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Valuation glitches hold up realty mutual funds

SEBI is yet to give it the final go-ahead as ICAI fails to come up with a suitable method of evaluation, reports Vyas Mohan.

business Updated: Jun 26, 2007 21:16 IST
Vyas Mohan

One may have to wait longer to invest in real estate mutual funds.

A year after its board cleared the guidelines for real estate mutual funds (REMFs), the Securities and Exchange Board of India (SEBI) is yet to give it the final go-ahead as the Institute of Chartered Accountants of India (ICAI), the body it entrusted with formulating the means of valuation of assets held by such funds, has not been able to arrive at the right method.

"ICAI was supposed to find an appropriate valuation technique for assets held by real estate mutual funds. But they have not yet come up with a suitable method of valuation,” said a source involved in the process.

Confirming the status, an official of the Association of Mutual Funds in India said they were working with the ICAI to clear operational snags in launching REMFs.

“We are working together with the ICAI. However, it will take time as matters need to be discussed, studied and examined in detail,” said the official, requesting anonymity.

Meanwhile, ICICI Prudential Asset Management has filed a draft prospectus with SEBI to launch a real estate mutual fund. As the regulations to invest in real estate are not in place, this fund has decided to invest in equity and debt instruments of companies involved in real estate development instead of directly investing in real esatate.

After SEBI put out guidelines for REMFs in June last year, there has been confusion in the mutual fund industry as the regulator mandated the declaration of net asset values (NAV) on a daily basis. Industry participants were of the view that since the asset held is real estate, there will be little change in the price of assets on a daily basis and the calculation of NAVs should be done on a longer time interval, perhaps of three months, they said.

According to the guidelines released in June 2006, real estate mutual funds would be initially closed-ended with their units listed on the stock exchanges. The funds can directly invest only in real estate properties in India. They will be required to invest a minimum of 35 per cent of their total corpus in real estate properties. The balance can go into mortgage-backed securities, shares, bonds or debentures of companies dealing in properties and property development, and in other securities.