SEBI AIF Regulatory Framework

Fractional real estate in India operates primarily under Category I Alternative Investment Funds (AIFs)regulated by SEBI (Alternative Investment Funds) Regulations, 2012. This provides:

• Legal recognition and regulatory oversight
• Investor protection mechanisms
• Standardized disclosure requirements
• Exit and liquidity frameworks

Key SEBI Requirements:

1. Minimum Investment: ₹1 lakh per investor (₹25 lakhs for certain Category I AIFs, but fractional platforms often structure to meet ₹1L threshold)
2. Maximum Investors: 1,000 per AIF scheme
3. Manager Qualification: Fund manager must have 5+ years experience, professional qualification (CA/MBA/CFA)
4. Custodian Requirement: Mandatory SEBI-registered custodian for asset holding
5. Audit & Disclosure: Annual audited financials, quarterly NAV reporting

Ownership Structure & Rights

Legal Ownership Model:

Fractional ownership through AIFs creates a beneficial ownership structure:

• Title Holder: AIF (Special Purpose Vehicle) holds legal title to property
• Beneficial Owners: Investors hold units representing proportionate ownership
• Registration: Property registered with AIF as owner, investors listed as unit holders
• Evidence of Ownership: Unit Holding Certificate issued by AIF

Investor Rights:

1. Income Rights: Proportionate share of rental income (monthly/quarterly distribution)
2. Capital Rights: Share of capital appreciation upon property sale
3. Voting Rights: Vote on major decisions (property sale, major renovations) proportionate to units held
4. Information Rights: Quarterly reports, annual financials, property inspection
5. Transfer Rights: Right to sell units on secondary market (subject to 18-month lock-in)
6. Exit Rights: Defined exit mechanisms through secondary market or AIF liquidation

Legal Documentation

Mandatory Documents:

1. Private Placement Memorandum (PPM):
   • Investment thesis and property details
   • Risk factors and disclosures
   • Fee structure and expenses
   • Exit mechanisms
   • Manager background and track record
2. Contribution Agreement:
   • Investor commitments
   • Payment terms
   • Representations and warranties
   • Default provisions
3. Unit Holding Certificate:
   • Unique unit identification numbers
   • Ownership percentage
   • Issue date and restrictions
   • Digital signature and blockchain verification (advanced platforms)

Investor Protection Mechanisms

SEBI-Mandated Protections:

1. Escrow Account:
   • All investor funds held in escrow until property purchase
   • Funds released only upon legal title transfer
   • Refund if transaction fails
2. Independent Valuation:
   • Mandatory SEBI-registered valuer report
   • Annual revaluation for NAV calculation
   • Prevents overpricing and fraud
3. Custodian Oversight:
   • SEBI-registered custodian holds property documents
   • Independent verification of transactions
   • Protection against manager misconduct

Dispute Resolution

Hierarchy of Resolution:

1. Platform Grievance Officer: First point of contact (7-day response SLA)
2. Mediation: Neutral third-party mediator (Mumbai Centre for International Arbitration)
3. Arbitration: As per Arbitration & Conciliation Act, 1996 (typically Mumbai jurisdiction)
4. SEBI Complaint: SCORES (SEBI Complaints Redress System) for regulatory violations
5. Civil Courts: Last resort for breach of contract, fraud, or criminal matters

Exit & Liquidity Framework

Primary Exit Mechanisms:

1. Secondary Market Sale:
   • Available after 18-month lock-in period
   • Platform-facilitated buyer matching
   • Transaction fee: 1-2% of sale value
   • Legal transfer via unit assignment deed
2. Property Sale:
   • AIF decides to sell property (requires 75% unit holder approval)
   • Proceeds distributed proportionately after expenses
   • Capital gains applicable
3. AIF Winding Up:
   • Typically 5-7 year AIF tenure
   • All properties liquidated, proceeds distributed
   • Final audit and closure report filed with SEBI

Compliance & Reporting Obligations

AIF Platform Obligations:

• Quarterly NAV reporting to SEBI
• Annual audited financial statements
• Half-yearly disclosures to investors
• Material event reporting within 2 working days
• KYC and AML compliance (PMLA, 2002)

Investor Obligations:

• Complete KYC verification (PAN, Aadhaar, bank proof)
• Declare source of funds if investment > ₹10 lakhs
• Report income in ITR (even if no distribution)
• Maintain investment documentation for 8 years

Regulatory Evolution & Future Outlook

SEBI is actively considering amendments to AIF regulations for fractional real estate:

• REITs for Retail Investors: Lowering minimum investment to ₹10,000-25,000 (currently ₹1 lakh)
• Secondary Market Infrastructure: Dedicated exchange for fractional units trading
• Enhanced Disclosure: Real-time property performance dashboards
• Digital Verification: Blockchain-based unit certificates for fraud prevention

Legal Checklist for Investors

Disclaimer: This article provides general legal information on fractional real estate investment framework in India. It does not constitute legal advice. Consult a qualified attorney for specific legal guidance. Laws and regulations are subject to change.

Legal Sources: SEBI (Alternative Investment Funds) Regulations 2012, Companies Act 2013, Indian Contract Act 1872, Arbitration & Conciliation Act 1996, SEBI Master Circulars, Mumbai High Court judgments on fractional ownership disputes