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TMI BlogNotification on Real Estate Mutual Fund Schemes and Initial Issue ExpensesX X X X Extracts X X X X X X X X Extracts X X X X ..... onferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996. Yours faithfully, Ruchi Chojer Encl : a/a THE GAZETTE OF INDIA EXTRAORDINARY PART -III- SECTION 4 PUBLISHED BY AUTHORITY New Delhi, April 16, 2008 SECURITIES AND EXCHANGE BOARD OF INDIA NOTIFICATION Mumbai, the 16th April, 2008 SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) (AMENDMENT) REGULATIONS, 2008 F. No. LAD-NRO/GN/2008/03/123042. - In exercise of the powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following Regulations to further amend the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, namely :- 1. These regulations may be called the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008. 2. They shall come into force on the date of their publication in the Official Gazette. 3. In the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996- (i) in regulation 2 - (a) for clause (q), the following shall be substituted, namely:- "(q) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to in sub-regulation (3A) are the following: (a) the scheme is launched after the commencement of the Securities and Exchange Board of India (Mutual Funds)(Second Amendment) Regulations, 2006 and prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008; (b) initial issue expenses in respect of the scheme are accounted in the books of accounts of the scheme in accordance with Tenth Schedule.". (viii) after regulation 49, the following Chapter and regulations shall be inserted, namely:- "CHAPTER VIA REAL ESTATE MUTUAL FUND SCHEMES Definitions 49A. For the purposes of this Chapter, unless the context otherwise requires- (a) "real estate asset" means an identifiable immovable property- (i) which is located within India in such city as may be specified by the Board from time to time or in a special economic zone within the meaning of clause (za) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (ii) on which construction is complete and which is usable; (iii) which is evidenced by valid title documents; (iv) which is legally transferable; (v) which is free from all encumbrances; (vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme and any provision to the contrary in the trust deed or in the terms of issue shall be void. (3) The title deeds pertaining to real estate assets held by a real estate mutual fund scheme shall be kept in safe custody with the custodian of the mutual fund. (4) A real estate mutual fund scheme shall not undertake lending or housing finance activities. (5) All financial transactions of a real estate mutual fund scheme shall be routed through banking channels and they shall not be cash or unaccounted transactions. Permissible investments 49E. (1) Every real state mutual fund scheme shall invest at least thirty five per cent. of the net assets of the scheme directly in real estate assets. (2) Subject to sub-regulation (1), every real estate mutual fund scheme shall invest- (a) at least seventy five per cent. of the net assets of the scheme in- (i) real estate assets; (ii) mortgage backed securities (but not directly in mortgages); (iii) equity shares or debentures of companies engaged in dealing in real estate assets or in undertaking real estate development projects, whether listed on a recognized stock exchange in India or not; (b) the balance in other securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate mutual fund scheme shall be calculated and declared at the close of each business day on the basis of the most current valuation of the real estate assets held by the scheme and accrued income thereon, if any. Duties of asset management company 49G. (1) Without prejudice to the provisions of regulation 21, the asset management company of a mutual fund having real estate mutual fund schemes shall appoint suitable number of qualified key personnel with relevant experience, before undertaking investment management of real estate assets of a real estate mutual fund scheme. (2) The asset management company may appoint advisors to advise it on acquisitions or proposed acquisitions of real estate assets. (3) The asset management company shall exercise due care while appointing real estate valuers for valuing the real estate assets held by the real estate mutual fund scheme and shall ensure that there is no conflict of interest. (4) The asset management company shall lay down an adequate system of internal controls and risk management. (5) The asset management company shall put in place systems to ensure that all financial transactions are done through banking channels and excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nism to invest in and manage investments in real estate assets on a continuous basis. (2) The trustees shall monitor whether due diligence is exercised by the asset management company in managing the investments. (3) The trustees shall review the market price of the units during the year and shall recommend proportionate buy back of units from unit holders, if the units are traded at steep discount to the net asset value. (4) The magnitude of discount which shall amount to steep discount referred to in sub-regulation (3) shall be disclosed in the offer document. (5) The trustees shall ensure that only permissible investments are made by the asset management company. (6) The trustees shall ensure that all financial transactions of the real estate mutual fund scheme are made only through banking channels and that systems exist to exclude transactions in cash and unaccounted transactions. (7) The trustees shall lay down the criteria for empanelment of real estate brokers. (8) The trustees shall lay down the broad procedure to be followed by the assert management company while transacting in real estate assets. (9) The trustees shall require the asset management company to set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), 50(3),55(4)(iii) ]" shall be substituted; (b) in the heading, after words "ACCOUNTING POLICIES AND STANDARDS', the words "Part A: For Investment in Securities" shall be inserted; (c) after clause l, the following shall be substituted, namely:- "m. In case of real estate mutual fund scheme, investments in unlisted equity shares shall be valued as per the norms specified in this regard." (d) after clause m. the following shall be inserted, namely:- "Part B: For direct investment in real estate asset Definitions 1. In this Part, unless the context otherwise requires-: (a) 'fair value' means the amount for which an asset could be exchanged between knowledgeable parties in an arm's length transaction and certified by the real estate valuer; (b) "'knowledgeable' means that both the buyer and the seller are reasonably informed about the nature and characteristics of the real estate asset, its actual and potential uses, and market conditions at the balance sheet date; 2. A real estate asset that is held by a real estate mutual fund scheme shall be valued at fair value. 