Will Sebi's fresh impetus revitalise investor interest in REITs, InvITs?

Since the inception of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) norms in 2014, the capital market regulator has made several amendments in a bid to attract investors. But so far, India has only seen three InvITs come to the market, having raised about Rs 10,000 crore. Besides, there is only one REIT which is in the process of making a public offer.

To make the instrument viable, the market regulator had of late come out with a new set of guidelines to boost the popularity of such trusts' structure in India. The proposed framework has been designed in a manner that could further ease fundraising, said a regulatory official. 

The proposed framework reduces the minimum allotment and trading lot for public issuances of these trusts. “At the time of initial/follow-on issue, the minimum application and allotment lot shall be of 100 units and the value of one such lot shall be within the range of Rs 15,000-20,000," stated the Securities and Exchange Board of India (Sebi) in a consultation paper in January.  After initial listing, a trading lot should also be of 100 units, it added.

Sebi has sought public feedback on the proposed guidelines by February 18. 

At present, the minimum subscription from any investors for both initial offer and follow on public offer in case of REITs and InvITs is Rs 2 lakh and Rs 10 lakh, respectively. The prescribed trading lot for the purpose of trading of units of REITs on the stock exchange is Rs 1 lakh; it is Rs 5 lakh for InvITs.

“The reduction in the minimum application and trading lots potentially enlarges the investor pool for both instruments. The reduction in the trading lot should also help in providing more liquidity and increase trading activity for such instruments,” said Karan Marwah, partner, Accounting Advisory Services at KPMG India.

Further, it has proposed to increase the leverage limit for InvITs to 70 per cent from 49 per cent. This will be applicable when there is an acquisition of new infrastructure assets. However, InvITs has to make additional disclosures about earnings on a quarterly basis, if they are increasing their leveraging. They also need to provide specific details of debt service coverage ratios and interest service coverage ratios and quarterly valuation of assets, as per the proposal. 

Currently, the aggregate consolidated borrowings and deferred payments of the InvIT net of cash and cash equivalents shall never exceed 49 per cent of the value of the InvIT assets. Any borrowing exceeding 25 per cent of the value of the InvIT assets requires unitholders’ approval and mandatory credit rating. “The current amendments related to enhanced leverage do not seem to apply to REITs. Sebi should consider clarifying this new regulatory structure for privately placed unlisted InvITs,” Marwah said.

These innovative fund-raising vehicles are highly popular in developed nations, allowing developers to monetise revenue-generating real estate and infrastructure assets. These also enable investors or unitholders to invest in such assets, without actually owning them. But the Indian market is yet to see traction. 

“The concept of these innovative vehicles was in line with the government’s broader scheme of reforms, to revamp the real estate sector and enhance affordable housing. While designing the regulation, it was perceived that common investors wouldn’t understand the product and therefore, lot size was kept at Rs 5 lakh, even subsequent trading was restricted at the same level. This led to lower participation from investing public and as a result acted against fair price discovery,” said Sanjay Chandel, a former Sebi official and ex-CEO, IndiaBulls Mutual Funds. According to him, Sebi should also consider allowing trusts to buy back InvIT should the price falls in a transparent manner.

The fresh guidelines also enable unlisted privately-placed InvITs. For this, Sebi has proposed a separate framework. The number of investors in such InvITs should be as determined by the issuer, including the extent of investment by a single investor. Existing privately placed listed InvITs may choose to migrate to the proposed framework for private unlisted InvITs if they obtain the approval of more than 90 per cent of their unitholders by value and exit may be provided to dissenting unitholders, Sebi said.

While the focus, for now, has been on infrastructure and real estate assets, experts said the structures can also be used by sectors such as renewable energy, hospitals, hotels, education and other corporates to unlock value and raise funds by leveraging their real estate portfolios.