Fresh set of conditions for strategic investments in REITs and InvITs

By Saloni Mathur , (finserv@vinodkothari.com)

The SEBI vide its circular dated 18th January 2018[1](‘Circular’) issued guidelines on participation by the strategic investors in InVIT’s and REIT’s. These guidelines have been issued in pursuance to the powers conferred on SEBI as per the provisions of the section 11(1) of the Securities and Exchange Board of India Act, 1992(‘SEBI Act’) read with regulation 33 of the Securities and Exchange Board of India (Real Estate Investment trusts) and (Infrastructure Investment trusts) regulations, 2014.[2]

This circular seeks to give clarifications on the participation by the ‘strategic investors’ in the public issue of the REITs and the InVITs. The board through the implementation of the ‘circular’ seeks to regulate and promote the interests of the ‘strategic investors’.

Strategic investor’ has been defined in Regulation 2 sub regulation 1 clause (zza) which means:

  1. an infrastructure finance company registered with Reserve Bank of India as a Non-Banking Financial Company;
  2. a Scheduled Commercial Bank;
  3. an international multilateral financial institution;
  4. a systemically important Non-Banking Financial Companies registered with Reserve Bank of India;
  5. a foreign portfolio investors, who invest either jointly or severallynot less than five per cent. of the total offer size of the InvIT or such amount as may be specified by the Board from time to time subject  to  the  compliance  with  the applicable  provisions, if any, of the Foreign Exchange Management Act, 1999 and the  rules or regulations or guidelines made thereunder.

Here in this write up we intend to cover the contents of this circular at length.

  • Holding requirements:

The circular states that the strategic investor(s) shall, either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.

The principal regulations earlier provided for only the minimum holding requirements but this circular has gone one step ahead and prescribed the upper limit as well. The idea is to encourage retail investments in the infrastructure sector.

Therefore, the situation with respect to holding of units stands as:

  1. Holding by strategic investors – Minimum 5%, maximum 25%.
  2. Holding by public, other than strategic investors and sponsors – Minimum 25%
  3. Holding by sponsor – Minimum 5%, maximum 70%
  • Issue price of the units and utilisation of funds:

In order to protect the interest of the investors, a pricing cap has been introduced. As per the circular, the price at which units are offered to the strategic investors must not be less than the price determined in the public issue.

If there is a situation where the price at which the units are subscribed turns out to be lower than the price discovered in the public issue, the investor shall have to chip in further funds within 2 working days from the date of public issue. However, if the price determined in the public issue turns out to be lower than the price at which the units are offered to the investors, the investors shall not be able to claim back the excess amount paid.

This can be illustrated with the help of the following:

Situation A
Price at which units are issued to investors – Rs. 140
Price discovered in public issue – Rs. 150
Excess amount to be brought in – Rs. 10
 
Situation B
Price at which units are issued to investors – Rs. 150
Price discovered in public issue – Rs. 140
Amount that can be claimed as refund – Nil 

Further, this circular provides that it must be ensured that the subscription amount is kept in the separate account until the public issue is opened.

  • Lock-in period

The units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue. The intention is to avoid early exit from investment by the strategic investors, which can turnout be prejudicial to the interest of the public unit-holders.

Conclusion

It is well acknowledged that considering the huge demand in the infrastructure sector in India, REITs and InvITs have superb potential. However, since their introduction in 2014, none of them have been able to live up to the expectations. In funds like REITs and InvITs, which are new structures in the capital market, strategic investments play a very important role to gain trust of the retail investors. This move of SEBI aims to make these structures popular in India and is largely in the line with government’s focus on infrastructural development.


[1] https://www.sebi.gov.in/legal/circulars/jan-2018/participation-by-strategic-investor-s-in-invits-and-reits_37454.html

[2] https://www.sebi.gov.in/sebi_data/attachdocs/1411722678653.pdf

 

COMPARATIVE ANALYSIS OF AMENDMENTS TO INVIT’S AND REIT’S REGULATIONS, 2017

By Saloni Mathur & Kirti Sharma , (finserv@vinodkothari.com)

The SEBI in its Board Meeting on 18th September, 2017[1] approved several changes to the regulations issued for REITs.

The recent amendments by way of Securities and Exchange board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2017[2] and the Securities and Exchange board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2017[3] has brought about several changes in the existing regulations, which are the necessary incorporations to the changes that were proposed in the board meeting held on September 18th, 2017. SEBI in its Board Meeting made certain amendments to the SEBI (infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real Estate Investment Trusts) Regulations, 2014 (referred to as ‘REIT Regulations’).