3. Where a portion of the real estate asset is held to earn rentals or for capital appreciation and if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The cost of such a real estate asset shall be measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired real estate asset shall be measured in this manner even if an real estate mutual fund scheme cannot immediately derecognise the asset given up. If the acquired real estate asset cannot be measured at fair value, its cost shall be measured at the carrying amount of the asset given up. 11. A real estate mutual fund scheme determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction Explanation: An exchange transaction has commercial substance if: (a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred, or (b) the real estate mutual fund scheme-specific value of the portion of the real estate mutual fund scheme's operations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of fair value is given by current prices in an active market for similar real estate asset in the same location and condition and subject to similar lease and other contracts. Care shall be taken to identify any differences in the nature, location or condition of the asset, or in the contractual terms of the leases and other contracts relating to the asset. v. In the absence of current prices in an active market, information from a variety of sources shall be considered, including: (a) current prices in an active market for properties of different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences; (b) recent prices of similar properties on less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and (c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that refle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble). Accordingly, if a valuation obtained for a asset is net of all payments expected to be made, it will be necessary to add back any recognised lease liability, to arrive at the fair value of the real estate asset for accounting purposes. ix. The fair value of real estate asset does not reflect future capital expenditure that will improve or enhance the asset and does not reflect the related future benefits from this future expenditure. x. Where a real estate mutual fund scheme expects that the present value of its payments relating to a real estate asset (other than payments relating to recognised liabilities) will exceed the present value of the related cash receipts it shall apply Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets to determine whether to recognise a liability and, if so, how to measure it. 15. To determine the fair value of a real estate asset in accordance with the above-mentioned paragraphs, a real estate mutual fund scheme is required to use the services of two independent and approved valuers having recent experience in category of the real estate asset being valued and use the lower of the two valuations. 16. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisation shall take into account the number of outstanding units and the aggregate amount during the relevant periods." (c) in clause (d), the following shall be substituted, namely:- "(d) In case of close-ended schemes floated on a 'load' basis prior to commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008, the unamortised portion of the expenses shall be included in the calculation of the NAV. However, such portion shall not be included in the NAV for the purposes of determining the asset management company's investment management and advisory fees or for determining the limitation of expenses under regulation 52 of these regulations." (xiii) for the Eleventh Schedule, the following shall be substituted, namely:- "ELEVENTH SCHEDULE ANNUAL REPORT 1. Annual Report The annual report shall contain- (ii) Report of the Board of Trustees on the operations of the various schemes of the fund and the fund as a whole during the year and the future outlook of the fund; (iii) Balance Sheet and Revenue Account in accordance with paras 2, 3 and 4, respectively of this Schedule; (iv) Auditor's Report in accordance with paragraph 5 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s specified in Seventh Schedule. Provided that in the case of real estate mutual funds schemes, investments in unlisted equity shares shall be valued as per the norms specified by the Board in this regard. iii. For quoted shares, the dividend income earned by the scheme shall be recognised, not on the date the dividend is declared, but on the date the share is quoted on an ex-dividend basis. For investments in shares which are not quoted on the stock exchanges, the dividend income must be recognised on the date of declaration. iv. In respect of all interest-bearing investments, income shall be accrued on a day to day basis as it is earned. Therefore when such investments are purchased, interest paid for the period from the last interest due date upto the date of purchase, shall not be treated as a cost of purchase, but shall be treated to Interest Recoverable Account. Similarly, interest received at the time of sale for the period from the last interest due date upto the date of sale must not be treated as an addition to sale value but shall be credited to Interest Recoverable Account. v. In determining the holding cost of investments and the gains or loss on sale of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue Account shall not decrease or increase the net income of the fund but is only an adjustment to the distributable surplus. It shall, therefore, be reflected in the Revenue Account only after the net income of the fund is determined. (b) The Trustees of the Board of the Trustee Company may, if necessary, transfer a portion of the distributable profits to a dividend equalisation reserve. Such a transfer would be independent of the requirement to operate an Equalisation Account as provided in (x)(a). xi. In a close-ended scheme which provides to the unitholders the option for an early redemption or repurchase their own units, the par value of the unit shall be debited to Capital Account and the difference between the purchase price and the par value, if positive, should be debited to reserves and, if negative, should be credited to reserves. In case of such schemes launched prior to the commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008 a proportionate part of the unamortised initial issue expenses shall also be transferred to the reserves so that the balance carried forward on that account is proportional to the number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or interest for a period specified in the guidelines issued by the Board. (iii)(B) The balance-sheet shall disclose under each category of real estate asset the aggregate carrying