Amendments to the Regulatory Framework for REITs And InvITs: An Analysis

[Jubair Bhati and Anjali Choudhary are 5th year B.B.A., LL.B. (Hons.) students at School of Law, Raffles University, Neemrana (Rajasthan)]

The regulatory framework for real estate investment trusts (“REITs”) and infrastructure investment trusts (“InvITs”) was first introduced by the Securities and Exchange Board of India (“SEBI”) in 2014.  However, these structures did not experience a great start in India due to several regulatory constraints which resulted in the very few stock exchange listings of InvITs and no listings of REITs so far.

Thus, in order to facilitate the growth and encourage the incorporation and listings of such structures in India, SEBI on 15 December 2017 notified amendments to SEBI (Real Estate Investment Trusts) Regulations, 2014 (the “REITs Regulations”) and the SEBI (Infrastructure Investment Trusts) Regulations 2014 (the “InvITs Regulations”).

Here we analyse the key amendments:

(a)        Expansion of options to raise capital

Unlike before, REITs and InvITs which are listed on the recognized stock exchanges have now been permitted to raise capital through issue of debt securities. An amendment in the Regulation 20 of both REITs Regulations[1] and InvITs Regulations[2] has been made to this effect. This amendment comes with the proviso that such debt securities must be listed on the recognized stock exchanges. Simultaneously, to give effect to this provision, an amendment in the definition of ‘debt securities’ provided under regulation 2(1)(e) of the SEBI (Issue and Listing of Debt Securities) Regulations 2008 has also been made to mean “non-convertible debt securities which create or acknowledge indebtedness and includes debentures, bonds and such other securities of a body corporate or a Trust registered with the Board as a Real Estate Investment Trust or an Infrastructure Investment Trust”. It may be noted that issue of ‘convertible’ debt securities by REITs and InvITs are not permitted under this amendment.

(b)        Strategic Investors Defined

A new clause has been inserted through this amendment in regulation 2(1) of the REITs Regulations to define ‘strategic investor’. It has been defined to mean an infrastructure company registered with the Reserve Bank of India (“RBI”) as a Non-Banking Financial Company (“NBFC”), any Scheduled Commercial Bank, any Multilateral or Bilateral Development Financial Institution, a Systemically Important NBFC registered with the RBI and a Foreign Portfolio Investor (“FPI”) who invest, either jointly or severally, at least 5% of the total offer size of REITs and comply with the Foreign Exchange Management Act, 1999 (“FEMA”) and its rules or regulations, as applicable.

The inclusion of this definition has led to the insertion of a provision under Schedule III of the REITs Regulations which provides that ‘any commitments received from aforementioned Strategic Investors’ shall also be mandatorily disclosed in the initial as well as follow on offer documents.

A similar provision already existed under the InvITs Regulations and the few amendments made to it are that the investors can now achieve 5% investment threshold either ‘jointly or severally’ subject to FEMA and its rules or regulations, as applicable.

(c)        Omission of minimum holding requirements

Prior to the amendment, REITs were required to hold at least two projects with not more than 60 per cent of the value of the assets in one project. However, the amendment has now done away with this requirement by the omission of regulation 18(8) of the REITs Regulations. It signifies that REITs can now use a single asset for two projects together rather than having two separate assets for one project. A similar provision already exists under the InvITs Regulations.

(d)       Lending

Like the InvITs Regulations, an amendment has been made in regulation 18(13) of the REITs Regulations to permit lending by a REIT to the holding company or special purpose vehicle (“SPV”) in which such REITs has invested. Such lending is mandatorily required to be disclosed in the Annual Report.

(e)        Other Amendments

In addition to the above key amendments, the following amendments have also been made to the REITs and InvITs regulatory framework:

– In accordance with the amendment to both REITs Regulations[3] as well as InvITs Regulations,[4] like in the case of equity shares and partnership interest, the holding period for compulsorily convertible securities (“CCS”) in the holding company or SPV will also be taken into account for calculation of time period of one year for units to be initially offered to the public by REITs and InvITs, provided that such CCS is converted to equity shares of the holding company or SPV prior to the filing of offer document.

– Under both the sets of regulations, the definition of ‘valuer’ has been amended to mean the same as the definition of ‘registered valuer’ under section 247 of the Companies Act, 2013.[5]

– In its board meeting dated 28 December 2017, SEBI approved the amendment to the REITs Regulations to allow investments by REITs in unlisted shares under the 20% investment category as provided under regulation 18(5) of the REITs Regulations.

– Further, in its board meeting, SEBI has approved the amendment to the REITs Regulations permitting REITs to invest at least 50% stake in their holding company or SPV and permitting the holding companies to invest at least 50% stake in SPVs subject to certain safeguards such as REITs should have at least 26% holding interest in the underlying SPVs,[6] and appointment of majority of boards of directors of SPVs should be made by the REITs manager in consultation with the trustee.[7]

In conclusion, in order to catalyse the listings of REITs and InvITs in the Indian market, these amendments are welcome in the real estate investment and the infrastructure investment sectors. Given the success of these structures in foreign jurisdictions and the favourable as well as relaxed amendments, the development of these structures in the Indian markets needs to be closely watched.

– Jubair Bhati and Anjali Choudhary

[1]Available at https://www.sebi.gov.in/legal/regulations/dec-2017/securities-and-exchange-board-of-india-real-estate-investment-trusts-amendment-regulations-2017_37117.html.

[2]Available at https://www.sebi.gov.in/legal/regulations/dec-2017/securities-and-exchange-board-of-india-infrastructure-investment-trusts-amendment-regulations-2017_37118.html.

[3] Amendment to Regulation 14(22) of the REITs Regulations.

[4] Amendment to Regulation 14(4)(v) of the InvITs Regulations.

[5] Amendment to Regulation 2(1)(zz) of the REITs Regulations and Regulation 2(1)(zzf) of the InvITs Regulations.

[6] Regulation 18 (3A)(a) of the REITs Regulations.

[7] Regulation 18 (3A)(c) of the REITs Regulations.

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