Sebi eases REIT norms to attract investors, realtors

Mumbai: With an aim to make REITs more attractive to investors and real estate players, markets regulator Sebi on Friday decided to relax its norms to allow these Trusts to invest more in under-construction assets and have a larger number of sponsors.

At a meeting held here, Sebi's board also approved proposals to remove restrictions on REITs (Real Estate Investment Trusts) relating to investment in the Special Purpose Vehicle (SPV) structures, while the norms relating to related party transactions would also be eased.

The proposed move would allow up to 20 percent investment by REITs in under-construction projects, up from a maximum of 10 percent allowed currently.

Besides, relaxations would be made to provisions relating to compliance of minimum public holding norms, as also for investments by the associate entities of the trustees.

After the meeting, during which Sebi's Annual Report for 2015-16 was also approved, the regulator said the board approved issuance of a consultation paper to amend the REIT Regulations. Final norms would be framed after taking into account public comments to the draft paper.

Sebi had notified the REIT 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.

While the government provided for certain tax benefits in the Budget this year, Sebi has now decided to relax the rules.

"With a view to smoothen the process of registration of REIT with Sebi and also the process of launching of the offer, Sebi Board has approved bringing out a consultation paper proposing certain changes and providing some clarification in the REIT Regulations," the regulator said.

The new changes have been proposed by Sebi after taking into account representations received from various quarters.

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.

One of the major proposals relate to allowing REITs to invest up to 20 percent in under-construction projects.

The existing regulations require at least 80 percent of the REIT assets should be invested in completed and rent-generating assets.

Of the remaining 20 percent, not more than 10 percent can be invested in under-construction properties and in 'not-completed and non-rent generating properties'.

The new proposal would allow REITs to invest up to 20 percent in under-construction assets, while at least 80 percent 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 percent of investment in other than real estate.

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 percent equity in the Holding Company. The Holding Company can in turn hold controlling interest and at least 50 percent 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.

Another move is to allow the REITs to have up to five sponsors, as against the current norm for maximum three.

Besides, a sponsor can have REIT holdings with its group companies or associates, all of whom would be counted as one.

It was felt that the current norms were restrictive in case of a sponsor group holding interest through group firms or individuals.

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 percent 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 percent. This would be aligned with Sebi regulations about the public offer size of 25 percent, or 10 percent initially with an eventual raising of public holding to 25 percent.

In case of change in control of sponsor entity on account of a sale, if the number of unit holders, other than related parties, falls below 200 or the public float slips below 25 percent, the trustees are required to seek a delisting.

This provision will be relaxed by allowing the new sponsor a one-year window to comply with the minimum public holding requirements by secondary sale or dilution through a fresh issuance of units.

Changes would be made 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 had 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.