 “In order to facilitate growth of Infrastructure Investment Trusts (InvITs) and Real Estate investment Trust (REITs), SEBI Board, has approved certain changes in the captioned regulations, which, inter alia, include the following:

  1. Allowing REITs and InvITs to raise debt capital by issuing debt securities
  2. Introducing the concept of Strategic Investor for REITs on similar lines of InvITs
  3. Allowing single asset REIT on similar lines of InvIT
  4. Allowing REITs to lend to underlying Holdco/SPV
  5. Amending the definition of valuer for both REITs and InvITs

The Board, after deliberations, decided to have further consultation with the stakeholders on a proposal of allowing REITs to invest at least 50% of the equity share capital or interest in the underlying Holdco/SPVs, and similarly allowing Holdco to invest with at least 50% of the equity share capital or interest in the underlying SPVs.”

Following is a comparative analysis of the key changes that have been amended in the Regulations.

Infrastructure Investment Trusts

REGULATION EXISTING REGULATION AMENDED REGULATION IMPLICATIONS
Reg 2 sub-reg 1 clause (zza)

 

Definition of Strategic Investor

 

‘strategic investor’ means, –

a. an infrastructure finance company registered with Reserve Bank of India as a Non-Banking Financial Company;

b. a Scheduled Commercial Bank;

c.an international multilateral financial institution;

d. a systemically important Non-Banking Financial Companies registered with Reserve Bank of India;

e. a foreign portfolio investor,

who together invest not less than five per cent. of the total offer size of the InvIT or such amount as may be specified by the Board from time to time;

 

‘strategic investor’ means, –

a. an infrastructure finance company registered with Reserve Bank of India as a Non-Banking Financial Company;

b. a Scheduled Commercial Bank;

c. an international multilateral financial institution;

d. a systemically important Non-Banking Financial Companies registered with Reserve Bank of India;

e. a foreign portfolio investors,

who invest either jointly or severally not less than five per cent. of the total offer size of the InvIT or such amount as may be specified by the Board from time to time subject  to  the  compliance  with  the applicable  provisions, if any, of the Foreign Exchange Management Act, 1999 and the  rules or regulations or guidelines made thereunder.

 

Also, the circular dated 18th January, 2018[4]has prescribed certain guidelines for participation of strategic investor(s) in the public issue shall,

 

1. The strategic investors shall either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.

 

2. In order to protect the interest of the investors, a pricing cap has been introduced. As per the circular, the price at which units are offered to the strategic investors must not be less than the price determined in the public issue.

3. The units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue.

 

 

 

 

 

 

 

 

Here, the term together invest have been substituted with the words ‘jointly and severally’.

 

Here, they have straightened the language and given more clarity to the definition.

Not less than 5% means atleast 5% has to be invested by the FPI either jointly and severally.

 

Since, the units are offered to strategic investors, before they are issued to the public, on board in or more than one strategic investors would give the investors lot of confidence.

 

The principal regulations earlier provided for only the minimum holding requirements but this circular has gone one step ahead and prescribed the upper limit as well. The idea is to encourage retail investments in the infrastructure sector.

Therefore, the situation with respect to holding of units stands as:

 

a.       Holding by strategic investors – Minimum 5%, maximum 25%.

b.      Holding by public, other than strategic investors and sponsors – Minimum 25%

c.       Holding by sponsor – Minimum 5%, maximum 70%

 

If there is a situation where the price at which the units are subscribed turns out to be lower than the price discovered in the public issue, the investor shall have to chip in further funds within 2 working days from the date of public issue. However, if the price determined in the public issue turns out to be lower than the price at which the units are offered to the investors, the investors shall not be able to claim back the excess amount paid.

Further, this circular provides that it must be ensured that the subscription amount is kept in the separate account until the public issue is opened.

 

The intention to prescribe the lock in period is to avoid early exit from investment by the strategic investors, which can turnout be prejudicial to the interest of the public unit-holders.

 

 

 

 

 

Reg 2 sub reg 1 clause (zzf)

 

Definition of Valuer

“valuer” means any person[(s)] who is a “registered valuer” under section 247 of the Companies Act, 2013[or as defined hereunder] and who has[/have] been appointed by the investment manager to undertake[both financial and technical] valuation of the InvIT assets:

 

 “valuer” means any person who is a “registered valuer” under section 247 of the Companies Act, 2013 or as specified by the Board from time to time.”

