Sebi to frame rules for REITs, InvITs issuing subordinate units to sponsors

Capital markets regulator Sebi is looking to come out with a framework for the issuance of subordinate units by REITs and InvITs to sponsors and their associates.

Additionally, the regulator has proposed a framework for unit-based employee benefits (UBEB) in the context of REITs (real estate investment trusts) and InvITs (infrastructure investment trusts).

The Securities and Exchange Board of India (Sebi) has sought comments from the public till December 29 on the proposals.

Under the proposed framework, subordinate units can be issued only to the sponsor, its associates and sponsor group, such units should carry only inferior voting as compared to ordinary units and the units can be issued to the eligible entities in the initial offer or in any offering subsequent to the initial offer, Sebi said in its consultation paper.

It further suggested that subordinate units can only be transferred inter-se amongst the sponsor entities. "Any issuance of subordinate units post initial offer shall require prior approval from 75 per cent of the unitholders by value. Sponsor(s), sponsor group, associates of sponsor(s) and any other parties related to the transaction shall not vote on such matters," Sebi suggested.

The regulator suggested that subordinate units and ordinary units must be issued under separate ISINs and such units should not be considered for the purpose of mandatory minimum unitholding requirements applicable to sponsors.

It further recommended that the entitlement date including performance benchmark for conversion of subordinate units to ordinary units should be clearly defined and specified in the offer document.

Further, a one-time extension in the entitlement date should be permitted for a maximum period of one year subject to certain conditions.

"The minimum time gap between issuance of subordinate units and entitlement date / event for conversion of subordinate units to ordinary units shall be one year," Sebi suggested.

The current rules permit REITs and InvITs to issue subordinate units only to the sponsors and associates. However, there is no framework detailing the mechanism for issuance of subordinate units.

On unit-based employee benefits, Sebi has proposed that the manager of REIT or the investment manager of InvIT can offer UBEB schemes for their employees based on the units of REIT or InvIT.

The implementation of the scheme should be done through a separate Employee Benefit Trust (EB Trust) which can be created by the manager of a REIT or investment manager of InvIT.

The units held by EB Trust should be used only for the limited purpose of providing unit-based employee benefits. The EB trust should not undertake any transfer or sale of units of REIT/InvIT held by it except for providing unit-based benefits to the employees of the manager or investment manager.

The trustee of the EB Trust should not be eligible to vote on account of the units of the REIT/InvIT held by it. For the purpose of disclosure to the recognized stock exchange, the unitholding of the EB Trust should be shown as "non-sponsor and non-public" unitholding.

The provisions of Sebi's insider trading PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) rules should apply to the manager / investment manager, its directors, its key managerial personnel, recipients of UBEB and EB Trust.