Sebi proposes fresh relaxation for REITs, InvITs norms

Markets regulator Sebi today decided to further relax in norms for REITs and InvITs in a bid to make these instruments more attractive for raising capital.
Several attempts are being made to garner due attention from business houses in the country but all the efforts failed leading to Sebi reconsidering the proposal to give further relaxations.
In order to facilitate growth of REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts), the Sebi board in its meeting here today decided to ease norms further in this regard. The decision was taken after extensive public consultation.
Sebi had notified the REIT and InvIT Regulations in 2014, allowing setting up and listing of such Trusts, which are very popular in some advanced markets.

However, no single Trust has been set up as yet as investors wanted further measures, including tax breaks, to make these instruments more attractive.
Sebi has granted approval to three companies - IRB Infrastructure, GMR and MEP Infrastructure - to launch InvITs.

While the government provided for certain tax benefits in the Budget this year, Sebi board has now decided to amend REITs and InvIT regulations.
It allowed REITs and InvIT to invest in two-level (special purpose vehicle) structure through holding company. This is subject to sufficient shareholding in the holding company and the underlying SPV.
It removed the limit on the number of sponsors. Currently, three sponsors are required. Besides, such trusts are allowed to have right to appoint majority directors in the SPV.

Further, holding company would be allowed to distribute 100 per cent cash flow realised from underlying SPVs and at least 90 per cent of the remaining cash flow.
Regarding REITs, Sebi proposed to allow such trusts up to 20 per cent investment by such trusts in under-construction projects, up from a maximum of 10 per cent allowed currently.
Sebi also proposed to rationalise the requirements under the Related Party Transactions, under which approval of 60 per cent unitholders apart from related parties, is required for passing a related party transaction.
Further, approval is required of 75 per cent unitholders, apart from related parties, for passing special resolutions such as change in investment manager, investment strategy and delisting of units.

The board also clarified the definition of real estate property in the regulations.
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Sebi Chairman U K Sinha said three companies have already filed applications to launch their InVITs, while three more are expected soon.
On further easing of norms for REITs and InVITs, EY's Tax Partner (Real Estate Practice) Maadhav Poddar said allowing them to invest in two-level SPV structure through a holding company would remove the need for a restructuring in many cases prior to setting up such trusts.
Poddar said this would reduce transaction costs and timelines as well as ensure liquidity to investors and developers who had invested at the holding company level.

"Increasing the percentage which a REIT can invest in under construction property from 10 per cent to 20 per cent will allow for more portfolios to be listed which hitherto could not be considered as their under construction portion was greater than 10 per cent.
"Reducing the mandatory sponsor holding in an InvIT from 25 per cent to 15 per cent will allow for more liquidity to sponsors," he added.
Advisory firm Corporate Professionals Founder Pavan Kumar Vijay hailed Sebi's decision to allow FPIs to access corporate bond market directly without an involvement of stock brokers would encourage more participation of foreign banks and overseas mutual fund in the country's corporate bond market.

"In yet another move to promote foreign investments, Sebi allows category I & II FPIs to access Corporate bond market directly without an involvement of stock brokers. This exemption is allowed only for proprietary trades of FPIs," he said.