 

The appointment by the investment manager for both financial and the technical valuation of the InvIT assets have been done away with pursuant to Section 247 of Companies Act, 2013 and corresponding rules getting notified.
Reg 4 sub reg 2 clause (l )and (m)

 

Eligibility criteria

(2) Without prejudice to the generality of the foregoing provisions, the Board shall consider the following, mandatory requirements namely

 

**

 

(l) whether any previous application for grant of certificate made by the applicant or any related party has been rejected by the Board;

 

(m) whether any disciplinary action has been taken by the Board or any other regulatory authority against the applicant or any related party under any Act or the regulations or circulars or guidelines made thereunder.

 

(2) Without prejudice to the generality of the foregoing provisions, the Board shall consider the following, mandatory requirements namely

 

**

 

(l) whether any previous application for grant of certificate made by the InvIT or the parties to the InvIT or their directors/members of governing board has been rejected by the Board;

 

(m) whether any disciplinary action has been taken by the Board or any other regulatory authority against the InvIT or the parties to the InvIT or their directors/members of governing board under any Act or the regulations or circulars or guidelines made thereunder.

 

Earlier, the law required disclosure of list of disciplinary proceedings initiated by SEBI against the applicant and all its related parties, at the time of application. Since the term “related party” as per the Regulations includes related parties as per the Companies Act, 2013 and the Accounting Standard, the scope of this clause became very wide.

 

The intention of this clause is to check the whether there are any pending issues against the applicant or those in control of the applicant, thus, through these amendments, the Regulations have been amended to narrow down the scope of this clause, as now, the applicant will have to give a list of disciplinary measures initiated by the SEBI against the applicant or the members of its board/ governing body.

Reg 14 sub reg 2 clause(c)

 

Issue of units and allotment

 

 

(2) If the InvIT [raises funds by way of private placement-

 

(a) [it shall do it] through a placement memorandum;

 

(b) from qualified institutional buyers and body corporate only, whether Indian or foreign:

Provided that in case of foreign investors, such investment shall be subject to guidelines as may be specified by Reserve Bank of India and the government from time to time;

 

(c) with minimum investment from any investor of rupees one crore;

 

[Notwithstanding the above, if such an privately placed InvIT invests or proposes to invest not less than eighty per cent of the value of the InvIT assets,  the minimum investment from an

investor shall be rupees twenty five crore;]

 

(d) from not less than five and not more than one thousand investors. 101[

 

(e) shall file a placement memorandum with the Board alongwith the fee as specified in Schedule II, atleast 5 days prior to opening of the issue:

 

Provided that such opening of the issue shall not be at a date later than 3 months from the receipt of in-principle approval for listing, from exchange(s).]

 (a) [it shall do it] through a placement memorandum;

 

(b) from qualified institutional buyers and body corporate only, whether Indian or foreign:

Provided that in case of foreign investors, such investment shall be subject to guidelines as may be specified by Reserve Bank of India and the government from time to time;

 

(c) with minimum investment from any investor of rupees one crore;

 

[Notwithstanding the above, if such an privately placed InvIT invests or proposes to invest not less than eighty per cent of the value of the InvIT assets in completed and revenue generating assets the minimum investment from an investor shall be rupees twenty five crore;

 

(d) from not less than five and not more than one thousand investors. 101[

 

(e) shall file a placement memorandum with the Board alongwith the fee as specified in Schedule II, atleast 5 days prior to opening of the issue:

 

Provided that such opening of the issue shall not be at a date later than 3 months from the receipt of in-principle approval for listing, from exchange(s).]

 

 

The new amendment has brought about specificity while defining assets. Assets under completed and the revenue generating assets have been considered for the purpose of investment.

 

If the investment is directed in the completed and revenue generating assets than the investors would be benefitted because of the fixed returns from these investments which only the revenue generating assets can do.

 

For example malls are commercial complexes which are revenue generating in nature. Such complexes can provide better returns to the investors indirectly.

