments were major hindrances. They said the cost of investment in such a fund tended to go up sharply because of this.

The Sebi sub-committee, headed by KN Atmaramani, had suggested that the Centre should take steps to involve states in making stamp duties uniform. Moreover, the committee said stamp duty should not be levied when the asset was purchased by a Sebi-registered real estate mutual fund.

The issue of allowing real estate mutual funds has been debated for quite some time now. The Sebi sub-committee was preceded by the Deepak Satwalekar committee earlier, which also looked into the subject.

The sub-committee has asked for tax benefits for investing in such funds.

The panel holds that in the US, investments in these funds shot up after such benefits were provided. However, the ministry may find it difficult as there will be a corresponding clamour from other funds also. The report says there are around 300 such funds in the US, with assets of over $300 billion.

Tapping the realty market

• The finance ministry decision will be based on the report of a sub-committee appointed by the Securities and Exchange Board of India
• Ministry official say a mutual fund dedicated to the real estate sector will give investors an attractive alternative to investing in small savings
• However, the absence of adequate data in the real estate sector, including land records, and the delay in reducing stamp duties by state governments, are among the major hindrances