Will The Hindenburg Report Dent India's Rapidly Growing REITs Segment?

Analysts said that the volatility in the Indian stock markets was primarily driven by global cues, especially amid the US economic data. They had little to do with the Hindenburg report.

“The stock markets in India have remained volatile but that has nothing to do with the report published by Hindenburg. It is more due to uncertainties in the global markets. On Monday, we saw the stock markets ending flat and there was no major hiccup,” Vikram Sahny, MD, Sahny Securities Pvt Ltd told The Secretariat.

Hindenburg Research on August 10 in its report claimed that SEBI made changes in the REIT rules to benefit private equity firm Blackstone. The private equity firm, where Sebi Chairperson Madhabi Buch's husband Dhaval Buch is employed, has sizeable investments in the domestic realty segment. The American shortseller also claimed that SEBI’s “surprising lack of interest in Adani's alleged undisclosed web of Mauritius and offshore shell entities” is due to Buch and her husband’s stakes in these entities.

The  Indian REITs Association (IRA) in a statement said that since the introduction of REIT regulations in 2014, India has established a strong and transparent regulatory framework that aligns with global best practices. “Developed in consultation with all market participants, this framework ensures the highest levels of investor protection for both: domestic and international institutional investors, as well as retail investors,” the association said.

The opposition parties, however, are demanding a joint parliamentary committee (JPC) probe into the allegations. The Congress has even threatened to carry out a nationwide protest if the Opposition's demand for a JPC is not accepted.

What is REIT?

REITs essentially real estate trusts, which operate as companies that own and operate, or even fund income-producing real estate, allow investors to earn income from real estate without having to purchase, or finance properties on their own. REIT functions in a similar way as that of mutual funds, offering easy ways to invest in real estate.  It is considered safe to invest in REITs since they are listed on the stock exchanges.

REITs were first introduced in the US in the 1960s. Besides India, where REITs are regulated by SEBI, several other countries including China, Singapore and Japan have actively developed a REITs segment. According to CRISIL, REITs account for about 50 per cent of the capitalisation of the real estate markets in countries such as Singapore and Japan where they were introduced nearly two decades ago.

How well are REITs working in India?

REITs, introduced in India by SEBI in 2014 took time to take shape. The first REIT in India was finally launched only in 2019.

Currently, there are four listed REITs on the Indian stock exchanges, collectively managing assets of more than Rs 1,40,000 crore with over 2,40,000 unitholders. These REITs have distributed over Rs 18,000 crore. The market capitalization of this asset class has already touched about Rs 80,000 crore.

According to the India Brand Equity Foundation (IBEF) despite rapid growth in the REIT market in India, the model represents just 13.7 per cent of the total listed real estate in the country – in comparison with 98.9 per cent in the US and 94.8 per cent in Australia. Which means the Indian REIT market still remains mostly untapped.

Though REITs, considered a game changer, can boost the real estate sector by providing much-needed liquidity and improving transparency, proper regulatory framework is the key.

How to Promote Transparency In REITs

Sriram Krishnan, Chief Business Development Officer, NSE earlier said that along with credible know your customer (KYC) process, deeper financial literacy, increased participation in various exchange-traded financial instruments, such as equities, exchange-traded funds (ETFs), REITs, infrastructure investment trusts (InvITs), government bonds, and corporate bonds have helped in expanding the overall investor base.

In a statement on the Hindenburg issue, SEBI said that REIT has been promoted with the aim of developing the Indian securities market, which was pointed out in the market regulator’s annual report. “Therefore, the claim that promoting REITs and [Small and Medium] SM REITs among various other asset classes by SEBI was only for benefitting one large multinational financial conglomerate, is inappropriate,” the market regulator said.

On Tuesday, the  Financial Services Commission of Mauritius issued a statement as well denying  allegations made by Hindenburg and claiming the nation is not a tax haven. 

“As per the peer review conducted by the OECD Forum on Harmful Tax Practices, the OECD is satisfied that Mauritius does not have any harmful features in its tax regimes, thus recognising Mauritius as a well-regulated, transparent and compliant jurisdiction. Therefore, Mauritius cannot be termed as a tax haven,” the FSC said in a statement on its website.

While a detailed investigation on the issue would boost investor confidence and uphold creditbility of the country's regulatory bodies, stakeholders need to refrain from taking knee jerk reactions.