 

 

Reg 14 sub reg 4

 

Issue of units and allotment

 

4. If the InvIT raises funds by public issue InvITs

 

4. If the InvIT raises funds by public issue InvITs

 

The word Invit was merely a repetition
Reg 14 sub reg 4 clause v sub clause (i)

 

Issue of units and allotment

 

(4) If the InvIT raises funds by public issue

 

**

 

(v) Units may be offered for sale to public,–

 

i. if such units have been held by the sellers for a period of at least one year prior to the filing of draft offer document with the Board:

 

Provided that the holding period for the equity shares or partnership interest in the [holdco or] SPV against which such units have been received shall be considered

for the purpose of calculation of one year period referred in this sub-regulation;

 

ii. subject to other guidelines as may be specified by the Board in this regard;

(4) If the InvIT raises funds by public issue

 

**

 

(v) Units may be offered for sale to public,–

 

i. If such units have been held by the sellers for a period of at least one year prior to the filing of draft offer document with the Board:

Provided that the holding period for the equity shares, compulsorily convertible securities (from  the  date  such  securities  are  fully  paid-up)” or partnership interest in the [holdco or] SPV against which such units have been received shall be considered for the purpose of calculation of one year period referred in this sub-regulation;

 

“Provided further that the compulsorily convertible securities,  whose  holding  period  has  been  included  for  the  purpose  of calculation  for  offer  for  sale,  shall  be  converted  to  equity  shares of the holdco or SPV, prior to filing of offer document.”

 

ii. subject to other guidelines as may be specified by the Board in this regard;

 

These regulations are amended in lieu of the issuance of the debt securities that was proposed and has now been incorporated.

 

Earlier, the regulation only provided holding period in case of equity shares. Compulsorily convertible securities are nothing but deferred equity, therefore, the same has now been treated at par with equity shares and accordingly the holding period of said securities must be converted to equity shares before filing of the offer document.

Here the compulsory convertible securities have been referred to as the “deferred equity.”

Reg 16 sub reg 8

 

Listing and trading of units

 

(8) With respect to listing of privately placed units, –

 

(a) its units shall be mandatorily listed on the designated stock exchange(s) within thirty working days from the date of [allotment];

 

(b) trading lot for the purpose of trading of units on the designated stock exchange shall be rupees one crore.

 

[Notwithstanding the above, if an InvIT invests not less than eighty per cent of the value of the InvIT assets, the trading lot for the purpose of trading of units on the designated stock exchange of such InvIT shall be rupees two crore;]

 

 (8) With respect to listing of privately placed units, –

 

(a) its units shall be mandatorily listed on the designated stock exchange(s) within thirty working days from the date of [allotment];

 

(b) trading lot for the purpose of trading of units on the designated stock exchange shall be rupees one crore.

 

[Notwithstanding the above, if an InvIT invests not less than eighty per cent of the value of the InvIT assets in completed and revenue generated assets the trading lot for the purpose of trading of units on the designated stock exchange of such InvIT shall be rupees two crore;]

 

The new amendment has brought about specificity while defining assets. Assets under completed and the revenue generating assets have been considered for purpose of investment.

 

If the investment is directed in the completed and revenue generating assets than the investors would be benefitted because of the fixed returns from these investments which only the revenue generating assets can do.

Reg 20

 

Borrowings and deferred payments

(1) An InvIT, whose units are listed on a recognized stock exchange, may issue debt securities in the manner specified by the Board:

Provided that such debt securities shall be listed on recognized stock

exchange(s)

The other clauses would be numbered accordingly.

 

(2) The aggregate consolidated borrowings and deferred payments of the InvIT191[, holdco and the SPV(s),] net of cash and cash equivalents shall never exceed forty nine per cent. of the value of the InvIT assets.

 

(3) If the aggregate consolidated borrowings and deferred payments of the InvIT192[, holdco and the SPV(s),] net of cash and cash equivalents exceed twenty five per cent. of the value of the InvIT assets, for any further borrowing,– (a) credit rating shall be obtained from a credit rating agency registered with the Board; and (b) approval of unit holders shall be obtained in the manner as specified in regulation 22.

 

(4) If the conditions specified in sub-regulations (1) and (2) are breached on account of market movements of the price of the underlying assets or securities, the investment manager shall inform the same to the trustee and ensure that the conditions are satisfied within six months of such breach.

 

InvITs have now been allowed to borrow funds through issuance of bonds as well.

 

Reg 21 sub reg 10

 

Valuation of assets

 

(10) Any valuation undertaken by any valuer shall be in compliance with by international valuation standards and valuation standards as may be specified by Institute of Chartered Accountants of India for valuation of infrastructure assets or such other valuation standards as may be specified by the Board:

 

 

Any valuation undertaken by any valuer shall be in compliance with by international valuation standards and valuation standards as may be specified by Institute of Chartered Accountants of India for valuation of infrastructure assets or such other valuation standards as may be specified by the Board:

 

Earlier, the regulations specifically stated that the valuation of the assets had to be done in accordance with internationally accepted valuation techniques. However, this has now been done away with.
Schedule I clause 6 sub clause (f)

 

Application for Grant of Certificate of Registration as Infrastructure Investment trust

 

Details of project manager

 

**

(f) Identity proof and address proof of the Investment Manager, its directors or partners

 

Details of project manager

 

**

(f) Identity proof and address proof of the Investment Manager, its directors or partners.This has been substituted with the project manager.

