Sebi finalises REIT, InvIT norms; addresses industry concerns

Written by PTI | New Delhi | Updated: Aug 6 2014, 10:53am hrs
To make its proposed REIT norms more attractive, capital markets regulator Sebi has agreed to incorporate industry suggestions to reduce their minimum asset size to Rs 500 crore and to allow foreign investors at IPO and later stages.

At the same time, the regulator is keen on REITs (Real Estate Investment Trusts) being limited to larger investors in the initial stages due to higher risks, and therefore the minimum investment amount would remain higher at Rs two lakh.

The final REIT regulations, along with that for another new product Infrastructure Investment Trusts (InvITs), are likely to be considered for approval by the Sebi board this Sunday, sources said.

Along with foreign investors, domestic institutions like insurers, pension funds and provident funds would also be allowed to invest in these trusts.

Through InvITs, the regulator is aiming to create a new avenue for raising funds to meet infrastructure investment requirements to the tune of Rs 65 lakh crore for the 12th Five Year Plan (2012-17).

The new norms would enable listing and trading of REITs and InvITs as any other security on the stock exchange platforms and also help create new platforms for raising of funds by real estate and infrastructure companies, respectively.

Despite significant tax benefits for the sponsors of these business trusts, these new regulations would also be "revenue accretive" for the government in form of taxes, sources said.

As per the proposed regulations, they would help in channelising domestic investments into real estate and infrastructure sectors, and also help attract foreign capital for these fund-starved segments of the economy.

Tax benefits for these investment vehicles were announced during the Union Budget last month by Finance Minister Arun Jaitley, who is likely to address the Sebi board also on August 10 when these proposals would be considered.

According to sources, certain changes or amendments and additional guidelines would be required the government and other regulators for development of REITs and InvITs in India.

These include allowing foreign investment into the units of REITs and InvITs at the time of IPO and for acquisition from secondary markets, and for allowing insurance companies, pension funds and provident funds to invest.

Sebi would take up these issues with the concerned regulator or the government deparment for necessary action, sources said.

The draft guidelines for REITs and InvITs were earlier put in public domain for comments by all stakeholders and the final guidelines have been prepared after taking those into account.

Among others, comments were received from 65 entities, running into over 450 pages, for REIT guidelines. For InvITs, comments were received from Finance Ministry, companies, merchant bankers and asset management companies.

Sebi has agreed to industry demand for reducing the minimum asset size for REITs from Rs 1,000 crore to Rs 500 crore, while it has also decided to allow multiple sponsors.

However, the regulator has decided against reducing the requirement of mandatory continuous holding by sponsors to ensure alignment of their interest with that of the Trust.

The minimum initial offer size would be Rs 250 crore with a minimum public float of 25 per cent.

The sponsors would need to have mandatory holding of 25 per cent of REIT units for three years and continuous holding of 15 per cent thereafter. Multiple sponsors would be allowed to hold the mandatory holding together.

The proposed norms allow the REITs to raise funds from any investor, whether Indian or foreign, subject to necessary guidelines from the government and the RBI.

On whether retail investors would be allowed to invest, Sebi feels that the market is still in a nascent stage and therefore it is necessary to keep the minimum investment thresholds at relatively higher levels.

The new norms would also ensure that excessive leverage is not undertaken through REITs, while the Trustees would be required to be independent and not an associate of the sponsor or the manager of the Trust.

The minimum networth of the manager would be increased to Rs 10 crore, from Rs 5 crore proposed in draft guidelines.

For InvITs also, Trustees would need to be independent and not an associate of sponsors or the managers.

For InvITs proposing to invest in PPP projects, where a regulatory requirement or concession agreement requires the sponsor to hold a certain minimum percent of the Special Purpose Vehicle, the sponsor holding norms have been relaxed.

The new norms would apply to all infrastructure projects, as defined by the Cabinet Committee on Infrastructure without any specification on the type of revenue.

The minimum networth requirement of an InvIT sponsor would be Rs 100 crore, as against Rs 10 crore proposed in draft guidelines. The networth of investment manager has also been raised from Rs 5 crore to Rs 10 crore.

The minimum investment size for InvITs would remain at Rs 10 lakh. The minimum requirement of two assets for publicly offered InvITs has been done away with, but the industry demand has been rejected for allowing such trusts to invest in holding company of the SPVs.

The majority directors of the Investment Manager would need to be independent, while it would not be required to have credit rating for non-PPP projects.

The associates of trustee would not be allowed to invest in the units of InvITs to avoid conflict of interest.

The InvITs would invest in infrastructure projects, either directly or through SPV. The proposed holding of an InvIT in the underlying assets can not be less than Rs 500 crore and the minimum initial offer size would be Rs 250 crore.

The aggregate consolidated borrowing of the InvITs and the underlying SPVs cannot exceed 49 per cent of the value of the Trust assets, same as the case for REITs.

An publicly offered InvIT would need to distribute at least 90 per cent of its net distributable cash flows to investors. Listing would be mandatory for both publicly offered and privately placed InvITs.

The unit holders can remove trustee and the manager with approval of 75 per cent unitholders, but votes of any related party or associates would not be considered.

The norms that might require changes due to introduction of REIT and InvIT guidelines include FDI policy and the FEMA Regulations.

Along with these new norms, the other issues likely to be discussed at Sebi's board meeting include grant of single regulation to stock brokers and clearing members, issues related to National Institute of Securities Markets and the latest recommendations made by the Sebi's International Advisory Board.

After its meeting last month, the IAB suggested separate governance standards for "big and complex business groups".

The suggestion comes at a time when India is gearing up for revised norms on various aspects of corporate governance, including those pertaining to related party transactions and independent directors.

Besides, the board has proposed the integration of disclosures made by entities under different regulations to reduce the number of times the same disclosure is to be made by an individual.

With regard to proposed norms for crowd funding, the IAB said that Sebi needs to undertake a detailed study and should also take into account issues like "fraudulent conveyance in crowd funding and the likelihood of equity bubbles".

It was also suggested that the involvement of government in the financing of SMEs, start-ups and infrastructure projects, at least in the initial stage, is very crucial.