Sebi to relax REIT rules to attract investors

With an aim to make REITs more attractive to investors, markets regulator Sebi plans to relax its norms to allow these Trusts to invest more in under- construction assets and have a larger number of sponsors.
The Securities and Exchange Board of India (Sebi) had put in place its regulations for Real Estate Investment Trusts (REITs) in September 2014, but these Trusts have not generated enough interest among investors and industry players who have been seeking further measures to make them attractive.
While the government has already announced various taxation related and other sops for REITs, Sebi has now decided to further amend its regulations by taking into account representations received from various quarters.

A proposal to amend REIT Regulations would be placed before Sebi's Board next week, after which a consultation paper would be floated for seeking further comments from various stakeholders before making the final changes to the norms, a senior official said.
A consultation process is already underway for making the InViT (Infrastructure Investment Trusts) Regulations.
Besides representations from the industry for making changes to REIT Regulations, Sebi has also held several meetings with market participants and industry bodies including about steps required to smoothen the process of seeking registration with Sebi and launching of an offer.

India's real estate sector has grown rapidly in recent years and the growing scale of operations of corporate sector has increased the demand for commercial buildings, office spaces, shopping centres, warehouses and conference centres. For such assets, REITs have been preferred investment vehicles globally and can be so in India too.

Among the proposed changes, Sebi plans to remove the restriction on the SPV (Special Purpose Vehicle) to invest in other SPVs holding the assets, which in turn would allow REITs to invest in a holding company owning stake in SPVs.
It is being proposed that the REIT would hold controlling interest and at least 50 per cent equity in the Holding Company. The Holding Company can in turn hold controlling interest and at least 50 per cent equity in underlying SPV.
A large proportion of real estate projects in India are financed by financial institutions on project-finance basis where lenders require a pledge on shares of the SPV.

In such cases, if the SPV is held directly by the SPV, the lenders would want pledge of the SPV shares held by the REIT and this might not be attractive for REIT investors with the existing restriction. Currently, an SPV is required to hold at least 80 per cent of its assets directly and cannot invest in other SPVs.
Besides, it is being proposed that holdings in REIT may be
held by a sponsor with its group companies or associates, all of whom would be counted as one.
It was felt that the current norm could be restrictive in case of a sponsor group holding interest through group firms or individuals.

Sebi also plans 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.
Another current provision requires that units offered to the public should be at least 25 per cent. This would be aligned with Sebi regulations about the public offer size of 25 per cent, or 10 per cent initially with an eventual raising of public holding to 25 per cent.

In case of change in control of sponsor entity of account of a sale, if the number of unit holders, other than related parties, falls below 200 or the public float slips below 25 per cent, the trustees are required to seek a delisting.
It is now being proposed to relax this provision by allowing the new sponsor a one-year window to comply with the public holding requirements by secondary sale or dilution through a fresh issuance of units.
One of the major proposals relate to allowing REITs to invest up to 20 per cent in under-construction projects.
The existing regulations require at least 80 per cent of the value of REIT assets should be invested, in proportion to the holding of the REITs, in completed and rent-generating assets.

Of the remaining 20 per cent, not more than 10 per cent can be invested in under-construction properties and in 'not-completed and non-rent generating properties'.
It is being proposed now that the REITs can invest up to 20 per cent in under-construction assets, while at least 80 per cent should continue to be invested in completed and rent- generating properties.
The proposal would provide greater flexibility to the REIT manager in determining the composition of REIT and also help widen the portfolio and therefore the size of the REIT by adding projects that are at various stages of constructions.
Also, if some part of an under-construction property has got Occupancy Certificate, that portion would be considered 'completed property' and the remainder would be 'under-construction' property.

Most of the international REIT regulations in fact permit up to 25 per cent of investment in other than real estate.
Changes are being proposed in rules governing the trustees and associates as well, pursuant to which associates of the trustees would no longer form part of the parties to the REIT. Besides, associates of trustees would be allowed to invest in units of such REIT, subject to such transactions being conducted at an arm's length basis.
Also, the disclosure of litigations related to associates of trustee would not be required to be given.
Sebi has also received representations that the rules do not have an explicit provision with respect to the liability of unitholders and more clarity may be required for entities such as insurance companies (who invest on behalf of their investors) to invest in REITs.

Accordingly, Sebi has decided to clearly clarify that the unitholder would be an investor and its rights and obligations would be limited to the amount of its investment.
Also, a developer would be allowed to function as a sponsor if at least two projects of the sponsor, or its associates, have been completed. The current norms do not provide the leeway of associates' projects being considered.