 

It was a technical default in the earlier regulations.
Schedule II clause 4

 

Fees

4. With respect to privately placed InvIT, the InvIT shall pay non-refundable filing fees of 0.1% of the total issue size including green shoe option, if any, at the time of filing of draft placement memorandum with the Board; 4. With respect to privately placed InvIT, the InvIT shall pay non-refundable filing fees of 0.1% of the total issue size including green shoe option, if any, at the time of filing of draft placement memorandum with the Board; The word draft has been deleted. The placement memorandum shall be a finalised document placed before the board.
Schedule IV clause 14

 

Mandatory disclosures in the annual report

 

 

 

14. Details of all related party transactions during the year, value of which exceeds five per cent. of value of the InvIT[assets]

 

14. (1) Details of all related party transactions during the year, value of which exceeds five per cent. of value of the InvIT[assets]

 

(2) Details regarding the monies lent by the InvIT

to the holding company or the special purpose vehicle in which it has investment in.”

 

This additional disclosure in the annual report is under clause 14 would specifically state the amount of investment InVIT’s in the holding company or the special purpose vehicle would bring the required disclosures in the report.

 

This increases accountability of the InvITs to ensure that the funds raised are not siphoned off to group entities.

Real estate Investment trusts

REGULATION EXISTING REGULATION AMENDED REGULATION IMPLICATIONS
Reg 2 sub reg (1) clause  (ztb)

 

Definition of strategic investor

‘strategic investor’ means, –

a. an infrastructure finance company registered with Reserve Bank of India as a Non-Banking Financial Company;

b. a Scheduled Commercial Bank;

c. an international multilateral financial institution;

d. a systemically important Non-Banking Financial Companies registered with Reserve Bank of India;

e. a foreign portfolio investors,

who invest either jointly or severally not less than five per cent. of the total offer size of the InvIT or such amount as may be specified by the Board from time to time subject  to  the  compliance  with  the applicable  provisions, if any, of the Foreign Exchange Management Act, 1999 and the  rules or regulations or guidelines made thereunder.

 

Also, the circular dated 18th January, 2018[5]has prescribed certain guidelines for participation of strategic investor(s) in the public issue shall,

 

1. The strategic investors shall either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.

 

2. In order to protect the interest of the investors, a pricing cap has been introduced. As per the circular, the price at which units are offered to the strategic investors must not be less than the price determined in the public issue.

3. The units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue.

 

 

 

 

 

 

 

Here, the term together invest have been substituted with the words ‘jointly and severally’.

 

Here, they have straightened the language and given more clarity to the definition.

Not less than 5% means atleast 5% has to be invested by the FPI either jointly and severally.

 

Since, the units are offered to strategic investors, before they are issued to the public, on board in or more than one strategic investors would give the investors lot of confidence.

 

The principal regulations earlier provided for only the minimum holding requirements but this circular has gone one step ahead and prescribed the upper limit as well. The idea is to encourage retail investments in the infrastructure sector.

Therefore, the situation with respect to holding of units stands as:

 

d.      Holding by strategic investors – Minimum 5%, maximum 25%.

e.      Holding by public, other than strategic investors and sponsors – Minimum 25%

f.        Holding by sponsor – Minimum 5%, maximum 70%

 

If there is a situation where the price at which the units are subscribed turns out to be lower than the price discovered in the public issue, the investor shall have to chip in further funds within 2 working days from the date of public issue. However, if the price determined in the public issue turns out to be lower than the price at which the units are offered to the investors, the investors shall not be able to claim back the excess amount paid.

Further, this circular provides that it must be ensured that the subscription amount is kept in the separate account until the public issue is opened.

 

The intention to prescribe the lock in period is to avoid early exit from investment by the strategic investors, which can turnout be prejudicial to the interest of the public unit-holders.