amount of nonperforming investment properties. A real estate asset shall be regarded as non-performing if it has provided no returns in the form of rental income for a period specified by the Board. (iv) The Balance Sheet shall indicate the extent of provision made in the Revenue Account for the depreciation/loss in the value of non-performing investments in securities. However, if the investments in securities are valued at marked to market, provisions for depreciation shall not be necessary. (v) The Balance Sheet shall disclose the per-unit net asset value (NAV) as at the end of the accounting year. (vi) As in case of companies, the Balance Sheet shall give against each item, the corresponding figures as at the end of the preceding accounting year. (vii)(A) The notes to the balance sheet should disclose the following information regarding investments:- (a)all investments shall be grouped under the major classification given in the balance sheet; (b) under each major classification, the total v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 994 15 (15) 105 Less: Distributed to unitholders 80 Transfer to reserve 5 (85) 20 (vii)(B) In respect of real estate asset, the following additional disclosures shall be made in the balance sheet: (a). a reconciliation between the carrying amounts of real estate investment properties at the beginning and end of the period, showing the following: 1. Additions resulting from purchase during the period; 2. Additions resulting from acquisitions through business combinations; 3. Deletions resulting from sales during the period; 4. Deletions resulting from disposal through business combinations; 5. Net gain or loss from fair value adjustments; 6. Other changes. (b) the method and significant assumptions applied in determining the fair value of each real estate investment asset including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the real estate mutual fund scheme should disclose) because of the nature of the asset and lack of comparable data. (c) the use of two approved valuers and the extent to which the fair value determined is based on the lower of the two valuations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal estate asset shown in the Revenue Account includes profit/loss on inter-scheme transfer of investments including real estate asset within the same mutual fund the aggregate of such profit recognised as realised, shall be disclosed separately without being clubbed with the profit/loss on sale of investments to third parties. (iii) Unprovided depreciation in value of investments in securities representing the difference between their aggregate market value and their carrying cost shall be disclosed by way of a note forming part of the Revenue Account. Conversely, unrealised profit on investment representing the difference between their aggregate market value and carrying cost, shall be disclosed by way of note to accounts. However, if investments are marked to market, depreciation may not be provided. (iv) The Revenue Account shall indicate the appropriation of surplus by way of transfer to reserves and dividend distributed. (v)(A) The following disclosures shall also be made in the revenue account: (a) provision for aggregate value of doubtful deposits, debts and outstanding and accrued income; (b) profit or loss in sale and redemption of investment may be shown on a net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per unit during the year and the price-earning ratio ; (g) per unit, ratio of expenses to average net assets by percentage; (h) per unit, ratio of gross income to average net assets by percentage (excluding transfer to revenue account from past year's reserve but including unrealised appreciation on investments) ; (i) per unit NAV. ANNEXURE 1A [Refer para 3] Contents of schemewise Balance Sheet ASSETS SIDE OF THE BALANCE SHEET: I. The assets of the balance sheet shall be grouped into the following categories: - Investments - Deposits - Other Current Assets - Fixed Assets II. INVESTMENTS: (a) The following types of investment in securities shall be separately disclosed: (i) Equity shares; (ii) Preference shares; (iii) Privately placed debentures/bonds; (iv) Debentures and Bonds listed/awaiting listing on the recognised stock exchange; (v) Calls paid in advance; (vi) Term Loans; (vii) Central and State Government Securities (including treasury bills); (viii) Commercial Paper; (ix) Others. (b) Real estate assets shall be separately classified into (1) major classes of residential and commercial properties and (2) sub-classified on the basis of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with reference to each type of investment in securities) (optional, if marked to market); - Provision for doubtful deposits; - Provision for outstanding any accrued income considered doubtful; - Provision for gratuity; - Provision for staff welfare fund; - Proposed income distributed on initial capital and unit-capital; - Other provisions. VI. Contingent liabilities - Disclosure should be made of all contingent liabilities, showing separately :- (i) Underwriting commitments; (ii) Uncalled liability on partly paid shares; (iii) Other commitments; and (iv) Others (specifying details). ANNEXURE 2 [Refer para 4] Contents of revenue account - Dividend; Interest; Rental (lease) income - Profit on sale/redemption of investments in securities (other than inter-scheme transfer/sale); Profit on sale of real estate assets (other than inter-scheme transfer/sale) - Profit on inter-scheme transfer/sale of investments; - Other income (indicating nature). Expenses and losses: - Provision for depreciation in value of investments in securities; - Provision for outstanding accrued income considered doubtful; - Provision for doubtful deposits and current assets; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DVT III/IV/69-ZB/2008/Exty.] Footnotes: (1) The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the Principal Regulations were published in the Gazette of India on December 9, 1996 vide S.O. No. 856(E). (2) The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 were subsequently amended - (a) on April 15, 1997 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1997 vide S.O. No.327(E). (b) on January 12, 1998 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1998 vide S.O. No.32(E). (c) on December 08, 1999 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1999 vide S.O. No.1223(E). (d) on March 14, 2000 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2000 vide S.O. No.235 (E). (e) on March 28, 2000 by the Securities and Exchange Board of India (Appeal to the Securities Appellate Tribunal) (Amendment) Regulations, 2000 vide S.O. No.278(E). (f) on May 22, 2000 by the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Regulations, 2000 vide S.O. No.484 (E). (g) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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