The national level market regulator SEBI stated that real estate mutual funds can invest in properties located in million-plus cities and urban agglomerations. Issuing a clarification, SEBI said the cities for investment by real estate mutual funds would include 35 cities in million-plus urban agglomerates and 27 under million-plus category as per the Census 2001. Million-plus urban agglomerations and cities include Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur, Lucknow, Nagpur, Patna, among various others. SEBI has defined the real estate asset as "an immovable property located in the country in cities specified by the board, the construction on which has completed and is legally transferable". In addition to the specified cities, such funds can also invest in SEZs as defined in the Special Economic Zones Act, 2005. The mutual funds, however, cannot invest in properties under construction, vacant land, deserted property, land for agricultural use among other things. SEBI after a long wait had recently notified that the mutual funds could invest in real estate and had specified that any MF proposing to launch such a scheme should have been in the business of real estate for at least five years. It had also specified that every real state mutual fund scheme will have to invest at least 35 per cent of the net assets of the scheme directly in real estate assets. Further, it also said that every such fund will be a close-ended scheme and its units shall be listed on a recognised stock exchange.

REAL ESTATE MUTUAL FUND SCHEMES
For the benefit of our readers, we have reproduced key extracts from SEBI Mutual Funds Regulations Amendment Act, April 2008 in connection with REMFs
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.    which is not subject matter of any litigation;
but does not include-
VII.    a project under construction; or
VIII.    vacant land; or
IX.    deserted property; or
X.    land specified for agricultural use; or
XI.    a property which is reserved or attached by any Government or other authority or pursuant to orders of a court of law or the acquisition of which is otherwise prohibited under any law for the time being in force;
b.    "real estate valuer" means a qualified valuer of real estate assets who has been accredited by a credit rating agency registered with the Board.
Applicability

49B.
1.    The provisions of this Chapter shall apply to real estate mutual fund schemes.
2.    Unless the context otherwise requires, all other provisions of these regulations and the guidelines and circulars issues there under shall apply to real estate mutual fund schemes, and trustees and asset management companies in relation to such schemes, except where specific provisions are made in relation thereto under this Chapter.
Additional eligibility criteria

49C .
1.    A Certificate of registration may be granted under regulation 9 to an applicant proposing to launch only real estate mutual fund schemes if he;-
a.    has been carrying on business in real estate for a period of not less than five years;
b.    fulfills eligibility criteria provided in regulation 7, except that specified in item (i) of the Explanation to clause (a) thereof:
2.    A real estate mutual fund scheme of a mutual fund registered under subregulation (1) shall not invest in the securities mentioned in sub-clauses (ii) to (iii) of clause (a) or in clause (b) of sub-regulation (2) of regulation 49E unless it has key personnel having adequate professional experience in finance and financial services related field.
3.    An existing mutual fund may launch a real estate mutual fund scheme if it has an adequate number of key personnel and directors having adequate experience in real estate.
Other conditions for real estate mutual fund schemes

49D.
1.    Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange:Provided that the redemption of a real estate mutual fund scheme may be done in a staggered manner.
2.    The units issued by a real estate mutual fund scheme shall not confer any right on the unit holders to use the real estate assets held by the 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 securities;
3.    Unless otherwise disclosed in the offer document, no mutual fund shall under all its real estate mutual fund schemes, invest more than thirty per cent of its net assets in a single city.
4.    No mutual fund shall, under all its real estate mutual fund schemes, invest more than fifteen per cent. of its net assets in the real estate assets of any single real estate project. Explanation: For the purposes of this regulation, "single real estate project" means a project by a builder in a single location within a city.
5.    No mutual fund shall, under all its real estate mutual fund schemes, invest more than twenty five per cent of the total issued capital of any unlisted company.
6.    No mutual fund shall invest more than fifteen per cent of the net assets of any of its real estate mutual fund schemes in the equity shares or debentures of any unlisted company.
7.    No real estate mutual fund scheme shall invest in -
a.    any unlisted security of the sponsor or its associate or group company ;
b.    any listed security issued by way of preferential allotment by the sponsor or its associate or group company;
c.    any listed security of the sponsor or its associate or group company, in excess of twenty five per cent of the net assets of the scheme.
8.    No mutual fund shall transfer real estate assets amongst its schemes.
9.    No mutual fund shall invest in any real estate asset which was owned by the sponsor or the asset management company or any of its associates during the period of last five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights.
Valuation of real estates assets and declaration of net asset value

49F.
1.    The real estate assets held by a real estate mutual fund scheme shall be valued -
a.    at cost price on the date of acquisition; and
b.    at fair price on every ninetieth day from the day of its purchase in accordance with the norms specified in Schedule IXB.
2.    The asset management company, its directors, the trustees and the real estate valuer shall ensure that the valuation of assets held by a real estate mutual fund scheme are done in good faith, in accordance with the norms specified in Schedule IX B and that the accounts of the scheme are prepared in accordance with accounting principles specified in Schedule XI.
3.    The net asset value of every real estate 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 exclude transactions in cash or unaccounted transactions.
6.    The asset management company shall exercise due diligence in maintenance of the assets of a real estate mutual fund scheme and shall ensure that there is no avoidable deterioration in their value.
7.    The asset management company shall ensure that the real estate assets held by a real estate mutual fund scheme are adequately insured against impair, damage or destruction.
8.    The asset management company shall ensure that the cost of maintenance and insurance of real estate assets is within reasonable limits and that no funds of the scheme are utilized towards development of such assets.
9.    The asset management company shall ensure that a real estate valuer certifies compliance with sub-regulation (8) on an annual basis.
10.    The asset management company shall ensure that no real estate valuer continues with valuation of particular real estate asset for more than two years and that no such valuer values the same asset for a period of at least three years thereafter.
11.    The asset management company shall record in writing, the details of its decision making process in buying or selling real estate assets together with the justifications for such decisions and forward the same periodically to trustees.
12.    The asset management company shall ensure that investment of funds of the real estate mutual fund scheme is not made contrary to provisions of this chapter and the trust deed.
Usage of real estate assets of a real estate mutual fund scheme

49H .
1.    The asset management company may let out or lease out the real estate assets held by the real estate mutual fund scheme if the term of such lease or letting does not extend beyond the period of maturity of the scheme.
2.    Where real estate assets are let out or leased out, the asset management company shall diligently collect the rents or other income in a timely manner.
3.    Real estate assets held by a real estate mutual fund scheme may be let out to the sponsor, asset management company or any of their associates, at market price or otherwise on commercial terms:
Provided that not more than 25% of the total rental income of the scheme shall be derived from assets so let out.
Duties of trustees