 

 

 

 

Reg 2 sub reg (1) clause  (zz)

 

Definition of valuer

“valuer” means any person who is a “registered valuer” under section 247 of the Companies Act, 2013 [or as defined hereunder] and who has [/have] been appointed by the manager to undertake [both financial and technical] valuation of the REIT assets: “valuer” means any person who is a “registered valuer” under section 247 of the Companies Act, 2013 or as specified by the Board from time to time.” The appointment by the manager for both financial and the technical valuation of the REIT assets have been done away with pursuant to Section 247 of Companies Act, 2013 and corresponding rules getting notified.
Reg 4 sub reg 2 clauses (k) and (l)

 

Eligibility Criteria

(k) whether any previous application for grant of certificate by the applicant or any related party has been rejected by the Board;

 

 

(l) whether any disciplinary action has been taken by the Board or any other regulatory authority against the applicant or any related party under any Act or the regulations or circulars or guidelines made thereunder.

(k) whether any previous application for grant of certificate by the REIT or the parties to the REIT or their directors/members of governing board has been rejected by the Board

 

(l) whether any disciplinary action has been taken by the Board or any other regulatory authority against the REIT or the parties to the REIT or their directors/members of governing board under any Act or the regulations or circulars or guidelines made thereunder.

Earlier, the law required disclosure of list of disciplinary proceedings initiated by SEBI against the applicant and all its related parties, at the time of application. Since the term “related party” as per the Regulations includes related parties as per the Companies Act, 2013 and the Accounting Standard, the scope of this clause became very wide.

 

The intention of this clause is to check the whether there are any pending issues against the applicant or those in control of the applicant, thus, through these amendments, the Regulations have been amended to narrow down the scope of this clause, as now, the applicant will have to give a list of disciplinary measures initiated by the SEBI against the applicant or the members of its board/ governing body.

Reg 11 sub reg 4 clause (b)

 

Rights and responsibilities of sponsor(s) (and sponsor group(s))

 

(4) If the sponsor(s) [and sponsor group(s)] propose(s) to sell its units below the limit specified in clauses (b) or (c) of sub-regulation (3) of this regulation

 

**

 

(b) prior to sale of such units, the sponsor(s) [and sponsor group(s)] shall

arrange for another person(s) or entity(ies) to act as the re-designated

sponsor(s) where the re-designated sponsor shall satisfy the eligibility norms for the sponsor as specified under regulation 3:

 

Provided that such units may also be sold to an existing sponsor;

 

**

(4) If the sponsor(s) [and sponsor group(s)] propose(s) to sell its units below the limit specified in clauses (b) or (c) of sub-regulation (3) of this regulation

 

**

(b) prior to sale of such units, the sponsor(s) [and sponsor group(s)] shall

arrange for another person(s) or entity(ies) to act as the re-designated

sponsor(s) where the re-designated sponsor shall satisfy the eligibility norms for the sponsor as specified under regulation 4:

 

Provided that such units may also be sold to an existing sponsor;

 

**

Typographical error has now been rectified
Reg 14 sub reg 22 clause (a)

 

Issue and allotment of units

(22) Units may be offered for sale to public

 

(a) if such units have been held by the existing unitholders for a period of at least one

year prior to the filing of draft offer document with the Board:

 

Provided that the holding period for the equity shares or partnership interest in the[hold co and/or] SPV against which such units have been received shall be

considered for the purpose of calculation of one year period referred in this sub regulation;

(22) Units may be offered for sale to public

 

(a) if such units have been held by the existing unitholders for a period of at least one

year prior to the filing of draft offer document with the Board:

 

Provided that the holding period for the equity shares, compulsorily convertible securities (from the date such securities are fully paid-up) or partnership interest in the[hold co and/or] SPV against which such units have been received shall be considered for the purpose of calculation of one year period referred in this sub regulation;

 

Provided  further  that the

compulsorily convertible securities, whose holding period has been included for the purpose of calculation for offer for sale, shall be converted to equity shares of the hold co or SPV, prior to filing of offer document.

These regulations are amended in lieu of the issuance of the debt securities that was proposed and has now been incorporated.

 

Earlier, the regulation only provided holding period in case of equity shares. Compulsorily convertible securities are nothing but deferred equity, therefore, the same has now been treated at par with equity shares and accordingly the holding period of said securities must be converted to equity shares before filing of the offer document.

Here the compulsory convertible securities have been referred to as the “deferred equity.”.

Reg 18 sub reg 4  clause (b)

 

Investment conditions and distribution policy

(4) Not less than eighty per cent of value of the REIT assets shall be invested [***] in completed and rent generating properties subject to the following,-

 

(a) if the investment has been made through a [holdco and/or] SPV, whether by way of equity or debt or equity linked instruments or partnership interest, only

the portion of direct investments in properties by such [ holdco and/or] SPVs shall be considered under this sub-regulation and the remaining portion shall be included under sub-regulation (5);

 

(b) if any project is implemented in stages, the part of the project which is completed and rent-generating shall be considered under this sub-regulation and the remaining portion including any contiguous land as specified under proviso to sub-regulation (2) shall be included under clause (a) of sub-regulation (5).

(4) Not less than eighty per cent of value of the REIT assets shall be invested [***] in completed and rent and/or income generating properties subject to the following,-

 

(a) if the investment has been made through a [holdco and/or] SPV, whether by way of equity or debt or equity linked instruments or partnership interest, only

the portion of direct investments in properties by such [ holdco and/or] SPVs shall be considered under this sub-regulation and the remaining portion shall be included under sub-regulation (5);

 

(b) if any project is implemented in stages, the part of the project which is completed and rent and /or income generating shall be considered under this sub-regulation and the remaining portion including any contiguous land as specified under proviso to sub-regulation (2) shall be included under clause (a) of sub-regulation (5).

Here, the amendment in the regulation gives due importance to word income as well which may be in the form of license fee, etc
Reg 18 sub reg 8

 

Investment conditions and distribution policy

(8)  A REIT shall hold at least two projects, directly or through [holdco and/or] SPV, with not more than sixty per cent. of the value of the assets, proportionately on a consolidated basis, in one project. This clause has been omitted The proposal of permitting a single asset should enable owners of large value assets to explore REITs.
Reg 18 sub-reg 13

 

Investment conditions and distribution policy

(13) A REIT shall not undertake lending to any person:

 

Provided that investment in debt securities shall not be considered as lending

(13) A REIT shall not undertake lending to any person other than the holding  company/special purpose  vehicle(s)  in which the REIT has invested in, subject to disclosures specified in Schedule IV:

 

Provided that investment in debt securities shall not be considered as lending

Lending has been restricted to holding company and SPVs only.
Reg 19 sub reg 4 clause (a)

 

Related Party Transactions

(4) In case of any related party transactions entered into prior to making the initial offer,-

 

a) adequate disclosures to that effect shall be made in the initial offer document including a consolidated full valuation report of all such assets in accordance

with clause (a) of sub-regulation (3), as may be applicable;

 

**

(4) In case of any related party transactions entered into prior to making the initial offer,-

 

a) adequate disclosures to that effect shall be made in the initial offer document including a consolidated full valuation report of all such assets in accordance

with clause (a) of sub-regulation (3), as may be applicable;

 

**

Earlier the requirement to obtain two valuation reports from two different valuers, independent of each other has now been removed
Reg 20

 

Borrowings and deferred payments

(1) The aggregate consolidated borrowings and deferred payments of the REIT [, holdco and/or the SPV(s),] net of cash and cash equivalents shall never exceed forty nine per cent. of the value of the REIT assets:

Provided that such borrowings and deferred payments shall not include any refundable security deposits to tenants.

 

(2) If the aggregate consolidated borrowings and deferred payments of the REIT [, hold co and/or the SPV(s),] net of cash and cash equivalents exceed twenty five per cent. of the value of the REIT assets, for any further borrowing,- (a) credit rating shall be obtained from a credit rating agency registered with the Board; and (b) approval of unit holders shall be obtained in the manner as specified in regulation 22.

 

(3) If the conditions specified in sub-regulations (1) and (2) are breached on account of market movements of the price of the underlying assets or securities, the manager shall inform the same to the trustee and ensure that the conditions as specified in this regulation are satisfied within six months of such breach.

(1) A REIT, whose units are listed on a recognized stock exchange, may issue debt securities in the manner specified by the Board:

 

Provided that such debt securities shall be listed on recognized stock exchange(s).

 

(2) The aggregate consolidated borrowings and deferred payments of the REIT [, holdco and/or the SPV(s),] net of cash and cash equivalents shall never exceed forty nine per cent. of the value of the REIT assets:

Provided that such borrowings and deferred payments shall not include any refundable security deposits to tenants.

 

(3) If the aggregate consolidated borrowings and deferred payments of the REIT [, hold co and/or the SPV(s),] net of cash and cash equivalents exceed twenty five per cent. of the value of the REIT assets, for any further borrowing,- (a) credit rating shall be obtained from a credit rating agency registered with the Board; and (b) approval of unit holders shall be obtained in the manner as specified in regulation 22.

 

(4) If the conditions specified in sub-regulations (1) and (2) are breached on account of market movements of the price of the underlying assets or securities, the manager shall inform the same to the trustee and ensure that the conditions as specified in this regulation are satisfied within six months of such breach.

REITs have now been allowed to borrow funds through issuance of bonds as well.
Reg 21 sub reg 10

 

Valuation of assets

(10) Any valuation undertaken by any valuer shall abide by international valuation standards and valuation standards as may be specified by Institute of Chartered Accountants of India (ICAI) for valuation of real estate assets: Provided that in case of any conflict, standards specified by ICAI shall prevail. This clause has been omitted Earlier, the regulations specifically stated that the valuation of the assets had to be done in accordance with internationally accepted valuation techniques. However, this has now been done away with.
Reg 33A clause (e)

 

Power to relax strict enforcement of Regulation

The Board may, in the interest of investors or for the development of the securities

market, relax the strict enforcement of any requirement of these regulations, if the Board is

satisfied that

 

**

 

(e) such relaxation will be in the interest of securities market any provision of Act(s), Rule(s), regulation(s) under which the listed entity is established or is governed by, is required to be given precedence to]

The Board may, in the interest of investors or for the development of the securities

market, relax the strict enforcement of any requirement of these regulations, if the Board is

satisfied that

 

**

 

e) such relaxation will be in the interest of securities market ; or

f) any provision of Act(s), Rule(s), regulation(s) under which the listed entity is established or is governed by, is required to be given precedence to]

No significant change
Schedule III clause 4

 

Mandatory disclosure in initial offer document/follow on offer documents

 

Terms of the Issue

a. Terms of the offer including number of units, price, issue opening date, issue closing date, terms and conditions and any other information as may be required for the investor to make an informed decision

 

b. Policy of distribution including method of calculation and the frequency for distribution

 

c. Listing of units

i. Names of the Designated Stock Exchanges where units are proposed to be listed ii. Timelines for listing

iii. Declaration that prior in-principle approval has been obtained from the Designated Stock Exchanges

Terms of the Issue

a. Terms of the offer including number of units, price, issue opening date, issue closing date, terms and conditions and any other information as may be required for the investor to make an informed decision

 

b. Policy of distribution including method of calculation and the frequency for distribution

 

c. Listing of units

i. Names of the Designated Stock Exchanges where units are proposed to be listed

ii. Timelines for listing

iii. Declaration that prior in-principle approval has been obtained from the Designated Stock Exchanges

 

d. Commitment received from strategic investors, if any.

REITs can also offer securities to strategic investors prior to the subscription by public. Presence of strategic investors will give comfort to the other investors.

 

The regulatory framework for infrastructure investment trusts allows institutional investors also known as strategic investors to subscribe to the securities of the applicable issue prior to it being supplied by the public. This provides surety and gives a degree of security from under-subscription.

Schedule  IV clause 12

 

Mandatory disclosures in Annual Report

Details of all related party transactions during the year191[, value of which exceeds five

per cent of value of the REIT assets]

(1) Details of all related party transactions during the year191[, value of which exceeds five per cent of value of the REIT assets]

 

(2) Details regarding the monies lent by REIT to the holding company or the special purpose vehicle in which it has investment in.

This additional disclosure in the annual report is under clause 14 would specifically state the amount of investment REITs in the holding company or the special purpose vehicle would bring the required disclosures in the report.

 

This increases accountability of the REITs to ensure that the funds raised are not siphoned off to group entities.

 


[1] https://www.sebi.gov.in/media/press-releases/sep-2017/sebi-board-meeting_35969.html

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

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

[4] https://www.sebi.gov.in/legal/circulars/jan-2018/participation-by-strategic-investor-s-in-invits-and-reits_37454.html

[5] https://www.sebi.gov.in/legal/circulars/jan-2018/participation-by-strategic-investor-s-in-invits-and-reits_37454.html

SEBI Board approves amendments to REIT Regulations

By Shreya Routh, (finserv@vinodkothari.com)

Introduction

The SEBI in its Board Meeting on 18th September, 2017[1]approved several changes to the regulations issued for REITs. Before we start discussing the changes approved, let us quickly recap the way in which a REIT operates. REIT is a form of alternative investment vehicle. The working mechanism of a REIT involves purchase of commercial properties and then providing them on rent to tenants. The funding is done through issuance of units to public which are tradable on stock exchanges. The main advantage of a REIT structure is grounded on the tax exemptions that it receives.

Since, REITs mechanism observed a complete downfall and the fact that till date no REIT has been listed with SEBI, the proposed amendments come as a saviour intending to gear up the market for REITs. Read more